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Insurers are increasingly using policy discounts to coax policyholders into desirable behaviors.

Is Big Brother Watching

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Behavior incentives are a growing trend among insurers, who increasingly use policy discounts to coax policyholders into desirable behaviors that are tied to lower risks.

While the premise of behavior incentives is rooted soundly in the insurance ideal of matching risk with pricing, the incentives themselves are often large enough to change the way whole classes of people behave and the methods for monitoring compliance are becoming increasingly intrusive.

Of course for every incentive, there is a disincentive. Although insurers started by offering incentive discounts without a corresponding penalty, the carrot approach has quickly morphed into the carrot and stick approach, where those who do not adopt the desired behavior are penalized with a higher premium or other disincentive.

There are behavior incentives/disincentive combinations for nearly every type of insurance.  For auto insurance you can receive a discount for installing telematic devices such as Progressive’s “Snapshot,” which monitors your driving habits and reports them to the insurer. If monitoring shows you to be an aggressive driver, you can be charged a surcharge. Home insurers can influence what type of windows you install, how far your house is built off the ground to avoid floods, whether you have an alarm system, and even what kind of dog you own. The disincentive? A much higher premium or even inability to get coverage. Worker’s compensation carriers have caused companies to set up safety programs that are monitored and tested, in exchange for large premium discounts or “safety awards”.

Most recently, healthcare insurers and employers have begun implementing employee wellness programs designed to align employee choices with employer and insurer risks. A 2015 study showed that 81% of employers with 200 or more employees offered some kind of wellness program, most providing a financial incentive. One problem with healthcare incentive programs is that, although they sound like a great idea, there is mixed evidence as to their effectiveness in actually changing behavior long-term or improving participant health. Some critics have claimed that these programs actually unfairly discriminate against those who are less healthy and poorer individuals.

Then there is the issue of privacy.  As insurers look for even more creative ways to monitor behavior in an effort to incentivize “good” choices, the erosion of privacy seems inevitable. Will my activity tracking bracelet soon be reporting my vitals to my health insurer, resulting in a higher premium if I make the “wrong” choices?  If I am unable or unwilling to make the changes the insurer thinks are appropriate for me, what will the consequences be? Will my driving habits and actual location be constantly monitored by my auto insurer, resulting in surcharges? Will my electronic assistant keep track of my comings and goings from my home and notify my home insurance company if I am away from home for too long? Will my smoke detector monitor the occupancy of my home and send me an extra bill because I increased my fire hazard by hosting a large party? What will companies do with all of this data that is collected in the name of improving behavior, health and safety?  How will my privacy be protected? How will the data be secured? History has not shown intentions to be pure or data to be secure. The implications are frightening.  How much of an insurance discount is our privacy worth?

Dianne Batistoni is a Partner in the Insurance Industry Practice with more than 20 years of professional accounting experience. She has extensive property and casualty insurance, captive and examination experience.

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