When we talk about the future, we often conjure up images from science fiction novels: flying cars and cities in the clouds, interstellar space travel, and medical technology beyond our wildest imagination. After all, this was the future we were promised as children.
However, when I think of the future of insurance, while technology does and should play a role, I think we need to focus on some of the harsher realities at play in the market and really engage with these challenges alongside the more exciting and novel opportunities it brings.
The context of the past year helps to focus on one area of growing concern within the market and that is the issue of insurers moving away from risk pooling and continuing to focusing on individual risk-based pricing models. Aside from the pandemic, and the economic impact it has had on individuals and businesses alike (to say nothing of the social and health-related impacts), there is a growing trend of people falling outside of ideal risk profiles. As we see greater refinement of actuarial models and the use of technology to better identify degrees of risk, it would not be a stretch to suggest more people will find themselves beyond the realm of market appetite.
So how do we answer the concerns of the public while also balancing these against business decisions? I do not believe there is an easy answer, and the topic itself needs a collaborative approach from professionals and firms alike; however, there are certain things that need to happen if we are ever to resolve these issues amicably.
Firstly, the purpose of insurance needs to be re-examined and we need to properly articulate whether it has fundamentally changed. For example, we have seen a more risk-averse mindset bed in and a greater focus on mitigation measures take hold. While a focus on moral hazard and loss prevention measures is not new, it moves the market away from insurance and indemnification and instead focuses on how to reduce or retreat from insuring certain risks.
Secondly, I think there is a wider debate that needs to be had in society as to where social policy ends and private insurance begins. If we can answer what risks can and should be picked up by the market – those that either need direct state intervention or a public or private partnership – we are better at articulating which risks are insured and which are uninsured, and where that leaves consumers.
Thirdly, although in a similar vein to the above, when identifying whether we need some form of government intervention, there needs to be a comprehensive discussion of how that should work, asking difficult questions around whether we truly are at the limits of market capacity and innovation in solving those key challenges and meeting those risks. This is particularly important, as there is a comprehensive list of risks that could fall into this category. It includes future pandemics (with both the associated economic and political risks); climate change and the wide-ranging impacts it is having on our planet and on people (flooding being a good example); and broader concerns surrounding risk-based pricing for individuals with medical conditions, disabilities and even those from low-income households and “riskier” geographic locations, who are priced out of the market with little to no ability to mitigate or change their circumstances.
The much greater ability to access and analyse data, and the continual regulatory pressure to be fully in control of risk, are issues that have no simple solution. What matters is that we don’t slowly and unconsciously find ourselves at a point of no return. There is a marked shift away from traditional risk pooling (as noted in the recent report from the IFoA, The Great Risk Transfer) and we need to be able to answer these difficult questions if we wish to build trust with the public. We mustn’t lose sight of the good that insurance does for society, whether it’s through personal protection, business protection or even insuring some of the riskier elements of our economy. We should certainly be proud of the support it has been able to provide during the COVID-19 pandemic.
The future of insurance is one that can effectively articulate what it can do, honestly engaging with the limits of its capacity, with transparency and clarity on what its products and services provide. Ultimately, the brightest future is one where we proactively engage in ensuring everyone has access to some form of protection, even if it has been provided by or in partnership with the government.
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