18/11/2022
Blog Business Insurance

Want to make it big in insurance? Data is the key

Marlena Wilk 4 min Read

“It is a capital mistake to theorise before one has data”, said Sherlock Holmes, the famous detective created by Arthur Conan Doyle. Today, this knowledge is owned and put to a brand-new use by major tech giants. We are on the brink of a Big Data revolution in insurance.

Who has Big Data is an insurance winner. Today this knowledge is owned and put to brand-new use by major tech giants. We are on the brink of a Big Data revolution in insurance

Importance of data in modern business

Despite his perspicacity, the iconic pipe-smoking character with a magnifying glass could not have meant modern Big Data. Today, data is universally hailed as the “new oil”, an important factor that overhauls economic paradigms. The phenomenon can also be observed in the insurance sector. 

Market analysts foresee that Apple will soon be using the health data it collects from its smartwatch devices to sell health insurance across the US. 

These parameters include sensitive data such as blood pressure, oxygen saturation, EKG and body temperature. Used in tandem with an iPhone, the smartwatch can help patients and doctors monitor conditions such as diabetes. 

Analysts believe that access to this abundant data source will give Apple an edge in the health insurance market, allowing it to reduce insurance costs for some consumers – obviously the healthier ones. It looks like a completely natural path for Apple to take. 

Likewise, in some regions of the US, Tesla already offers insurance policies that rely on risk estimates calculated on the basis of driving style analysis. The key metric it employs to calculate insurance premiums in real time is known as the Tesla Safety Score; the TSS evaluates driving behaviour by monitoring data such as forward collision warnings per 1000 miles, hard braking, aggressive turning, tailgating and forced autopilot disengagement. Risks estimates are updated after each journey. Those who drive safely are then offered more competitive insurance products. 

The history of the insurance sector has witnessed several important turning points. The first documented life insurance was offered in 1583, when a resident of London, one William Gybbons, took out a policy to the tune of 382 pounds 6 shillings and 8 pence. There were no risk-based calculations available at that time. These only appeared at the turn of the 17th and 18th centuries, i.e., with the growth of mathematics, especially probability theory, statistics and stochastic analysis. 

Since then, risk estimate methods have been modernised, but most insurance providers still rely on statistical data analysis. Big Data is now changing that paradigm. The burden of risk assessment has shifted to a point where it can be accurately determined based on detailed data collected in real-time, which are now available to large tech companies specialised in products and services that have absolutely nothing to do with insurance. 

The process has already changed the market and may soon turn it upside down. It also raises a host of urgent ethical problems, since the ability to compile and analyse such detailed data sets upends the way in which insurers look at large consumer groups and perform risk assessments. This will affect the cost of insurance policies and their availability to all consumers. 

From now on, tech giants, such as autonomous vehicle or smartwatch manufacturers, will always have an advantage over traditional insurance providers, because Big Data enables them to reward clients who are rated as less risky or better-behaved. In consequence, other clients will have no choice but to buy more expensive insurance products from traditional insurance providers. 

We all love new tech gadgets. They make our lives easier. We use them more and more often, with the full knowledge that by doing so, we surrender important free information, which then ends up as an element of the priceless Big Data. 

Insurance companies need to catch up

Does all that mean we will soon be offered property insurance by home security companies whose apps now increase our sense of safety? Will Google Maps be offering insurance products at good prices to those who never venture into areas with higher crime rates? 

Time will tell. There is no doubt, however, that we are witnessing another big change in the insurance market. Traditional, renowned insurance institutions may now be increasingly marginalised, saddled with a portfolio of “bad clients”, who do not drive safely, fail to take care of their health or engage in risky behaviour on a daily basis. 

As a result, insurers will need to gradually improve their offer or else they may lose out to tech companies, only attracting clients without a better alternative. This in turn will lead to customer selection and raise more ethical problems: is this business strategy justified at all? Will tech giants start to model social behaviour? How far will their social impact go? For now, we will leave these questions unanswered.