How will insurers and the crowd listen to each other?

At this point, those of us with any knowledge at all of social media probably agree that it’s not going away. Therefore, ignoring social media is not sensible option. So for prudent insurers, the focus must be on how to make use of the information vortex swelling from social media networks.  For now, it’s just a really loud, mixed conversation—a bit like standing in the middle of a large, outdoor concert crowd. How can insurers sort the wheat from the chaff in the cloud of noise resounding from social networks?

Early examples of insurers’ attempts to “listen” to the crowd appear to be haphazard, if not accidental. In 2009, a Canadian woman was denied future disability payments after her insurer found evidence on Facebook contradicting her disability. We will probably see more and more examples of insurers using information found on social media sites in claims investigations, and those that are dishonest will either find life harder or get more innovative.

Indeed, claims investigations and even underwriting, which are both information-collecting exercises will likely find valuable uses for information volunteered by individuals on the Web. Much like employers now do informal background checks on potential employees by looking at their social media profiles, insurers can be expected to do the same sort of reconnaissance on their current and potential and insureds.  But will social media information only be useful on an individual, case-by-case basis?  Can we learn more about the crowd too?

Learning from the Crowd Today

The price of an insurance product (often referred to as the “premium”) is the result of many things. It reflects market conditions, the insurer’s expense scale, profit expectation, and information about the target market of insureds. The core part of the “information” component is based on the probability of outcomes. For a term life product, the probabilities are in the form of mortality rates, which are simply probabilities of death. For a health insurance product, morbidity rates reflecting the probability of illness or disability are used.

Conventionally, these probabilities have been determined by a combination of  industry studies and the company’s own experience. Rates are developed based on patterns of outcomes. For example, by observing how many of their insureds have died year by year, a company can develop an idea of the future likelihood of death for various groups of insureds (males, females, smokers, nonsmokers, etc.). The higher the expected mortality rate, the higher the premium.

As you might have guessed, companies with the best information about their insureds make the best guesses about future outcomes, and consequently, price their premiums the most effectively. Good information is important not only to the financial success and solvency of the insurance company, but also necessary to provide sufficient benefits to claimants at a fair and competitive price.

Learning from the Crowd Tomorrow

A common joke describes an insurance company as a car: “the president is driving, marketing has its foot on the gas, underwriting has its foot on the brakes, and the actuary is looking out the rear view mirror screaming directions.”

While we’ll never be able to tell the future, we can try to tilt the rear view  mirror closer to the present. This is where social media will be helpful. In fact auto insurers are just beginning to tilt their rear view mirrors by using crowd-listening tools like Telematics, a technology that allows the insurer to harvest valuable information about driving habits as well as provide customers with additional services on-the-go.

It’s not unreasonable to imagine a day when macro studies of human online social behavior might aid insurers in their quest for the best probabilities available.  Social media profiles and interaction patterns among people online will provide an unprecedented view of human behavior at both low and high levels.

The “market information” component I mentioned above can also be augmented by social media information. Imagine if Company ABC notices that the customers of Company XYZ, ABC’s key competitor, are not very happy about some product feature or level of customer service. (People can be very vocal online if things aren’t going their way.) Services like Twitter make it possible to broadcast rants quickly and cheaply. ABC would be able to adjust their marketing efforts to capitalize on the opportunity.

It will be interesting to see if—or rather how quickly—insurers are able to glean information from the crowd that can be used to more effectively price insurance products and aid competitive strategies. It’s a data mining exercise of finding patterns and connecting the dots. For better or worse, technology will eventually arrive that makes the dot connecting easy, though it’s a seemingly impossible task today. A company called Narus is already working on an technology that will aid government in catching criminals who are operating anonymously online. It’s conceivable that the same technology could be used to data mine social networks for insurance and other intelligence uses.

From the Customer’s View

If you’re not an insurance company, but rather the customer of one, this may seem unsettling. The idea that insurance companies are “spying” on you is not comforting. I have two main thoughts to offer on this. First, more consumer education is needed to make people aware of the consequences of broadcasting their lives online. Insurance is the least of your worries if you tell the world everything about yourself. Second, the era we’re entering will not only shed more light on your behavior as a customer but also that of insurance companies.

Web 2.0 is not a one-way mirror. Increased transparency will reward the most ethical companies and be punitive for those that that the public perceives as exploitative.

One thing is certain to me: as the public becomes more aware of the economic consequences of publicizing their lives, habits will change. And this is by no means a bad thing. Much like people are incentivized today to adopt healthier life styles to qualify for more affordable health or life insurance, the Web 2.0 era could accelerate this even more.

For example, people who frequently discuss their exercise habits online can be expected to have better health than those that talk about eating cookies. People that like to update public social media sites while on vacation are probably more likely to be robbed.

By putting more of an economic spotlight on people’s behaviors, they may find more reason to change bad habits.

Insurance is very much a social necessity, and is arguably as old as humanity. Before we fully judge the era we’re entering, we should ask the question: is too much information a bad thing? Yes, it’s a loaded question and depends entirely on context, but with insurance, information can have powerful, positive effects: Companies are able to provide fairer, higher quality, more customized products and consumers are better informed on the choices.

Image credit: http://www.flickr.com/photos/cosmosfan/ / CC BY-NC-ND 2.0

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