Insurance is an arrangement where a third party undertakes to provide a guarantee of compensation for specified losses due to injury, damage, illness, or death in return for payment of a fee (premium). In an effort to eliminate malfeasance the courts have ruled on the principle of insurable interests determining that one cannot profit from a contrived insurance contract.
Insurance has changed very little since it was first established. The basic rules are common to all types of protection – the consumer must first make a proposal for insurance – this is reviewed by an underwriter taking account of all the risks – an offer of insurance is presented and on payment of a premium the insurance contract is established. The insurance company expects that the premium it charges will more than cover the claims it pays. The insured knows that the insurance provides peace of mind and monetary compensation, as needed.
The marketing and design people have added jargon and colour to the process but the fundamentals of insurance remain unchanged. This is unusual because in every other walk of life change is rampant! Take car insurance as an example of how little has altered and how much more could change if some imagination was added to the mix.
Insurance companies provide car insurance to pools of individuals (broadly assessed for risk) and set a price for the insurance for each pool. The price is usually higher for younger, inexperienced drivers and cheaper for older, capable drivers. Underwriters become skilled at redefining the pools to ensure that the company is undertaking only a limited level of risk. But much more could be done to tease out these probabilities.
Insurance companies have recognised that new drivers have a disproportionate number of accidents and they have taken steps to address this by cleverly using modern technology. They have reduced the risks by encouraging drivers to install a monitoring device on driving performance. The inducement to the drivers is a lower premium. Could other forms of modern technology be used to revolutionise the traditional insurance market?
In most cases the car is driven for a period during the day and remains idle for the rest of the time. Technology exists to track car usage and to provide more specific insurance to meet different situations. For example, the risks are lower when the car is safely parked in the owner’s driveway rather than when it is being driven at excessive speed.
A futuristic view! When drivers start their cars they will be offered a route map. In addition to directions they will also be shown the best insurance quotes for the trip. Insurance will become much more flexible – very basic insurance (at rock bottom prices) for owning the car – a little more when the car is parked (more again if parked illegally) – and then a pay-by-journey top-up just like taking the bus or the train. The technologies are there but could somebody join the dots together? Self-driving cars will definitely stimulate more insurance innovation. The insurance of drones, for instance, is already on a flight-by-flight basis!