Safety nets needed as big data raises non-insurance risks

Soaring northern Australia premiums and the proposed cyclone reinsurance pool illustrate that big data and the ability to more effectively price individual risks is increasing the need for safety nets in the digital economy, an Actuaries Institute paper says.

The paper says rising premiums can encourage consumers to take mitigation action, but may also lead to non-insurance or underinsurance when risks are beyond an individual’s reasonable control.

“While this is not a new problem, greater availability of data raises the prospect of more situations where uncontrollable risks might be identified, priced for in detail and result in what may be perceived as ‘unfair’ pricing,” the paper by Actuaries Institute CEO Elayne Grace says.

The issue, and the role of government action, is playing out in northern Australia, where surging premiums reflect a deeper understanding of address-level risks, while uncontrollable “externalities” such as past land-use planning and climate change are also at play.

“A particularly challenging question is whether the location of a residence is controllable, at either the individual or societal level,” the paper says.

“While people can sell their home or move home, and homes can be relocated, this is not without very significant cost, especially if the homeowner has been in that location for a long time and well before there is widely available information about the externality.”

The Actuaries Institute says safety nets for vulnerable members of society are needed and are best considered proactively, especially for those who become underinsured or uninsured and who can’t act to mitigate their risks.

“The experience with the reinsurance pool for home buildings, re-emergence of mutuals and any other solutions on the horizon, should be informative for all sectors; safety nets must be in place,” the paper says.

The paper, titled Big data and the digital economy: Benefits and pitfalls in the insurance industry, says in many ways every company has become a data analytics company given technological changes.

The Actuaries Institute urges a review of the legal framework around the digital economy, mechanisms to ensure standards remain broadly aligned with social norms and expectations, and says care should be taken to guard against a digital world of haves and have-nots amongst businesses and consumers.

“Digital transformation affords Australians unapparelled opportunities,” it says. “Incumbent upon us is maximising the benefits for society as we embrace those opportunities.”