Insurance fairness: challenge and opportunity

Occurrence of more intense weather-related catastrophes (eg, tropical cyclones, floods, wildfires) could challenge the insurability of certain perils in specific regions,¹ potentially necessitating higher premium rates or even a termination of certain risk covers.² This can cause discontent among insured populations. Some homeowners may find it unfair that they are being charged higher premiums to cross-subsidise the losses on other homeowners’ high-risk properties.³ Others may perceive it as unjust that they may not be able to afford insurance from one year to the next.⁴ Such perceptions of inequity are likely boosted by a general trend of settlement in high-risk areas.⁵

Risk balance issues and fairness concerns are being raised in other fields of insurance too. Within Life & Health (L&H) insurance, the digitalisation of our lives and breakthroughs in machine learning (eg, generative AI)⁶ and novel diagnostic data (eg, from wearables or tests), potentially enable greater granularity and accuracy of risk quantification.

Self-monitoring and ongoing data collection can enable us to better track individual health, including abnormal readings which may indicate the onset of ill health. This in turn may help us live longer, healthier lives.⁷ Early detection of cancer, for example, can improve chances of recovery and lower associated rates of mortality.⁸ However, the proliferation of such technologies may also lead to information asymmetry and anti-selection risks. Consumers may have knowledge of their health status based on information acquired by over-the-counter diagnostics tools. Should they not, where adverse, disclose this information to insurers, it could lead to non-transparent subsidisation of their elevated risk status by other policy holders, and could even render certain risks uninsurable.

Amid these developments, the re/insurance industry potentially faces accusations of unfair practices. Such accusations may come from opposing sides in a given case, with diverging perspectives of fairness. In some instances, the underlying assumptions may be incompatible.⁹ To address concerns around fairness is no small challenge. But debate and propositions around fairness and inequality have always been core to the world of insurance, and the concerns should be tackled. What can the insurance industry do to alleviate concerns, and are there recent examples?

Most productively, re/insurance companies transparently lay out their core capabilities of identifying risk pools and enabling innovative risk transfer solutions. Protection gaps need to be closed to reduce inequalities, and affordable insurance helps.¹⁰ Core insurance values such as reliability, security and transparency remain vital for gaining the trust of clients, especially in the growing digital domain.¹¹

Among new approaches in Property & Casualty business to help make vulnerable populations more resilient in face of natural perils is parametric insurance. Recent examples include protection against severe weather conditions in high-growth markets.¹² Another example is a flood insurance scheme in New York that supports low- and mid-income households.¹³ And yet another case is Flood Re, a public private partnership in the UK that incentivises adaptation and mitigation measures. Flood Re helps households and communities transition to risk adequate pricing gradually by keeping flood insurance affordable for a certain period of time.¹⁴ On the L&H side, alternative data from wearables could have the potential to enhance underwriting or enable dynamic underwriting. And digital platforms can improve access, affordability and service for customers, thereby making insurance more inclusive.¹⁵