In the past year, real-estate developers have reported rate increases of up to 50%, and auto insurance has spiked 17%. And the home-insurance crisis is so bad, more people are forgoing coverage each year. (...)
Behind the curtain
Insurance is an esoteric, byzantine, and secretive business, so most of us only see the tip of the iceberg — the rejected claims, the raised costs, the revoked coverage. What we don't see are the complex systems that insurers have created to keep us in the dark, collect as much data as possible, and squeeze profits from the customers they are meant to serve. And the further integration of technologies like AI is only supercharging the industry's capacity to rip us off while allowing companies to evade public awareness and accountability.
In years past, insurance policies were based largely on broad demographic categories like age and gender. Now, with the vast range of data insurers have access to, consumers are charged not just based on their objective risks but also based on how much they are willing to pay — a practice called price optimization. To make those predictions, insurers gather and analyze data about individuals to create detailed personal profiles, looking at everything from whether you smoke cigarettes to your shopping habits to which internet browser you use.
As Duncan Minty, an ethics consultant for insurers, recently wrote, "It's difficult to think of data that they haven't been collecting about policyholders."
That data is fed into proprietary models for analysis to determine how much to charge a particular consumer. The personalized prices that the algorithm spits out are not just based on how risky a person is compared to other similar people but also on metrics like Customer Lifetime Value — or the predicted net profit that a customer will deliver over their lifetime.
To determine that magic price tag, insurance companies drill down into the nitty-gritty details of your life. They might look at your home's roof using drones and automated image analysis, or where you're driving based on data from a smart device in your car, or what kinds of foods you're eating by looking at nutrition trackers. They might also look at your credit score, ZIP code, social-media posts, and battery-charging habits. This data can then be used as proxies for social categories like class and race or to make moral judgments about your personal responsibility, which factor into decisions for prices and policies. (...)
Insurers justify possessing so much data by saying that it's all in the name of fairness. Everybody should be charged according to their own risk. The only way to know that fair price is for insurers to have a vast amount of information about each individual. But how exactly they reach those decisions is largely unexplained. We have to guess, piece things together, and reverse engineer the results. And the outcomes seem to always favor insurers above all.
A recent survey found that most people are opposed to these kinds of surveillance programs: "68% of Americans would not install an app that collects driving behavior or location data for any insurance discount amount." However, that lack of consumer support has not stopped companies — insurers are starting to make such programs mandatory. For instance, health insurers can mandate employee participation in corporate wellness programs that track lifestyle data, and auto insurers can mandate smart devices in your vehicle if you've been deemed higher risk.
The direction the industry is heading is to use this flood of data to optimize pricing to the extent that your insurance policy is dynamic and constantly changing. For example, insurers are testing new business models like on-demand insurance: Rather than purchase an annual contract for something like car insurance, every time you drive, your insurance would activate, and when you aren't driving, it would deactivate. Each of these activations would be treated as a new transaction with a new contract — and a new price. Driving to get groceries on a sunny weekend morning might cost less than, say, picking up your kids during rush hour on a rainy evening. This emerging model is spreading as insurers experiment with new products such as single-day heat insurance that you can activate using a mobile app.
Colm Holmes, formerly the CEO of Aviva and now CEO of Allianz Holdings — both massive multinational insurers — summed up the problem with this model in a 2020 interview: "The use of data is something I think regulators will have to look at, because if you get down to insuring the individual, you don't have an insurance industry — you just create people who don't need insurance and people who aren't insurable."
Holmes is saying that the end result of this direction is that risky people lose their access to insurance while everyone else never needs to use their insurance — undermining the entire purpose of insurance as a way of collectively pooling risk. We're already seeing this as more people have their home-insurance policies canceled and claims denied. It could also mean endless profits for the companies: Millions of people pay in, while the insurer rarely, if ever, needs to pay out. To keep companies from becoming the architects of their own demise by pursuing that financial incentive, Holmes is saying that regulators need to step in to enforce limits. Otherwise we would have no real insurance to speak of.
Nickel and diming
At her keynote during the recent International Congress of Actuaries, Inga Beale, the former CEO of the UK insurer Lloyd's of London, shared a story about trying to file a home-insurance claim after her roof had been damaged in a hailstorm. Beale's insurer had required her to get three independent quotes for repairs, fill out a stack of paperwork, engage in long interactions with a claims handler, and on and on. Eventually, Beale was so frustrated by the whole process that she decided to just pay for the repair herself. Beale was a professional underwriter in the highest echelon of the insurance industry, but she was also the victim of claims optimization, the insurance-industry practice where consumers are offered payouts not based on what they fairly deserve but based on what they are willing to accept.
From the freedom of retirement, Beale was taking aim at insurers' obsession with finding exclusions — that is, reasons not to underwrite risk or cover claims. She saw this as antithetical to the social purpose of insurance. What's the point of having insurers if they don't want to insure anything risky? Beale called these practices a systemic feature of an industry that has become too profit-oriented and risk-averse. I'll go even further: To boost their own profits, insurance companies are becoming increasingly antisocial and antagonistic. You may hate your insurer, but they probably hate you more.
One possible way insurers limit how much they pay on claims is by simply paying less on a batch of claims and seeing how many customers complain. If the number of complaints doesn't reach a certain threshold — say, 5% of claim decisions result in a formal complaint — then the amount paid is lowered even further with another batch of claims. The process of lowering payouts, which can be automated by AI tools, is continued until that threshold of complaints is reached.
Insurers can also use their data-driven analysis of customers to predict who is prone to complain and preemptively offer them a fairer deal than those who are more likely to just accept what they are offered. Or, they can target customers with low credit scores — which indicates they might have money troubles and need cash right now — and offer them a quicker, no-hassle process in return for a reduced payout.
In addition to dragging out claims until customers just give up, recent reporting by ProPublica found that the health insurer Cigna uses a system that helps doctors instantly reject a claim on medical grounds without opening the patient file, forcing customers to go through a tortuous appeals process. "Cigna adopted its review system more than a decade ago," writes ProPublica, "but insurance executives say similar systems have existed in various forms throughout the industry."
by Jathan Sadowski, Business Insider/Yahoo Finance | Read more:
Image: Tyler Le/Insider
[ed. Surprise, surprise. Actually, the thing about on-demand insurance is a new one to me. I used to know someone who's wife worked in insurance claims, and it's true, she just threw out 30-40 percent of claims upfront to see who would spend the time and effort to complain (and to whom?). See also: It Shouldn’t Be This Easy to Lose Your Health Insurance (NYT).]
