Risk, insurance, anddisruptive technology:

The future of theinsurance industry

An EXL whitepaper

Written by

Ashish MakhijaniVP, LifePROlookdeeper@exlservice.com

An EXL whitepaper

Written by

Pronay Kanti ChakrabortyManager, LifePRO

How advancements in medicine and wellness are already changing health and life coverage

1 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

Insurance companies have long relied on

personal contacts and agent networks for

selling and have been reluctant to invest

in technology. This has caused them

to fall behind in the technological race.

Insurance companies already struggle

with the rapid pace of change in the digital

market compared to businesses like retail

banks. While new technology creates

new risks, it also creates opportunities and

new business models. For example, the

recent wealth management app launched

by Alibaba is already worth billions, and

online trading models launched in the

early 2000s now compete with traditional

brokerage firms. Technology has created a

disruption that changed business models

and reinvented new ones.

The health insurance industry landscape

has been shifting. Thanks to the new

technologies and advancements in

medicine and wellness, people are living

longer and healthier. Advanced medicine

has increased life expectancy, causing

strain on long term care and life certain

annuity products. Increasingly it is also

becoming easier to accurately predict how

likely an individual is to develop certain

conditions or diseases. New technical

advances and Big Data are changing the

way information is gathered, interpreted,

and used.

In any industry, technological evolution offers huge opportunities that have the potential to level the playing field for new entrants. At the same time, if established players fail to adapt to these changes, the technology can be a huge threat. For example, take Kodak and Blockbuster. These two companies had ample warning about digital media, but failing to integrate the new technology had detrimental effects.

2 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

Genetic testing and individual risk profilesWhole genome sequencing (WGS) is a

laboratory process that can determine

an individual’s entire DNA sequence. The

sequencing of the entire human genome

was completed in 1998. At the time, life

and health insurers thought they were

many years away from considering the

impact of WGS on their industry. But this

technology has advanced much more

quickly than expected – less than 20 years

after the human genome was sequenced

for the first time, a lab can sequence

someone’s genome for about $1,000 in just

a few hours. While WGS is not a common

enough practice to integrate into insurance

operations at this moment, the time is

coming soon. In the near future, it’s likely

that WGS will advance to the point that

an individual can get his or her genome

sequenced in just a few hours, for a few

hundred dollars.

Today, the insurance industry uses an

individual’s existing medical information

and demographic statistics to evaluate the

Some of these new advances in genetic

testing, medicine, and wearable devices

have the potential to disrupt the current

health and life insurance landscape.

To remain competitive and relevant,

it is critical that insurance companies

understand how these advancements will

impact the insurance industry, and prepare

as much as possible.

3 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

likelihood of morbidity risk. It is important

for an insurer to evaluate risk according to

the likelihood that claims will occur. Facts

increasing the likelihood of claims should

theoretically be considered and result in a

higher premium. For instance, older people

usually pay significantly higher premiums

than younger people for term life insurance

because older people are likely to file a

claim sooner than young people. So if

insurance companies integrated WGS

results, people with a genetic disease or a

genetic predisposition leading to a lower

life span and more claims per time unit

should theoretically pay higher premiums.

The appearance of WGS information

could disrupt the insurance industry’s

existing quoting structure by creating an

asymmetry of information. Basic legal

principles of insurance include that the

insured and the insurer are bound by a

good faith bond of honesty and fairness,

requiring that material facts must be

disclosed prior to contracting insurance.

Currently, insurance companies are not

allowed to perform genetic tests and the

obligation to disclose previously obtained

genetic test results is restricted by law and

remains vague. That means if the insured

has access to WGS information, and

the insurer does not, then the insurance

company cannot properly manage their

risk. People who have been informed about

being affected by a genetic condition may

look to insure undisclosed excessive event

risks for low premiums typically available

only to risk-free persons.

Individuals with genetic predispositions

to certain conditions have lower life

expectancies and a higher chance of

expensive medical procedures. For

example, about 15% of cancers have a

genetic susceptibility, as do at least 10%

of chronic diseases such as heart disease,

diabetes, and arthritis.1 Lifetime health

insurance costs for individuals with these

conditions are significantly higher than

those for the general population.

Individuals with genetic predispositions to certain conditions have lower life expectancies

4 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

As WGS becomes more accessible to the

general public, it’s important for health

and life insurers to pay close attention to

the laws and regulations that accompany

this development. In countries that

don’t specifically prohibit access to this

information – a list that currently includes

Canada, the United States, Russia, and

Japan2 -- insurers may need to change

their product and underwriting principles

so that they have access to the genetic

information if an individual decides to

undergo testing. Then, they will have to

design their products and adjust their rates

to fit that person’s risk profile.

Insurers should be proactive in planning

for their technology platforms to include

WSG in their underwriting processes.

The technology platform will need to

be advanced enough to understand the

enormous amount of data produced by

a genetic sequencing report. In addition,

the platform will need to be capable of

combining that information with other

data such as income group, age, and

family history. National and international

companies will have to account for

differences in law amongst states and

countries.

The high cost of a longer lifeThe average American is living 2.2 years

longer than just a decade ago. A 65-year-

old today will live until the age of 87.7.3 This

is an important piece of information for

insurers, as a person’s medical expenses

typically double between ages 70 and 90.4

This longer life expectancy is particularly

significant for providers of long-term

care policies. These products, which

cover nursing homes and home health

care expenses, guarantee payment for

the remainder of life. This means today’s

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[ Risk, insurance, and disruptive technology ]

insurers are paying for more years than

they expected. A long-term care product

sold 35 years ago was based on a slightly

shorter life expectancy, and the individual

purchasing that product paid a premium

based on that life expectancy.

Complicating the issue is the fact that

insurance companies invest the premiums,

relying on the added interest to help

provide care. Unfortunately, current low

interest rates mean that these investments

aren’t paying off the way the insurance

companies expected. In the United States,

life insurers have lost 12% since 2008, when

the Federal Reserve lowered interest rates

to help the economy.5

Increased life expectancy combined with

low interest rates are creating a financial

predicament, causing insurers to reduce

their cost of operations and shift that extra

money into paying for care. One way that

insurers can reduce costs is by outsourcing

some of their operations. Some outsource

technology or customer service. Others

outsource all administrative functions.

To further cut down on costs, insurers

are also limiting the types of products

that they sell. They are offering simpler

products and stepping away from long-

term care to avoid similar predicaments in

the future. Today, most insurers are putting

a strong emphasis on wellness and staying

healthy. A recent example of this is Zurich

Omni Health, which gives customers 10%

back on their premiums if they have no

health insurance claims in that year. The

company also offers wellness plans to help

customers reduce their cholesterol levels

or lose weight; those who successfully

reach target numbers are rewarded with

reduced premiums.6

Other common wellness plans and

incentives include offering rebates for

smoking cessation programs, or expanding

coverage to include access to dieticians.

Unfortunately, these new wellness

programs don’t help insurers deal with

long-term care products they’ve already

sold. In those cases, the only option

available is to manage their impact. In the

U.S., some long-term policy providers have

been able to negotiate their contracts with

state insurance departments. Recently,

Pennsylvania allowed four insurers to raise

rates on existing policies.7

6 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

Big data with big benefitsAs life and health insurers move towards

emphasizing a healthy lifestyle, many

have incorporated wearable devices

that allow customers to track nutrition,

exercise, sleep, and other variables. Some

companies will reduce premiums or offer

a rebate if customers show improvement

in certain key areas, such as nutrition or

exercise.

These devices are changing the

relationship between insurers and their

customers. Instead of relying on data

from a customer’s annual visit to a primary

care physician, insurers have access to a

constant stream of real-time data, down

to the number of steps he or she takes

in any given day. The insurer can use this

information to become an active partner

to improve the customer’s health. This

emphasis on wellness also helps keep

costs down.

Perhaps this is why a third of insurers

already offer insurance products that

include wearables, and 63% think that the

technology will be adopted within the next

three to five years.8

This does not mean, however, that every

insurer is ready to embrace wearables.

To properly integrate wearable devices

into operations, insurers need a strong

technology platform that can handle big

data, and perhaps more importantly, can

distinguish useful data from the non-

useful noise. This requires a technology

platform able to use the data to prepare

insurance quotes and establish premium

rates. More than half of insurers think

integrating this data will be extremely or

very challenging, and 90% of them have

not yet implemented a company-wide big

data strategy.9

7 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

Data isn’t the only challenge presented

by wearables. Because the data from

wearable devices is transmitted over

the internet, cybersecurity is a major

concern. Most data breaches are criminal

attacks.10 In fact, 78% of healthcare

organization breaches last year were due

to online malware attacks. Unfortunately,

health plans remain unprepared – only

40% of them reported concerns about

cybersecurity.11

If insurers want to realize the benefits of

wearable device data, they need to make

sure their system is secure in addition

to making sure that it is useful. Data

privacy for their customers needs to be a

priority, especially since over half of them

reported that a security breach would

cause them to switch providers.12 The

Healthcare Information and Management

Systems Society (HIMSS) has a list of

suggested technical controls and security

considerations.13

Table 1: Technical and operational controls to enhance data privacy

Although challenging, wearables have

the potential to change the industry, and

insurance companies that move early

and develop standard protocols for

wearable devices will benefit. There’s a big

opportunity in using analytics to design

how to handle, predict, and manage

information from wearable devices.

Technicalcontrols

• Anti-malware software• Data loss prevention software• Two-factor authentication software• Patch management software• Disc encryption software• Logging and monitoring software

Operational controls/security measures

• Security and compliance oversight committee• Formal security assessment process• Security incident response plan• Ongoing user awareness and training• Information classification system• Security policies

8 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

Conclusion: Move earlyWhole genome sequencing, advanced

medicine, and wearable devices have

already begun to change the health

and life insurance industry. These

technologies will be disruptive, but also

present opportunities. All of these new

technologies can help insurers manage

risk and reduce costs – provided the

insurers move quickly to integrate these

advancements into their product designs,

operating procedures, and technology

platforms.

Integration may require working closely

with lawmakers and regulatory bodies,

reducing operating costs by outsourcing

some work functions, and making large

investments in technology. These huge

changes can be difficult to implement, so

insurers should begin now – those who

move early will see the most benefit.

Key takeawaysTo keep up with disruptive technologies,

health and life insurance providers can take

the following actions:

• Pay attention to laws surrounding genetic

testing. They are apt to change, so plan

for their potential to influence product

design and underwriting.

• Offset low interest rates and higher

lifetime payments by outsourcing

administrative functions.

• Create incentives for customers to stay

healthy.

• Identify opportunities for renegotiating

state health contracts.

• Revamp technology platforms to handle

big data from wearable device and

distinguish real information from noise.

• Make cybersecurity and data privacy a

top priority.

9 © 2016 ExlService Holdings, Inc.

[ Risk, insurance, and disruptive technology ]

References1. https://www.scor.com/images/stories/pdf/library/focus/life_focus_112013_en.pdf

2. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3992580/

3. http://www.institutionalinvestor.com/article/3373646/investors-pensions/the-rising-challenge-of-measuring-and-managing-longevity-risk.html?ArticleId=3373646&p=1#/.V6n4FjV_Q8Y

4. http://journalistsresource.org/studies/government/health-care/elderly-medical-spending-medicare

5. http://www.wsj.com/articles/life-insurers-pass-pain-of-low-rates-on-to-consumers-1458466210

6. https://www.zurich.com.my/en/show-me-zurich-insurance-products/for-myself-protection/for-my-health/zurich-omni-health

7. http://www.mcall.com/news/local/watchdog/mc-long-term-care-insurance-rates-watchdog-20160504-column.html

8. http://www.computerweekly.com/news/4500246005/Wearable-technology-to-transform-laggards-in-the-insurance-industry

9. http://www.computerweekly.com/news/4500246005/Wearable-technology-to-transform-laggards-in-the-insurance-industry

10. http://www.beckershospitalreview.com/healthcare-information-technology/50-things-to-know-about-healthcare-data-security-privacy.html

11. http://www.beckershospitalreview.com/healthcare-information-technology/50-things-to-know-about-healthcare-data-security-privacy.html

12. http://www.beckershospitalreview.com/healthcare-information-technology/50-things-to-know-about-healthcare-data-security-privacy.html

13. http://www.himss.org/sophos-white-paper-healthcare-security-compliance-guide

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