'Dynamic' pricing for chronic ills
In the information era, the insurance game has changed
Dynamic health insurance pricing could be the key to reducing the cost of treating chronic diseases like diabetes and hypertension.
The heart of insurance has always been to calibrate prices to different risk profiles.
Ten years ago, insurers' main tools were demographic correlations, hospital records and policyholders' honesty -- something not to be taken for granted.
With social media, everyone from pollsters to banks to insurance companies started beefing up customer profiles by scraping up internet data.
Interestingly, a deep dive into someone's Facebook friend list can better predict whether he or she will repay a loan, some banks say. It could also predict how likely the person is to drive aggressively, or engage in other risky behaviours.
Insurers are taking data one step forward by introducing products that change price almost instantaneously in response to your behaviour. Adding extra cheese? That could cost you a few extra cents at the end of the month. Thinking about running that 10-mile mini-marathon on Saturday? That could help you shave a few dollars of your bill.
Dynamic pricing, as termed by reinsurer Swiss Re, is made possible by the wider availability of products that measure and relay key aspects of our lives (think iPhone and Fitbit), as well as platforms where customers voluntarily submit information like pictures of the food they are eating.
Dynamic pricing represents a seismic shift in the insurance paradigm that doesn't just involve the sources of data available.
The first big change is in how data is procured. Insurance has long been a cat-and-mouse game where policyholders hide potentially damaging information from insurers, who then dig out as many of these data points as possible, sometimes from controversial sources.
Under a dynamic pricing model, consumers could voluntarily submit information to insurers at every point of their day.
Consumers may still be trying to hide skeletons in their closets, and insurers will still seek to call them out on it. The difference is that this data will become much harder to hide as consumers live increasingly transparent lives through their devices, said Winnie Ching, Swiss Re's head of client markets for life and health in Southeast Asia.
This deluge of data leads to a second and perhaps more fundamental change: hypersegmentation. Consumers get insurance to secure their peace of mind, but also because they hope to get more than what they paid for in the event of an accident.
Under a traditional insurance model, the premiums of a lot of customers with few or no claims subsidise an individual with a lot of claims or very expensive claims.
As insurers get to know more about their clients, and learn to translate this information into risk more accurately, they will charge consumers something closer to the actual value of the benefits they will receive.
This is good news for healthy policyholders, who will derive a greater "bang for the buck", but not-so-good news for the chronically ill, who would be saddled with sky-high prices, Ms Ching said.
Dynamic pricing, however, can have a role in assuaging this last concern.
"We can cover [the chronically ill] and make prices dependent on the actions they take to reduce their risk profile," said Sohila Kwan, Swiss Re's head of health and medical solutions in Asia. "We are now accepting a wider spectrum of risk."
Dynamic pricing is especially suited to chronic "lifestyle" diseases like diabetes and heart conditions, for which policyholders can take active steps to reduce risk.
"If you look into it, the risk factors underlying these conditions are essentially the same, which suggests the solution can be easily scaled," Ms Kwan said.
DYNAMIC PRICING IN THAILAND
Swiss Re, in partnership with Muang Thai Life Assurance, launched a dynamic pricing diabetes policy in Thailand two weeks ago.
"This is the only insurance product in the Thai market to use dynamic pricing and offers access to a diabetes management mobile application and outpatient doctor visits," Ms Ching said.
According to the company, dynamic pricing could result in 49% lower premiums when compared with traditional insurance packages.
Dynamic pricing could be the trigger that accelerates the vertical integration of insurers, a trend already spearheaded by the likes of Aetna (which acquired CVS last year) and United Health Group (which owns surgery centres, clinics and a pharmacy benefits manager).
Insurers will have a heftier stake in the quality of the care provided, as well as in the technology used to measure health.
"Before, we used to write a check to leave consumers on their own; now, we are concerned about giving them access to the right care to manage their conditions," Ms Ching said.
In order to offer this solution, the company will also partner with BDMS Hospital, Theptarin Hospital, Prenetics and Roche.
Hong Kong-based genetics testing firm Prenetics will develop the project's mobile app, which will provide consumers with access to personalised nutritionist services for proper diet and exercise counselling.
"Insurers moved to cover diabetes complications five years ago, but this is the first product that insures people who already have diabetes with a disease-management approach," Ms Ching said.
The company aims to sign up 1,000 customers under the sandbox environment sponsored by the Office of Insurance Commission. It's also exploring the possibility of introducing the product in other Asian markets.
"More than 60% of diabetics live in Asia," Ms Kwan said.
The company, for example, recently introduced a similar product aimed at cardiovascular diseases in India.
While dynamic pricing could widen insurers' reach, "it is still too early to tell if dynamic pricing will be more profitable than the traditional model", Ms Kwan said.
"Rather than profitability, we are looking at sustainability," Ms Ching said.
By some estimates, close to one in 11 adults globally, and one in eight adults in Thailand (8 million cases), has diabetes, suggesting that diabetes management could be a sizeable portion of Swiss Re's portfolio once the market matures, Ms Ching said.
GOVERNMENT AS STAKEHOLDER
Governments, Ms Kwan suggested, could become important stakeholders in preventive care solutions like this, which could diminish the demand for expensive emergency procedures and reverse or delay the onset of diabetes.
After all, the Thai government picks up a large chunk of the country's expenses after the introduction of universal coverage reforms in 2001.
People with diabetes have medical expenditures 2.3 times higher than those without, according to the American Diabetes Association.
The challenge is to convince consumers of the value of dynamic pricing.
"Insurance is not something that you see and want to get, but we are working to improve the customer design," Ms Kwan said.