Control is like the crankshaft of the personalisation engine that many in the sector want insurance to develop into. It represents the connecting logic between the data being observed and the analytical decisions being taken. How you calibrate control will influence the outcomes being generated.
This makes it important that control is properly understood. If not, then your ‘personal insurance engine’ will generate too much steam and not enough momentum. The problem at the moment is twofold.
Firstly, control is usually presented in rather binary terms. You can control this, but you can’t control that, so we’ll make you responsibly for this, but not responsible for that.
Second, it is portrayed and applied in a rather one dimensional way. Yet lots of academic research points to control being much more varied than this.
So what sort of ‘control things’ are we talking about here? It would include how we drive, what we eat, where we live, how we live, how we exercise, and what we do online and with devices. These are all presented as things we can control. How we control them will generate different risks for insurers and so the choices inherent in how you go about controlling them should influence the premium you pay to insure the resulting risk.
Behavioural Fairness
Four years ago, in a detailed article I wrote on behavioural fairness, I quoted from an academic paper by Belgian researchers on fairness and insurance. This quote is from a senior reinsurance manager, in an interview about why the sector was engaging with behavioural fairness so strongly:
“…ultimately, in the long run, insurers will be blocked from using things that people have no influence over. For example, we are not allowed to use genetic testing because you are born like that. You have no say in it. No matter what you eat, you have no influence at all on your genetics. So in the long run the regulator and consumer interest groups will probably shut down us using things that people have no control over. Now, the one thing people have clear control over, is their behaviour. And that is a very easy discussion to have with people to say: ‘You know you are doing wrong. Yes I do. Why don’t you change it? I don’t feel like it.’ Then you say: ‘You understand, I cannot actually reward you for that or accept you as a client. There is not much you can argue because all you have to do is act in a positive way and that solves the problem.’ It is something they have full control over.”
His words could be summarised as ‘take responsibility for how you handle the choices you have’ and 'be accountability for the consequences'. Or to put his words into the context of how insurance is changing, this is part of the move from social solidarity to individual responsibility. So this is not ‘me the insurer deciding what your premium should be’, but ‘you the policyholder deciding what risk you want to present'.
Total Control?
Yet how many things in life do we really have full control over? After all, why do people often spend so much time doing things they would really prefer not to be doing? Or have so little time to do things they would prefer to do? Surely the many new things that so distinguish modern life should give us more time to do the things we enjoy most? Instead, we sometimes feel pushed around by life, by circumstances and even by people close to us.
And these things rarely exist in isolation. Remember how many of the things we thought we had control over were pulled from us by the coronavirus pandemic. It reminded us that very little of what we do is fully within our total control.
What can we draw from this then? Remember that earlier point about how control is often presented in binary form. You have control, or you don’t have control. That’s invariably an illusion. In reality, you often have some control over things, but rarely full control. External events, or other internal events, will have their influence, whether you like it or not.
False Readings
For insurers designing products around the notion of behavioural fairness, the danger is that they assume levels or types of control that simply do not exist. On the one hand, they’ll be rewarding someone for something that wasn’t entirely their responsibility (aka false positives). And on the other hand, they’ll be penalising someone for something that again wasn’t entirely their responsibility (false negatives). Be they negative or positive, they’re still false.
This needn’t be disastrous for a portfolio, but then, it will introduce variances over a portfolio population that would otherwise be unexplained. Why hasn’t this portfolio grown? Why are the results so volatile? Is our strategy working? These are some of the questions those variances can trigger. If unanswered, then yes, the portfolio may end up having to be swept into the bin.
Let’s move on and look at two lines of business with which behavioural fairness is increasingly associated: motor and health.
Telematics
So how much control do you have over your driving? Let’s break it down and look at how control can easily be lost…
- How you drive – influenced by external factors such as the volume of traffic where you live and work, how others drive, the road conditions and levels of congestion, to name a few;
- What you drive – influenced by income and employment;
- When you drive – influenced by what type of job you have, and where and when you work;
- Where you drive – influenced by where you live and work, which are in turn influenced by a whole range of social factors.
What this adds up to is a pretty mixed picture in terms of the level of control you have. It’s not that you have no control, and neither that you have full control, but very much somewhere in the middle. This means that a motor insurer’s telematics product has to be designed so that its assumptions about control and responsibilities aren’t undermined by all the false positives and false negatives that the above factors will be producing.
This matters for the customer too. They often complain when they make sure not to do something and their premium doesn’t respond. Or when they made sure to do something and their premiums goes up. It may be an error margin for a system, but customers see it as the insurer not delivering on their fairness promise.
Health Lives
There is a big trend in those lines of insurance business associated with health to focus on the individual’s responsibility to lead a healthy life. And there’s definitely some mileage in that, but there’s also a lot running against it.
There’s a lot of academic research pointing to the influence of ‘social determinants of health’. And this has been taken up by policy makers at both national and international level. An influential report in the UK came out as part of the Marmot Review in 2010. Its focus was on health inequalities and gave rise to six policy initiatives:
- Give every child the best start in life
- Enable all children, young people and adults to maximise their capabilities and have control over their lives
- Create fair employment and good work for all
- Ensure healthy standard of living for all
- Create and develop healthy and sustainable places and communities
- Strengthen the role and impact of ill-health prevention.
The detail of these is less important here than the clear evidence coming out of the review that our health is hugely influenced by external factors like the above, from the moment we are born and then through out our lives. Here’s a rather stark passage from an article in the British Medical Journal of 11th May 2024.
“The individual approach to health assigns blame to those who show behaviours associated with ill health, and is a convenient mechanism for those in and with power, and wider society, to abrogate responsibility for creating the conditions for a health society. Instead, those with the worst health are blamed for their conditions. For example, during the peak of the pandemic, people from lower income households, frequently with front line roles, were unable to work from home and had greater loss of income during quarantine when infected with the virus.”
And it goes on…
“Asking individuals to make choices that their circumstances do not allow almost guarantees persisting health inequalities.”
For sure, the article’s authors are looking at health at the societal level, but they’re also pointing out weaknesses in the arguments of those looking at health at the individual level (which is where insurers now mainly focus).
There’s a key point that the sector can draw from that last quote. It is that it is unfair for insurers to expect individuals to take full control over their health, when so many aspects of it are well outside of their control.
So, is the problem then with the adjective ‘full’, as in full control? Possibly, but then, remember that senior reinsurance manager – he was taking about full control. Was that assumption then being baked into the products his firm was providing to insurers?
How we should think about this, is that insurers designing products around individualised health are in danger of assuming far greater levels of control than exist in reality for many people. The result = too many false negatives and false positives. The outcome = greater portfolio volatility.
Loci of control
Ok, ok, ok - I hear you say - I can see that it’s complicated, so how can we manage it? Let’s break it down a bit, using the notion of loci of control. A locus of control reflects the degree to which people believe they have control over the outcome of events in their lives, as opposed to those outcomes being driven by external forces outwith of their influence.
A person’s locus of control can be either internal or external. Individuals with a strong internal locus of control believe events in their life are primarily a result of their own actions: for example, when receiving exam results, people with an internal locus of control tend to praise or blame themselves and their abilities. People with a strong external locus of control tend to praise or blame external factors such as the teacher or the difficulty of the exam.
Whether you have an internal or external locus of control will depend on a range of factors, such as age, education, social class, culture, family situation and life experiences. So for example, those with an internal locus of control are more likely to be of higher socio-economic status, and are more likely to be politically engaged.
What’s clear then is that our locus of control is often not decided by us. We may be individuals, but we live in society and what we feel we can control can be influenced by many factors. That influence starts at birth, is evolved in families and developed at work.
Let’s bring in insurance now. The people who design insurance products and services are likely to be the self motivated types who have a strong internal locus of control. And these people, like that senior reinsurance manager, have a tendency to assume that everyone else is able to act in that way too.
So what happens when those two things are not in sync – insurance people who believe that customers do have full control over their behaviour, and customers whose experience is that often such control is only partial? The customer feels that what control they do have is being eroded even further, by the insurer who expects them to exert control over things they cannot control.
This is why the control at the heart of behavioural fairness needs to be handled with care, in case it results in unfair outcomes for customers. People can’t just change their age, work, family situation or social class, yet these things will exert far more control over their health than any number of prompts or warnings from a health insurer’s app.
Those who design motor or health products with lots of behavioural fairness built in, must recognise that the product needs to be designed around a deep understanding of the types of customers in their target market, not around themselves. The choices (and hence control) that the latter have are often quite different to those that the former has.
To Sum Up
Insurers need to approach personalised insurance, behavioural fairness and views on control and risk/reward with a lot more critical thinking. There’s a danger that they will only see the things they are use to seeing, rather than what customers are experiencing in real life.
The result will be products that can be launched but which then fail to scale due to being out of kilter with the reality of their target markets. The result will be a lot of lost investment and reputational damage for how good the sector is at innovation.
