The way in which the UK insurance industry assesses risk has been slowly evolving from pretty basic pricing models to something a little more sophisticated over the past 20 years. For example, enhanced and impaired annuity rates designed to reflect the life expectancy of specific consumer segments are now commonplace, and term insurance products promising better rates for people with healthy lifestyles have also gained share. But this is certainly evolution, not revolution.
The distribution of the products has not changed that much either. Clearly, more web-based, non-advised transactions are taking place, but even here we see price comparison sites and strong retail brands partnering with traditional distributors in order to access the market. And while new, highly efficient underwriting technology has the potential to reduce costs and improve the adviser and client experience, it is not disrupting existing provider models.
So, is there any possibility we will see actual disruption in the UK individual protection market? And could this lead to a larger market? The answer to both questions is probably yes.
Technology will be the driver and the enabler. A good example of how this can develop can be found in pay-as-you-drive motor insurance, which is gaining considerable traction in the US, Canada, Latin America, France and Norway. This solution, often referred to as telematics, helps insurers identify risk exposures and puts pricing control in the hands of customers, who can decide how much and how well they want to drive. The technology is simple and can take the form of hardware provided by the insurer or an app on the driver’s smartphone.
The key to PAYD is that drivers can receive immediate feedback through apps, emails and provider portals to keep track of their premiums. There is already evidence to show that seeing the close correlation leads to changes in driver behaviour. In the future, this could also improve underwriting and rating methodologies.
But why stop there? How about pay-as-you-live? There are already products that reflect lifestyle but wearable technology can facilitate an entirely different customer experience. Wearable technology or smartphones with similar functionality are already able to track exercise, heart rate, BMI, sleep patterns, calories and training or diet logs, alongside many other indicators, to provide immediate feedback to consumers and potentially to their insurers.
In the not-too distant future, these devices will also be able to monitor blood sugar for diabetics and track food purchases at supermarkets.They will even alert those with a high probability of deep vein thrombosis when it is time to get out of the chair and take a walk.
Evidence suggests the data available from wearable technology provides significant motivation to improve fitness and usage is growing rapidly. In California, the number of people wearing these devices already exceeds the number of people with gym memberships. And in the UK, we are starting to hear people comparing their resting heart rates in the office or even competing for the lowest rate at a dinner party.
According to the most recent forecast from the International Data Corporation, vendors will sell a total of 45.7 million wearable technology units in 2015, up a strong 133.4 per cent from the 19.6 million units sold in 2014. By 2019, total sales volumes are forecasted to reach 126.1 million units, resulting in a five-year compound annual growth rate of 45.1 per cent.
All of this has the potential to benefit consumers, reduce the strain on the NHS and provide insurers with the data to investigate modified pricing models and risk factors. It also has the potential to increase the size of the market as consumers start to connect with institutions that can provide products, services and channels that resonate with them. These might include websites more focused on healthy lifestyles instead of selling products, and giving weekly feedback on how well the policyholder is doing in terms of fitness goals and related premium rates.
PAYL is being actively explored by a number of our global clients, particularly those that already deploy PAYD products. We believe this concept will be a major area of innovation in the UK life and health markets. Furthermore, we think it has the potential to disrupt an industry that has so far remained fairly safe from the kind of disruption seen in areas such as lending, motor insurance and payments.
Malcolm Kerr is senior adviser at EY