Forget yoga, wearables insurance is the path to a better life!

By Rick Huckstep

And before my yoga-practicing daughter berates me, it’s a tongue-in–cheek headline! But it is also a headline born out of the emerging trend in life and health insurance to encourage and motivate policyholders to lead a more active life.

This stems from the fundamental problem insurers have in this market. To rate the risk you are seeking to cover, they require a lot of data. Policyholders fill out extensive questionnaires asking for personal data, family histories and the like (I’ll come back to personal data in a minute).

Prospective policyholders also often submit themselves to expert examination. All this information is fed into complex actuarial models that seek to normalize the specific variables of the assessed. Using comparable data collected over large samples of the population and with decades of history, the result is a statistical assessment of the risk of a life threatening illness or being knocked down by the proverbial bus.

But, here’s the problem.

This is a static, point in time data model. Like a balance sheet in the annual report, it’s a snapshot view of the state of the individual. Unlike the balance sheet analogy, the insurer doesn’t have the equivalent of a CFO updating the balance sheet on a regular basis.

The insurer is not able to reassess the changing risk profile over the term of the policy.

Once the risk has been assessed and the premium has been set, this is the base line for the term of the policy. Whilst the policyholder has an obligation to declare material changes in circumstances, the reality is that these only cover the exceptional items.

For example, a year ago I regularly went to the gym, and had done so for about five years. Then I stopped because I simply got out of the routine. These things happen as other things took my attention, like writing for Daily Fintech every week. Now I don’t go to the gym anymore.

I’m not obliged to disclose this “material” fact to my insurer even though it does change the data that was used to rate me. My BMI is now different, as is my weight, general levels of fitness and, crucially, my diet.

Of course, this is a lifestyle change that works in both directions. What if I used to spend all my time on the sofa, eating pizza and watching Jeremy Kyle re-runs? (no judgment or offence intended, just illustrating a point!) And then I changed my behavior and started to go to Body Combat and Spin classes 3 times a week? As a result, I lose 20lbs, eat better, sleep better and have changed the basis upon which my cover could be rated.

I’m not obliged to disclose this “material” fact to my insurer either!

And that’s the issue with pricing for Life and Health cover. It is all based on static data at a single point in time. Once the price point is set, this is the baseline for the full term or every renewal.

It’s a one–size fits all approach. Whilst it may be driven by complex actuarial models to achieve a high degree of granularity, the underlying principle of how the cover is priced remains the same. The premium I pay has more to do with the life expectancy and general health and wellbeing of every other male in their fifties than it does with my actual lifestyle, attitudes and changing behaviour.

But times are a-changing!

The adoption of wearables-tech by insurers is growing. A 2014 survey by Strategy Meets Action (SMA), a Boston-based research firm found that 22% of insurers are developing a strategy for wearables. Ironically, the same survey also reported that only 3% of these insurers actually wore a wearable device themselves!

BTW, when I talk about wearables in this article, I mean the collective name for miniature electronic devices that are worn on the body in some way to track health and lifestyle information. The well-known wearables include Fitbit, Jawbone and, of course, now the Apple Watch. Wearables also include such technology as Google Glass or Golden-I, but their application in the claims process is a subject for another day.

In the US, estimates vary around the 10% mark of all Americans who wear a fitness tracker, although this is going to rise dramatically in the coming years. The widespread adoption of sensors that track more than just fitness will also explode. Sensors that monitor breathing, heart rate, stress levels and the onset of chronic illness will all add to the current generation of fitness trackers that count steps and sleep patterns.

The big one is the pursuit of blood-glucose monitoring, as this is the link to an individual’s diet and eating behavior, which has a greater impact on health than simply measuring activity.

Already employers, and particularly the self-insured corporations, are buying wearables in large quantities to give to employees to both track and also encourage them to a healthier lifestyle (thereby reducing the potential cost claims burden from absenteeism and ill health).

The early pioneer in this space some 20 years ago was South African insurer, Vitality. They were the first insurer in the world to both reward and encourage healthy behavior and the first to use a USB connected pedometer (in the days before wearables were called ‘wearables’!)

We first saw Vitality in the UK around 2004 when they entered the market with PruHealth. In 2009, they teamed up with gyms in the US and are now integrated with 6,000 clubs across all 50 states. In 2010, they entered the China market with Ping An, followed in 2013 with the partnership with AIA to enter eight countries across Asia. Last year, they acquired the UK business and rebranded them to VitalityHealth and VitalityLife.

When you look at their work they have put a lot of resource into programs that educate on the benefits of healthy diets and a healthy lifestyle…for the good of the individual as well as for the insurer or employer. To me this defines corporate social responsibility far better than any go-green policy or carbon footprint reductions.

Vitality has gone further than just integrating wearables. Their relationships with the network of gyms enables them to track when policyholders go to one of them from the swipe of their membership card. Through their mobile app on the smart phone, they can then track how long you have stayed there.

And it’s not just going to the gym that earns reward points, playing a round of golf also counts towards the overall reward points tally.

The reason that this model works is because there are clear benefits to both parties. It’s a win-win with significant social consequences. The policyholder is healthier and spends less because of lower future premiums and rewards. The insurer spends less by reducing the overall cost of claims.

However, there is a price to be paid for this advance in mobile and wearable tech in the insurance industry. And this is in the area of data privacy.

To work, the policyholder must be willing to share data continuously with the insurer. This data will come from multiple sources, and not always at the explicit request of the insured. When Vitality first launched the pedometer, the insured would physically connect the pedometer to the computer via a USB cable. The policyholder knew what they were doing.

However, today, there are no cables required. Whether the insured is swiping their gym membership card, blue-toothing their Fitbit or simply carrying their mobile in their pocket, the insurer is continuously collecting data on them.

Ironically, given the amount of personal information that has been written on forms for decades when applying for insurance, we are now in an age when sensitivities about personal data run very high. In some quarters, the use of wearables and mobile tech to track and collect personal data is an intrusion that must be stopped, or at least curtailed.

I’m not in that camp. I’m down with the millenials on this one, who seem completely bemused by the debate on privacy.

Having said all of this, the fact is that the wearable insurance model is still at a rudimentary stage in its evolution. The data collected is assessed and aggregated, but only to create a points system. These points are simply exchanged for a future discount or rebate on the policy in the form of amazon gift vouchers. The underlying underwriting process hasn’t changed!

So, this might not yet be the giant leap for mankind, but it is certainly one small step towards the nirvana of personalized and dynamic premiums. Where premiums will adjust over the term of the policy to reflect a policyholder’s efforts to reduce the risk of ill-health or a chronic illness on an on-going basis.

To do that requires a seismic shift in the approach to underwriting risk and represents one of the biggest areas for disruption in the insurance industry.

When this happens, I will be able to take my personal data collected across multiple sources, aggregated it together on Nudge, and upload this data to an underwriting marketplace where insurers will bid for my cover based on my profile. And I will be healthier and wealthier as a result!