Insurers are digitising familiar concepts in an attempt to influence customers to take fewer risks, ultimately driving better outcomes for their bottom line. But what does this mean for the future…?

The paradox of moral hazard

A few months ago I bought a new DSLR camera and was on edge every time I left the house with it. After some persuasion, I bought insurance to cover loss, theft and damage, and now my camera has travelled to Vietnam, Cuba and beyond… Since buying insurance I’m more relaxed about taking greater risks now that I’m protected from the consequences. This is a classic example of moral hazard.

Moral hazard is the lack of incentive to guard against risk, or the motivation to take greater risks, when you are protected from the consequences. We all know that as customers, our expectations have changed: we want a smoother, quicker experience at a lower cost from our insurers. Many insurance players, big and small, are tackling this by improving their digital capability and customer experience. But that’s not all. We are also seeing increasing success for those players that are proactively tackling moral hazard by influencing our behaviour as customers for the better. This doesn’t just help insurers reduce the number of claims made, it also benefits the customer through being provided with new incentives and an increasing variety of policy types to choose from.

What concepts are working?

Changing customer behaviour requires encouragement and (as with most innovation in insurance) startups have taken the lead. There are three key ways that new players are doing this:

1. Rewarding desired behaviours

It is a technique often used to train dogs and educate children, but positive reinforcement is a simple yet effective mechanism that has been adopted by insurance incumbents to positively influence customer behaviours. As customers, we are being incentivised to live healthier or lower risk lifestyles with gifts and cash back. And we like it.

John Hancock Vitality were one of the first insurers to offer customers a free FitBit. Getting the device was the incentive to buy a policy with this particular insurer, but the lure of reduced premiums for hitting fitness targets tracked by the FitBit is how the insurer is changing our behaviour as customers. Similarly, Oscar, a health insurance provider in New York plans to offer every single customer a Misfit Flash. If they hit personalised step goals, Oscar will provide them with $1 in Amazon credit per day. Other examples of reward driven insurance are AllLife who insure customers with HIV and diabetes and reduce premiums if they are seen to be proactively managing the illness, and Discovery who reward safe driving by refunding a proportion of fuel bought by the customer.

Rewards are not a new concept in insurance – motor insurers have been offering ‘no claims discounts’ for years. The difference between then and now is that insurers are using rewards as a fundamental way to attract customers, proactively driving desirable behaviour during the entire lifecycle of the policy.

2. Peer-to-peer


When the concept of insurance first arose in the 16th century, peer-to-peer (P2P) insurance was the original mechanism for coverage. Families or small communities would come together to support each other in the event of damage. Over the last year we have seen an influx of startups offering simple P2P brokerage models, such as Guevara and Friendsurance. P2P insurers are now also emerging, such as Teambrella who set their own rules and vote about claims and Lemonade, the first company to launch a P2P commercial offering and a new high-profile player in the US market.

As customers, we like this model because we’re not claiming from faceless corporate insurers, we’re claiming from trusted peers. Combine this with reduced premiums when fewer claims are made and the P2P model consistently encourages us to limit risk-taking behaviour as a result. At the moment this seems constrained to the new players. Only time will tell if this model can be replicated by the more mainstream insurers.

3. Automated monitoring

Monitoring of customer behaviour is becoming a more common way for insurers to influence how we behave. By gaining more information about our activities, insurers are able to understand the actions we unintentionally hide. It also gives us, as customers, access to information that means we can understand our own risks better and adapt our behaviour accordingly.

Monitoring in this way started in 2013 when motor insurer, InsureTheBox, used telematics to track how safely their customers were driving. Since then, most mainstream insurers have offered us this type of car insurance. We have seen a 40% increase in blackbox telematics car insurance policies over the last year. The market has started to see the use of this technology in home insurance too. Neos now provides its customers with smart technology such as alarm systems and leak detection kits to provide tailored home insurance premiums. Having access to this data allows insurers to better price the risk they are underwriting. It also allows us, as customers, to understand our own behaviour better so we can change it accordingly.

Barriers to changing customer behaviour

To continue to adopt these types of influential techniques, all insurance players need to find ways to tackle hurdles like aggregator competition and the impact of new regulation. Perhaps one of the biggest hurdles they need to overcome is self-selection and the possibility that these techniques will only attract those customers who already demonstrate desirable (and rewarded) behaviours. An added consideration is how to manage concerns from customers that tracked data may not be misread or used erroneously by the insurer. Overcoming these barriers will be key to wider adoption of these techniques from more players in the market.

What next?

It’s still early days, but the market is changing beyond simply introducing cutting-edge technology to provide seamless and delightful experiences to customers. Instead of just using improved data to provide personalised rates, a smaller influx of insurers are now combining this with mechanisms to create more desirable customer behaviour.

The bigger insurers are watching these concepts come to life, and if successful, over the next few years we expect to see more and more insurers build upon the innovation we have seen in the startup networks and further evolve these techniques. Using more customer data such as measuring blood pressure for health and life insurance is certainly not impossible. Expansion into the commercial insurance industry is also likely to evolve in the near future.

As we’ve seen, this isn’t just beneficial to the insurer – as customers, we benefit through lower premiums and greater rewards. For insurers, this means there is a huge opportunity to build a strong and trusted personal relationship with their customer through mutually beneficial outcomes. Not only that, but lowering the risk profile of insured customers means a better bottom line for the insurers. This helps to increase trust in, and change the perception of, the insurance industry as a whole. In doing this, insurers can not only erode moral hazard, but also develop a much better relationship with customers. A relationship that is based on an implicit understanding of stable, managed and predictable behaviour.

To us, that sounds like a relationship that’s built to last.