The Insurance Industry's Looming Challenges June 2018
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An increasing number of studies show that the climate indeed appears to be changing. Climate change will have important effects on the insurance industry. For instance, climate change is placing many population-dense areas at an increasing risk of experiencing loss events such as major storms. Data provider CoreLogic (Irvine, California) claims that 6.9 million homes on the Atlantic and Gulf coasts are at risk from hurricane storm surges and suggests that the costs of damages to these homes could surpass $1.5 trillion. Although costs for insurance companies will likely increase, insurance companies have limitations on their ability to pass those costs on in the form of higher premiums. For instance, California is notorious for its earthquakes, but high premiums for earthquake insurance in the state have limited the number of earthquake-insurance policyholders. According to a study by Risk Management Solutions (Newark, California), only 10% of households in California had earthquake coverage in 2014. Two factors will play a role in climate-change-driven insurance offers. First, communities are increasingly considering building infrastructures—such as levees—to counter the effects of climate change. Second, communities are attempting to sue mostly large companies to extract money for damage caused by human-created climate change. For example, cities and communities in California, Colorado, and New York have filed lawsuits against fossil-fuel companies that, the plaintiffs argue, sold products that contributed to climate change that is resulting in extreme storms, droughts, and wildfires. Both developments could help insurance companies reduce or shoulder climate-change-associated costs.
Developments in health care also will have an impact on insurance companies. Foremost, population aging in many countries will have a negative effect on health-care costs. In particular, the number of people with Alzheimer's disease will increase. For example, without the discovery of a cure or new treatments for Alzheimer's disease, the number of Alzheimer's patients in the United States could increase from fewer than 6 million today to some 13.8 million by 2050, according to the Alzheimer's Association (Chicago, Illinois). By 2050, total costs for the care of dementia patients could reach $1.1 trillion in today's dollars. Other developments could help health-care-insurance providers better plan for costs and premiums. For instance, Metabiota (San Francisco, California) is developing models to quantify and mitigate infectious-disease-associated risks. The company has developed a modeling platform to aid insurers in understanding and underwriting epidemic risk. Interest in Metabiota's approach goes beyond insurance companies: In-Q-Tel (Arlington, Virginia)—a venture-capital firm that supports the US intelligence community—signed a strategic agreement with Metabiota. Other developments could lead to medical nightmare scenarios that will have a substantial effect on health-care systems, including insurance companies. Public-health officials are seeing disturbing increases in the number of antibiotic-resistant diseases and in the speed at which antibiotic resistance is spreading. Sally Davies, chief medical officer of England, claims that because antibiotic-resistant diseases are becoming more common, "the world is facing an antibiotic apocalypse" ("'Antibiotic apocalypse': doctors sound alarm over drug resistance," Guardian, 8 October 2017; online). An October 2017 conference in Berlin, Germany, focused on this particular concern. Biomedical-research charity Wellcome Trust (London, England), the United Nations Foundation (Washington, DC), and several governments organized the conference to issue a worldwide call for the acceleration of efforts to address drug-resistant infections. The Wellcome Trust warns that "at least 700,000 people a year die from drug-resistant infections. If we don't act now, this number is predicted to rise to 10 million a year by 2050" ("A global call for action on drug-resistant infections," Wellcome Trust, 25 August 2017; online).
Other developments put information in the hands of potential and current policyholders and could have negative effects on the health-care-insurance industry. For example, health-care providers and insurance companies are facing potential business-model disruption because of the growing popularity of direct-to-consumer genetic testing. Individuals can send samples of their DNA to companies such as 23andMe (Mountain View, California) and receive a personal report that highlights aspects of their genetic makeup that could, for instance, make them more susceptible to certain forms of illness. And researchers at the Washington University School of Medicine (Washington University in St. Louis; Saint Louis, Missouri) have created an algorithm capable of predicting with noteworthy accuracy whether a patient will eventually develop Parkinson's disease. These approaches challenge the existing business model for providing medical insurance, in which actuaries assess an individual's risk to calculate insurance premiums. Because people usually do not have to disclose information from predictive tests to insurance companies, individuals who use such tests and determine that they are at high risk for certain illnesses can keep that information hidden from insurers and secure health insurance that would cost much more if insurers had the information at their disposal. This "asymmetry of information—when the customer knows more than the insurer—is the industry's nightmare" ("Genetic testing threatens the insurance industry," Economist, 3 August 2017; online).
The automotive industry is going through drastic changes that have relevance for insurance companies. If autonomous vehicles become reality and reduce accidents dramatically as many experts expect them to, premiums for car insurance could drop substantially. But a recent report by Accenture (Dublin, Ireland) and Stevens Institute of Technology (Hoboken, New Jersey) predicts that the widespread use of autonomous vehicles could create an opportunity for US auto insurers to take advantage of roughly $81 billion in new revenue between 2020 and 2025. This revenue will derive from new premiums that pertain to risks in autonomous-vehicle-relevant areas such as cybersecurity, product liability, and public-infrastructure security. Cars will eventually generate massive amounts of data that the insurance industry could leverage if it has access to it. For this reason, insurance company Allianz (Munich, Germany) suggests that no single party should have exclusive access to the data that vehicles will eventually generate. Car manufacturers intend to keep the data to themselves, but Allianz recommends that a third party—similar to an escrow service—should keep the data available for access by carmakers, insurance companies, agencies that inspect and certify cars as safe for street use, and other parties that might require the data.