"We know that no one ever seizes power with the intention of relinquishing it.” So wrote George Orwell in his famous predictive novel, 1984.
Today, the 1980s seem like ancient history; a time of simplicity. While visionaries as far back as Nikola Tesla in the early 1900s pondered the idea of worldwide information sharing systems, it was not until the 1960s, when emerging computer technology became prevalent, that the ability to analyze and compile large quantities of data began to seem like a reality instead of a dream.
Only one year before Orwell’s fated year of 1984—on Jan. 1, 1983 the Advanced Research Projects Agency Network (ARPANET) adopted the Transmission Control Protocol and Internet Protocol, or TCP/IP, and the internet made its public debut to the world. It is an understatement to say nothing has been the same since, and this is especially true in the world of insurance.
While the rise of big data analytics, predictive modeling, and artificial intelligence is impacting all sectors of our personal and professional lives, few industries have embraced these still-emerging technologies more than the business of insurance. Before the end of 2021, estimates say insurers will spend nearly $4 billion on implementing these technologies into their business models. It is easy to see why. According to DataFloq, big data implementation results in 30 percent better access to insurance services, 40-70 percent cost savings, and 60 percent higher fraud-detection rates. Few CEOs or CFOs would not want to invest with so great a potential return.
But what is really driving insurers to embrace these new technologies? Improved consumer experiences? Fighting insurance fraud? An industry roundtable published recently by one of the largest insurance services organizations in the U.S. got straight to the point: When asked, leading insurance executives responded uniformly, “Premium growth,” with one executive stating, “Delivering premium growth is probably the most pressing business issue.”
As the digital train pulls out of America’s station, a fair question to ask is if consumers will have a seat on board, or do they face a modern-day equivalent of the silent-movie-era maiden being tied to the tracks with the speeding locomotive bearing down? Insurers, of course, want their customers to trust them through “good hands,” being a “good neighbor,” and being “on our side.” But have America’s insurance companies earned the right to be trusted to properly use the power that data technology is about to unleash in the marketplace?
Apparently, consumers believe the answer is a resounding, “No.” In a recent study of trust in insurance, Statista found only 38 percent of consumers believe insurers do the right thing “a little,” 26 percent said “not much,” and 17 percent have no trust at all. Do the math, and a whopping 81 percent of Americans do not trust the same insurers that now want to access increasing amounts of their personal data. Are they all wrong? Or, more importantly, what are insurers doing to gain—or destroy—the trust of consumers in this increasingly digital age? Past, and current, practices may provide a clue to what drives these lack-of-confidence statistics.
According to Cyber Security Hub, two of the top three targets for data breaches in 2019 directly involve insurers. Health care came in with the unfortunate number-one ranking, while finance and insurance ranked third. Retail sales fell in the middle. The nearly 80 million Anthem policyholder files hacked in 2015 continues to appear at the top of the list for data breaches. While P&C carriers may cry, “That’s not us!” consumers don’t necessarily draw such distinctions. Any linking of the words “data breach” and “insurance” erodes consumer confidence.
The National Association of Insurance Commissioners (NAIC) appears to agree. Following nearly two years of hearings and drafting, the NAIC Insurance Data Security Model Law has already been adopted in 11 states since May 2018. With the NAIC holding vast accreditation powers, look for more states to follow. If consumers go to the NAIC website, they are told, “In recent years, there have been several major data breaches involving large insurers that have exposed and compromised the sensitive personal information of millions of insurance consumers.” A true statement, but not one that builds trust or confidence.
Perhaps deeper wounds come from those that are, too often, self-inflicted. Repeatedly, in their race to use new data technologies, insurers have taken too many steps backward when it comes to gaining consumer trust. Beginning in the 1990s, many insurers felt a new software program called “Colossus” was going to be the panacea to forever solve the problem of evaluating claims. Using data to analyze claims payments makes sense, and payments to injured persons should be based on an accurate analysis of factors rather than the personal emotions or sentiments of the individual claims professional assigned the claim. What could possibly go wrong?
Just about everything. Rather than using the software as an evaluation tool, many insurers began relying on the computer to set the claim value for soft tissue injuries. As a lawyer practicing during that time, I observed more than a few settlement conferences where judges skewered claims professionals who, perhaps too honestly, advised that they would have been willing to pay more, but the computer program would not allow them to do so.
Whether the number was right or wrong is debatable, but, either way, the optic was bad for insurers; they were seen as showing no human empathy by allowing a computer program to set the value for someone’s injury.
Following far too quickly on the heels of Colossus came the idea of “price optimization,” a practice so bad at least 18 states adopted laws or regulations prohibiting its use. Price optimization is based on a series of computer algorithms that determine how sensitive people are to their premiums being increased. Long-time and often older loyal insureds who don’t shop their policies are more “elastic,” and will simply pay more, versus a newer insured who may look around and change carriers to save a few bucks. The practice is not based on risk, but instead on how much more someone is willing to pay.
In 2013, price optimization software developer, Earnix, claimed its survey showed 45 percent of American insurers using this pricing tool, with another 29 percent planning to do so. Many leading insurers boasted of their use of such pricing models. In a 2011 SEC filing, one insurer noted, “We will utilize price optimization to increase our price competitiveness to a greater share of target customers.”
Then came regulatory scrutiny, legislative action, and several large class-action lawsuits focused on how consumers were being harmed by such practices. To some degree, no doubt, price optimization, is still ongoing. Even the NAIC noted in its report on such practices that “regulators do not currently have the data necessary for an independent evaluation of most of the insurer modeling calculations.” The message from that conclusion? Advance your technology so quickly that neither consumers nor regulators can keep up.
As if prior acts involving misuse of data are not enough, how many other industries spend billions of dollars a year telling consumers their collective profession is out to lie, cheat, and steal from them? In 2018 property and casualty insurers became the second largest advertising group buying time on American television screens, leaving beer companies in the dust and ranking only behind automakers. Several U.S. insurers already spend more than $1 billion dollars each year on advertising, with others close behind and expecting to cross the billion-dollar threshold soon. Combined, on television ads alone, America’s top insurers spent almost $4 billion in 2018.
Unlike most other advertisers, which extol the virtues of their own product, insurers seem to go out of their way to point out why consumers should not trust their own profession. With lines such as, “You didn’t pick the wrong policy, you chose the wrong insurance company,” or asserting other carriers will fail to cover your claim when “mayhem” strikes, the message is clear: Don’t trust your insurer to put your interests ahead of theirs. One insurer went a step further with its television ad titled, “Liar, liar pants on fire,” which depicted two executives from a competitor having their pants burn off while they lie to a consumer about how their company will help her. What collective message do these ads send? We don’t see beer companies claiming their competitors are out to poison drinkers, or automakers claim you will die a fiery death if you buy another brand of car.
Ads send messages, and here, the message is that insurance companies are not really out to help you, but to charge you more than you should pay and then look for ways to not pay your claim. To think this messaging does not influence how consumers view insurers in terms of trusting them with vast amounts of personal data is a mistake.
Such practices, along with other missteps, sow the seeds for the high jury verdicts insurers dislike. Those may pale in comparison to future jury verdicts arising from data breaches and misuse. In a recent Risk & Insurance article on why juries award billion-dollar-plus verdicts, one insurance executive noted, “The majority of jurors believe corporations are unethical and will do anything to maximize profit.” Add to that the observation that younger jurors tend to distrust corporations more, and the future for insurers that “get it wrong” appears to be bleak unless major changes are made quickly.
And high jury verdicts may only be part of the problem. Whether it be through legislation, regulation, or both, government officials—especially those elected to office—will respond to constituent concerns and fears. If insurers prove unworthy of being trusted when using these data-collecting technologies properly, the counterbalance may well be excessive regulation and restrictions. That result may equally harm consumers by stripping insurers of their ability to use new technologies to improve customer service, identify and fight insurance fraud, and resolve claims more quickly and accurately. If insurers get it wrong, it may take a generation or more before legislators and regulators would again be willing to afford them another chance.
So how do insurers earn the trust of consumers in the new cyber world? It may not be so difficult. When looking to new technologies, there is nothing wrong with placing the consumer first. Doing so is the very foundation of why insurance exists and what most insurers claim is their focus. Adopt and implement specific written standards for the moral and ethical use of emerging technologies. Be transparent and use those standards to put in place best practices for how technologies will be utilized across the enterprise network.
Insurers increase their risk far more by hiding behind vague or non-existent claims of wanting to do right, rather than by setting out clear expectations and standards. Jurors are more likely to forgive human errors in trying, and even failing, to achieve a goal than they are the perception of corporate greed and vice being in control.
Finally, promote how these new technologies are being used positively to help insurance consumers. One of the fastest emerging uses of technology is fighting against insurance fraud. Predictive modeling, machine learning, and big-data analysis are ideal fraud-fighting tools. Let consumers know you are using these breakthroughs to help protect them from both becoming victims of insurance fraud, and paying the higher premiums fraud brings.
The rocket ship of insurance technology is on the launch pad. This is perhaps the most exciting time ever as the world of insurance prepares for the changes that are coming. As the engines fire, it will be those at the controls today who set the trajectory of the ride we are all about to take. Consumers are carefully watching that launch. The question is whether they will be partners in your success, or fear what an Orwellian future may still yet hold.