Everything used to be different…
… because customers were still actively looking for protection then! To put it bluntly, why not now? Especially since the industry is celebrating growth in almost all areas. Admittedly, liability insurance is in the upper range in terms of its market penetration. Only the overall market penetration is far from the 100% mark (see table). The OECD statistics show insurance penetration as a percentage, measured by premium sum in relation to gross domestic product (GDP). While it is almost 50% in Finland, it settles at only 7% in Germany. Has the desire for security or “insurance” in this country changed over the years?
Once upon a time there was the Babylonian King Hammurabi. A clever little fellow. Almost 4,000 years ago, he had already recorded the distribution of risks and compensation for damages in the “Codex Hammurabi” on huge stone obelisks (which, by the way, can be seen in the Louvre in Paris). Babylonian caravans gave “a tithe” of their profits at their destination. This was used to compensate robbed caravan traders. The concept was as simple as it was ingenious: for example, if a caravan spotted robbers on fast horses on the horizon, they would try to escape. The merchant with the slowest camel would throw down his goods and escape with at least his life. Everyone paid him his share in solidarity. It was a small loss for all, rather than a disaster for one. No one questioned the system, everyone could afford it, and everyone went along with it.
A perfect system – this first insurance! But…
How would we deal with such insurance today? In the course of competition and the search for lucrative target groups, the question of all questions would come sooner or later:
“How fast is your camel?”
Dealers with the fast camels would have a much lower risk and would therefore not have to pay 10% of their profit, but perhaps only 3%, which then leads them to ask: “What should happen to me with my fast camel and why do I need insurance at all?”
However, the traders with the slow camels would then have to pay many times more and would soon no longer be able to afford the insurance. What would be left would be the dealers with average speed camels.
What does this look like in reality today? As soon as the market was liberalized, this risk selection virtually cut off potential target groups. Instead of fast or slow camels, a distinction is now made according to more or less risky professions or activities, then particularly risky hobbies are also given high premium surcharges or sorted out completely, and finally an increased risk is also determined on the basis of the state of health. Or why do only 25% of the working population have an (in my eyes) important occupational disability insurance?
Non-smokers, for example, do not want to co-finance the vice of smokers with your contributions. But let’s face it, “Let he who is free from guilt cast the first stone.” What about the non-smoking people who sometimes consume a little more alcohol, simply eat an unhealthy diet, or don’t exercise enough? There is no bonus/malus system for them. Anyone who gets a hankering for wingsuit flying or becomes a chain smoker after taking out a policy does not have to re-register this and remains insured at original conditions.
Opinions certainly differ widely between individual risk pricing and standardized premiums. But is that why insurance companies are in a bad light today? No matter who you ask, insurance tends to top the “most wanted” hit list from the bottom.
In addition to the individual price structure, the risk questions have opened a Pandora’s box, so to speak. Every risk question inevitably increases complexity. To stay with the example: Can the trader evaluate whether his camel is fast or slow compared to the rest of the caravan? Is it always equally fast, or does it have a bad day?
In the event of a claim, it is then checked whether he gave correct information at the time. In today’s world, we don’t have just one question, but several dozen – sometimes highly complicated – application questions, depending on the product. The risk that customers then inadvertently provide incorrect information leads to disputes when claims are rejected. When I think back to the statements of my acquaintances, I now find several points that simply didn’t exist before:
- too complicated
- too expensive
- they do not pay anyway
Should we now go back to the old system with one-size-fits-all pricing?
The insurer who takes this step would then only get the “slow camels” as customers in free competition, while the “fast camels” would then insure themselves with the cheaper competition.
This cannot be reversed.
So we need a pioneer to design a new type of product that can set up pricing without competitive pressure and without application questions. Of course, the premium may be adjusted to the value of the risk to be insured. But how do you take the complexity out now?
In today’s networked world, it is very easy to obtain essential information from a third party without bothering the customer. I once worked with a very large reinsurance company to develop a digital occupational disability insurance policy. The risk managers insisted on application questions instead of external data sources because “you can’t check whether the information is correct” and “you can’t then refer customers to a pre-contractual breach of the duty of disclosure.” In other words, “reject it.”
But that’s exactly the point. If we had reliable data from a third party, checking for a pre-contractual breach of the duty of disclosure would be obsolete and the claims processing process would be much faster and more customer-friendly.
We are seeing the first attempts at this in the area of motor vehicle insurance with telematics tariffs and soon also in pet insurance. But they only supplement and do not replace application questions. When will we see a customer-friendly solution for really complex products that does away with application questions altogether?