This article was originally commissioned and published in the February 2015 edition of the Investment Life & Pensions Moneyfacts publication.
Tom Murray explores the impact of emerging technologies on the protection market.
I have been working my way through the TV series ‘House’ over the last few months, courtesy of Netflix, and I have been struck by the similarity between the difficulties faced by the diagnostic team in the programme and those faced by underwriting teams in the life assurance industry.
“Everybody lies” is one of the catch-phrases of Hugh Laurie playing the misanthropic Dr. House; as a head of the department of Diagnostic Medicine in the series, his primary difficulty in getting to the true diagnosis of the patient’s condition is the inability to get the patient to tell the truth. In order to get the key facts to make the diagnosis, one of his key rules is to meet or talk to the patient as rarely as possible, as the patient’s lies are liable to drive the diagnostic process down the wrong track. Instead, his team breaks into the patient’s apartment or workplace, or hacks computer records to find out the patient’s lifestyle and family medical history, which they need to work out what is wrong with the patient.
The exact same issue is one of the key difficulties faced in the protection world. Getting disclosure from the applicant for a protection policy, in order to underwrite it correctly, has always been problematic. The truth is out there, but it can be hard to get it from applicants at proposal stage.
I don’t mean by this that fraud is rampant among customers of protection products. Far from it! Many of those who fail to disclose matters material to an assessment of their health believe themselves to be completely honest; it’s just that they either don’t know enough accurate family medical history, or else they are essentially blocking bad news from their own minds. Overlooking or oversimplifying of medical conditions is an inherent human trait to avoid depressing news and focus only on the positive. Thus, frequently unbeknownst to themselves, the customer gives an overly positive view of their health and that of their ancestors.
This situation has got somewhat worse over the last 30 years. Increasing labour force mobility means that more people are migrating from country to country, and therefore have a great deal less knowledge about their extended family than heretofore.
As a result, life companies have had to price their products against the fact that full disclosures are not always made and the incomplete nature of the disclosure is not always discovered in time to prevent a pay-out. Curiously enough, incomplete disclosure is always on the negative side - practically nobody fails to disclose positive news that will reduce the cost of their insurance. Although medical examinations are routinely carried out, they don’t necessarily give the complete picture as many medical issues rely on the symptoms and facts as described by the customer. The only safe approach for life companies is to build a margin of safety into the rates, an ‘optimism factor’ if you like, which ultimately increases the cost that the customer has to pay.
Advances in DNA Science
In a better world, we would have accurate medical information for underwriting departments to base their assessments upon. This would be fairer to both life companies and their clients. And this is where the huge advances in science, and in particular in technology, is set to transform the whole underwriting area.
Incredible leaps forward have been made in the science of DNA over recent decades. Access to this information would dramatically improve the ability of underwriters to individually underwrite to a new, hitherto unforeseen, level. Genetic disorders are a significant factor in assessing the likelihood of an individual acquiring a life-expectancy altering condition later in life. Currently the industry is primarily reliant on family histories answered by the client, but access to DNA testing would significantly improve the life company’s ‘hard’ knowledge of the customer without having to rely on the customer themselves. The trouble is that DNA testing has, up to recently, been a highly specialised and expensive process.
Advances in technology are making it far easier to test for these disorders and it won’t be long before the majority of tests can be carried out on simple machines in doctor’s surgeries and clinics, rather than in high-tech specialist labs. This will mean that it will be far easier to get a full and accurate report on the likelihood of genetic diseases manifesting themselves from a source that can’t lie – the customer’s own body. As the cost of these tests is reduced by technology, it will become cost efficient to carry them out on all applicants, rather than just on those who are applying for extremely large insurance amounts.
This increased knowledge will make it easier to refine the pool and therefore to provide cheaper underwriting to the healthy clients, and to load those who are genetically pre-disposed to the type of conditions that will affect their mortality. We can expect the ever-increasing pace of DNA research to reveal a lot more as time goes on, and technology will make this information available to life companies.
Another key factor in underwriting individuals is their lifestyle choices. Given the increasing obesity issues being experienced by most developed countries, the underwriter is likely to need a good deal of specific information regarding the lifestyle of the applicant.
Information gathered on this subject is either via a questionnaire or through questioning by the doctor during a medical examination, and therefore, the accuracy of the information is completely dependent upon the accuracy of the descriptions given by the individual. The trouble here, of course, is that we all tend to fool ourselves about how much we eat, how much exercise we take, how much sleep we get etc. And here again technology can provide the answer.
The advent of wearable technology at an affordable level means that it is possible to gather and monitor information about the prospective customer’s activity levels, including their sleeping patterns, pupil dilation, blood-pressure, and heart rate during their day to day activities. This constant monitoring of vital signs will give the level of accuracy that will allow near-perfect assessment of the individual’s state of health, which will bring the life companies’ ability to fine-tune and personalise risk profiles to a level previously unimagined.
Wearable technologies allow far more accurate assessments of an individual’s health and, in particular, their lifestyle. Apps are available that allow people to record their diet during the day, giving definitive answers to the questions, and probably quite a shock to many individuals. Remember, an iPhone 5 has a CPU that is 1,270 times faster than the Apollo 11 guidance computer than landed the spacecraft on the moon. Technology such as Google Glass (version 2.0 is now being worked on) will almost certainly increase the amount of personal information that can be gathered by apps without requiring significant effort by the person wearing them.
Of course the volume of data that can now be gathered will also play a big part in increasing the accuracy of underwriting if it is possible to analyse it correctly. This is where recent advances in technology will also help. The ability to churn through ‘Big Data,’ as it is referred to, has made huge strides. The increasing power of technology now makes it feasible to quickly process vast volumes of data, establishing patterns that could never be discovered by more manual means.
This makes it possible and cost effective to get highly finessed views on the effects of people’s lifestyles and genetic disposition on the longevity of the individuals concerned, and on their likelihood to contract certain diseases and conditions, a key factor for the assessment of critical illness policies, for example. In other consumer markets, use of technology is providing consumers with highly individualised experiences, and the ability to rapidly crunch big data and to get highly detailed information on the customer is going to become a key factor for life assurance companies as, they try to provide the same level of personalised customer experience in their market.
There is one area that could cause this to become a problem, however. The perennial issue for life companies is the amount of highly-personalised data they hold. Given the previously discussed approach of using wearable technology to get even more information about the customer, you can see why there would be fears that the information would be leaked. After all, some of this information the customer was even hiding from him or herself, and certainly he or she would want assurance that the information will not become widely available.
Therefore a key concern is the ability of companies to keep this volume of highly personalised data secure. To get people to give this kind of information, it is necessary to be able to assure them that the data is safe and will not be leaked or misused. Here technological advances in data protection will make it easier, as huge amounts of money are currently being ploughed into the area of data security. The fact that it is a key issue for governments as well is reassuring as this means that funds will constantly be made available for research in this area.
Despite the media trumpeting of occasional security failures, trust is nevertheless growing rapidly in data security. Just a decade ago, most people were extremely wary about using their own credit card details online, and yet now a huge proportion of the world uses the internet to shop and are quite comfortable using their financial information online in order to do so. According to Statista.Com, the amount of shopping carried out online in the USA for Christmas 2014 was 45% of the total holiday spend.
This makes it easier to see a future where people will not be wary of sharing that level of personal medical information with life companies, giving us a protection market that is better value and more customisable than ever before.
Technology is changing our tomorrow
It is possible for people to be wrong. Even the incredibly astute and clever Dr House can get it wrong; “it’s not lupus – it’s never lupus” …until it actually was lupus in the eighth episode of the fourth series. However, the availability of such a huge amount of detailed and personalised data, and the ability to process it rapidly, means that far more accurate predictions of future health and longevity are possible for underwriters, which will usher in a new era of heightened accuracy and personalisation in the protection market.
Google Plus: TomMurray
What do you think? Let us know in the comments below!
Investment Life & Pensions Moneyfacts provides unrivalled access to accurate and factual data on investment, retirement and protection products. The essential tool for the professional adviser, it’s invaluable both as a research guide to help intermediaries prepare for client meetings and as a sales aid at face-to-face interviews.
Investment Life & Pensions Moneyfacts provides wide ranging coverage of income protection, term assurance, pensions, annuities, ISAs and bonds. It also contains the most up-to-date fund performance figures of any trade monthly, covering over 9,000 funds (supplied by Lipper - a Reuters company). All the data is clearly presented in easy-to-follow charts and graphs, making it ideal for audit trails.
A range of technical articles and surveys written by key industry figures and our experienced editorial team keeps readers informed of the latest industry news and views.