A founder recently told me, “The job of the traditional insurance company is to predict risk — not to change risk.” Predicting risk primarily resides in the purview of actuarial scientists who examine data and build models to predict the future. Changing risk requires the development — and deployment — of prescriptive action plans, which today is the only way to alter the underlying predictions of the future. At least until we have a grasp on time travel or figure out how to access parallel universes, of course.
Broadly speaking, risk is priced in the form of duration, dollars, and doubt. For any given risk, you need to understand, a) how long the exposure is to that risk, b) how to price premiums that will cover both customer claims and insurance company expenses — insurance companies usually only make profit from investing received premiums, and finally, c) doubt. As in, “I doubt it’ll happen, but in case it does, let’s protect against that possible but highly unlikely whopper of a claim.”
When doubt turns to likelihood and a particular risk exceeds 50%, it’s no longer a doubt but closer to a certainty. And is priced accordingly, to be sure. Health insurance, for example, seems to be structured and priced as a certainty — especially for elderly and chronic-disease populations — given the recent move toward higher premiums, deductibles, and utilization of health services vs. other populations.
So, should health insurance (and perhaps even other types of insurance) be treated like most of today’s risk products where the only requirement is to predict risk, price it accordingly, and wait for customers to file their claims? Or, should the broader industry strive to be more prescriptive and build action plans to tackle risk head on?
Seems like the vast majority of incumbents have zero desire to do so. Differentiating on price and brand marketing campaigns don’t seem to be sustainable strategies for carriers, given the abysmally low NPS marks for the industry. However, a new breed of startups is not only taking on risk but setting out to prove they can fundamentally change it.
Even if the new crop is successful, can happy customers and profitable insurance companies co-exist in the long run? Maybe not. Perhaps I’m being too “pie in the sky” — where any newly available profits via prescriptive action plans would be competed away, and carriers would still be left with a single profit source: the investment of received premiums.
But, which world would you want to live in? One with more risk or less risk?
Risk is a fundamental force of nature. It underlies all parts of life, not just the field of insurance. Yet, not all risk is bad. Often, it comes masked in a scary veneer. But, if you see it coming and have a clear plan for reducing or eliminating it, risk can turn out to be a darn good thing.