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Personalization in Insurance and the Death of the Middle Class

Jennifer Overhulse | September 11, 2015

In the beginning, the whole premise of insurance centered around the homogenization and distribution of risk across a group or segment in order to lessen single, individual or personal liability. When premiums were paid to an insurance company, it was with full acknowledgement that the average price being paid should technically be higher for some and lower for others based on certain risk factors. Insurance as it was originally conceived liked the “law of large numbers.” Simply put, it’s just easier for 10 people to pay to recover a loss than for one person to handle the expense alone.

Seriously, insurance was born of the idea that everyone would be better off if risk was shared or distributed across a group, thereby letting everyone absorb just a little. It’s your “Star Trek” moment for the day. How did Spock put it? “The needs of the many outweigh the needs of the few or the one.” You get the gist, I’m sure. Anyway, it seems the idea was sound, and for a couple of centuries, the industry has operated on this single, guiding principal.

Today, the industry seems to be leaning away from the law of large numbers in favor of the power of one. Consumers are enamored of personalized products. Any individual visiting the Amazon home page can easily find recommendations based specifically on what has been viewed recently or purchased previously. It’s comforting, and convenient, when a company or trusted partner really knows where one “lives,” so to speak. That said, it stands to reason that this level of personalization is now hotly demanded not only from Amazon, but from banks, favorite restaurants, and insurance companies as well.

Unfortunately, as more personalized insurance products are brought to market the industry may risk damaging the foundation upon which the industry was built. It is true that today an individual can buy an auto insurance policy which, through telematics, is priced almost exclusively on that person’s behavior, driving frequency, short stops, and overall speed, instead of the characteristics of a broader group based on geography or demographics. It seems my risk is my risk once again, and the trend is moving beyond personal auto. I have to admit, I’m part of this problem, having recently chided my health insurer for increasing my premiums based on characteristics of the risk pool of which they think I am a member.

“I don’t care about your risk pool,” I said. “I am not like these other people and should not be penalized for their poor health habits.”

My health insurer relented, sent my information back through underwriting and proposed a new kind of policy that would give me more personal coverage (and, thankfully, lower premiums if I remain healthy and take steps, literally, to stay that way). That said, and if I am any indication at all, it would appear that consumers are in the driver’s seat and they aren’t giving up control to anyone. The trend toward personalization continues in earnest.

This means that when it comes to insurance, consumers today as a whole don’t want to lend their fellow man a hand. Millennials in particular and as a generation or group, exhibit signs of being concerned about the “greater good.” These individuals may not want to proactively pay to cover risks incurred by others, but will give both time and money when they find a worthy cause. In fact, a Huffington Post article, “Charitable Giving: 75 Percent of Millennials Donated to Charity in 2011,” states: “According to the recent Millennial Impact Report, 75 percent of young people donated to causes last year and 63 percent said they gave their time to volunteer.”

So, since being charitable is also increasing in popularity, why the demand for more personalization and customization in insurance? Isn’t this counterproductive? You tell me. The scary part from my perspective is the impact this trend could have if we play it out to a possible extreme.

Have you heard? According to the talking heads on the Sunday morning talk shows, the middle class is under siege. The numbers seem to indicate those falling into this classification are dwindling in favor of the uber-powerful “one percent,” the very rich; the upper echelon.  Is it true? 

When you bang these two trends (personalization of products and declining middle class population) up against one another, I think there is a very disturbing potential result. As we continue to personalize insurance policies and risk becomes ruled by the individual again, we perpetuate the idea that the rich get richer (and therefore the poor get poorer), don’t we?  Won’t the one percent of “Elysium” moviedom eventually be the only people insured, while those that used to constitute the middle class will simply be uninsurable and poorer than ever?

Consider what happens if I’m a really bad driver? I probably exceed the speed limit on a regular basis. Suppose I’ve had four accidents in four weeks. I probably run red lights. I might also drive more than an hour to work each day through heavily congested areas. And worse yet, I work in a high crime area. Sounds like a pretty high risk policy, doesn’t it? How much do you think those premiums will be every month, and what do you think this all means for the future of insurance? 

I know this is likely just a bunch of “big questions” which have few concrete answers. But when you read the news today and find RSA backing out of personal auto before year’s end, and Citizens ditching nearly 300,000 policyholders back out into the private insurance market due to low margins (I suppose), one is left to wonder…when only the one percent are eligible for insurance can the rest of us go back to group policies, risk pools, and homogenized risk? Should we? Or, will we one day all be uninsurable?

Jennifer Overhulse is the principal owner of St. Nick Media Services.  She can be reached for further comment or information via email at jen@stnickmedia.com


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