I read ITL’s cover email this morning (Feb 8, 2022) encompassing the various articles that I could delve into if I was interested. One of the articles was an excerpt – or perhaps it was a copy – of an article that Donald Light had published in IRR discussing a cross-over insurance product issued by John Hancock and Allstate: a product that fused Allstate’s Drivewise with Hancock’s health monitoring services. Donald poses the question of whether property/casualty data from Drivewise might help a life insurance company like Hancock better determine life insurance mortality outcomes or if the reverse also might hold true (whether life insurance health app’s data might help P/C insurance companies determine better loss outcomes.
I’m sure Donald will let me know if I do or don’t have the essence of his proposition correct.
He questioned in his article whether it would be cost-effective to collect the requisite data (I assume to determine profitable premium). I question the amount of data that would be required and how many decades it would take to collect the data. I also mentioned that I’m not sure if insurance companies offering LTC, which emerged in the insurance marketplace many decades ago, have yet collected sufficient data to price that insurance product more accurately than they do currently.
Donald invites Data Scientists and Actuaries to comment on the data (and other) issues involved in the situation of cross-over insurance products.
(I can hear some Data Scientists say ‘we don’t need that much data … AI applications will lessen the number of years of cross-over data that we need. Actually I hope that no reputable Data Scientist working in the insurance industry ever says that … unless the insurance companies they work for can take whatever losses are incurred generated by their models from the salaries of those Data Scientists.)
Paul Carroll (of ITL) wonders if this is the crack in the door to combine other insurance lines of business including combining personal and commercial lines of insurance. He wonders why this seemingly artificial segmentation of major insurance lines of business, such as these, are separate in the first place. (I’m adding the terms ‘major’ and ‘seemingly’ to his statement of wonder even if he didn’t use the term ‘wonder’). I believe that Paul said he is hopeful this fusion will happen and I know he will let me know if I misunderstood him.
The key issue
Obviously, the key issue is whether it makes sense – from an insurance industry perspective – for insurance lines of business to be segmented and differentiated in the first place. Is the segmentation of insurance lines of business a matter of the hundreds, or thousands, of years of insurance industry history at play, a matter of convenience, or something (or many things) else?
I’m a creature of the insurance industry having worked in the business side of almost every major insurance line of business over almost 20 years. The rest of my 25+ years of insurance experience – management consulting to the industry and subsequently being a technology-focused industry analyst of the insurance industry – filled in most of the other lines of business that I hadn’t worked in during my industry decades. I definitely remain weak in the areas of reinsurance and health insurance.
I mention the above as context for my answer to the key question of whether insurance lines of business should be segmented and that is the title of this post: Yes, from my insurance industry experience, it is eminently logical to segment insurance lines of business.
I saw different market dynamics, different competitive dynamics, and different customer expectations and needs for each major insurance line of business. I saw different frequency and severity distributions for each major insurance line of business. I saw different levels of complexity even within seemingly similar long-tail lines of business and within seemingly similar short-tail lines of business.
For me, again, it is logical to separate life insurance from P/C insurance; or personal lines P/C insurance from commercial lines P/C insurance; or private personal auto insurance from commercial auto; or private personal auto insurance from homeowners insurance; or personal homeowners insurance from CMP insurance; or life insurance from annuities, or STD from LTD, or ….
But why is that my answer?
The context for my answer involves multiple reasons beyond the differences I mention above.
First, keep in mind (always) that the societal value-add of insurance is risk management or mitigation.
Second, and as importantly, each insurance line of business represents a combination of related coherent risks that differ from other lines of business: the ‘package’ of risks attendant to private passenger auto insurance differ from the ‘package’ of risks attendant to commercial auto insurance. Similarly for the ‘package’ of risks for other insurance lines of business.
I ask forgiveness from the insurance product pricing experts for my deliberate oversimplification pricing discussion below. Feel free to laugh out loud about it ….
Insurers – actuaries and others involved with pricing the insurance policies for a line of business – collect data to estimate the likelihood of the various risks in the ‘package’ of risks happening and combine that data with other elements (loss experience, loss costs to name only two) to arrive at a price, or a price range, for a contract of terms, conditions, and restrictions to manage or otherwise mitigate the losses of any of the coherent package of risks. Moreover, insurers do their best to ensure that the prices of the contracts generate profit according to the metrics of the insurance line of business in question.
I’m sorry I only used the word ‘data’ once in the above paragraph because the existence, availability, and accessibility of data, particularly very large amounts of data, is critical to the calculation (whether by insurance professionals, algorithmic models, or some combination of humans and digital artifacts) of the prices attendant to the contracts. Insurance companies that have existed for hundreds of years offering insurance coverages throughout that time will have collected an extremely large amount of data attendant to each coverage they have sold during that time period.
A third reason is that major lines of business have different regulatory requirements attached to them. I am not going to go much further on this point other than to say that there are different and varied levels of training (for sales, for underwriting , for pricing, for claim adjudication) associated with each major line of business. I hope, but do not know, if there are different types of training for customer service for each line of business but there should be.
But the world continues to changes … as does the risk landscape
It is a Captain Obvious statement to mention that our world continues to change and so does the risk landscape. but should these changes led to a fusion of insurance lines of business? I’m not so sure about that.
When Transportation Network Companies – Uber, Lyft – emerged and people who used their own vehicles (and insured those vehicles with private personal auto insurance) participated as commercial transportation drivers, their package of coherent risks changed. I would go further and state that their coherent package of risks became less coherent, in fact the number and types of risks expanded. At best, when they turned on the app to accept passengers the risk package became more like, if not exactly like, the risk package of a commercial driver (for which their private personal auto insurance policy did not cover nor should it have covered).
It makes no sense to me that the insurance company who agreed to sell private passenger auto insurance (for an agreed upon premium to cover that risk package) should automatically now also cover the risk package of a commercial transportation driver because that is not what the contract covers. Similarly with private homeowners who offer hospitality services as an Airbnb host. The package of risks differ between a private homeowner and a person offering commercial hospitality services. The private homeowner should not expect the contract that was agreed upon between them and the insurance company would now automatically cover the risk package that is attendant to commercial hospitality services.
And where a package of risks differ, the premium for that risk package could very well, and probably will and should, differ.
Can insurers provide fused coverage?
Actually the question should be: do insurers want to provide fused coverage? Because they could if they wanted to do that. But I think there are some reasons why insurers might not want to provide fused coverage:
- They may not believe it would be profitable.
- They may not believe that a sufficient number of customers would want to purchase the fused product.
- They may not believe they can collect sufficient data to price the fused product.
- They may not believe doing so would provide a competitive advantage (in their current or target markets).
- They may not believe they have the distribution channels to market and sell the fused product.
- They may not believe they have the operational systems to support sales, distribution, service, and claims concomitant with the fused product.
In summary, there is no artificial segmentation of the major lines of insurance. There are practical and logical reasons for lines of insurance (whether major or not) to be stand-alone businesses. One insurance firm partnering with another insurance firm from different insurance markets (life insurance and P/C insurance) is not an opening for insurers to offer fused insurance products for all the reasons I discuss above.
Keep hoping, Paul, but don’t hold your breath …..