Solidarity principle vs. polluter pays principle – how big data will lead the insurance business ad absurdum.

Admittedly, the title is a little too pointed. Recently, I have often been asked by representatives of the insurance industry what impact digitalization will have on them. On the one hand, there is the mandatory range of online tools and communication channels that need to be digitized. On the other hand, I believe that the increasing amount of data on policyholders will create enormous business opportunities in the medium term. In the long term, however, it will call into question the core business model of insurance companies.

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Principle of solidarity

In economic terms, insurance works according to the principle of solidarity. A group of cost causers is bundled together and instead of individuals having to bear their losses alone, and possibly not being able to bear them at all, all participants pay a small share of the losses and can thus feel secure.

In this way, the healthy pay for the treatment of the seriously ill and the accident-free drivers pay for the broken bodywork of the negligent drivers. Or worse.

The insurance company, as the issuer of these policies, calculates the corresponding probabilities of occurrence from empirical data and expected future trends, adds a margin and thus defines the price that everyone has to pay.

If it is too cautious or interprets the data conservatively, this results in a higher price. If it takes more risk, it can offer its policyholders better conditions.

The fact that insurance works like this in principle is not due to any social virtue. No, there was simply no other way to achieve a finer segmentation and thus a finer pricing of risks.

More data means a better basis for decision-making

What is now slowly but surely changing is that we have more data available about policyholders or about the risk. It is being collected more and more casually and more or less voluntarily.

In Switzerland, for example, anyone who wants to be included in a daily sickness allowance insurance policy has to fill out an illness questionnaire. The insurance industry, for example, has apparently sworn to exclude unfavorable risks such as former burn-out patients. Others may decide whether this makes social sense or not. The fact is that insurance companies are beginning to include personal data in their risk assessments.

Now this is nothing new. It just shows that it is happening. So what will happen when we have much more personalized data at our disposal? Causers will be identified and clustered accordingly, and ultimately their risks will be priced differently.

Polluter pays principle

Interestingly, we are moving in the direction of the polluter-pays principle and the insurance industry will thus undergo a kind of paradigm shift. Of course, it makes no sense to switch completely to a polluter-pays principle, because in theory everyone would then pay all the costs for themselves and bear the full risk. This would literally reduce the current business model to absurdity.

Incredible opportunities in the insurance market

In this advent of the age of personal data, completely new business opportunities are emerging for innovative insurers. Instead of taking only three or four relevant data strands into account, as is the case in health insurance today, hundreds of parameters could be used for risk clustering in the future.

For health insurance, for example, the sequencing of personal DNA should already be included today. On the one hand, this would make it possible to determine the probability of diseases more reliably, and on the other hand, it could also be used to match antibiotic resistance, for example. Both have an enormous impact on the risks and costs that a patient could incur.

At the moment, it all sounds pretty crazy and anti-social. But I don’t think it is per se. On the one hand, the constantly falling costs of DNA sequencing (currently around US$ 1,000) provide a good economic path to such “liquid policies”. On the other hand, the polluter pays principle enjoys a very high level of social acceptance.

Personal Data Shepherd

What is missing, or I haven’t noticed it yet, is a personal data shepherd. A company that aggregates personal data reliably and neutrally and stores and makes it available to customers. (Hint: Free Business Idea)

We already collect plenty of data. But we can’t do very much with it yet, as it can’t be put into context with each other in a sensible way.

You will now say that people don’t want to release personal data. And yes, that may well be the case today. But as soon as this affects your wallet, things look different again. Once you understand that sharing your “Withings” scale weight data can result in a lower insurance premium or a lower transportation fare, you will think twice.

New business models for insurers

So what insurance companies need are people who can handle big data and BI. I think that big data and BI will have to be by far the most important skills of an insurer in the future. This will enable them to develop completely new product models and ultimately also business models compared to their competitors.

Although this will produce an overall shift from the more social solidarity principle to the more antisocial polluter-pays principle, it is foreseeable that most policyholders will be offered a product that brings more value to the bottom line for almost everyone. Even if only on a psychological level for the time being.