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Using physical fitness data to reduce the cost of life insurance

27 August 2019 Munich Re of Africa (MRoA)

Physical activity data collected from smartphones and wearable devices is changing the way that insurers and reinsurers price life insurance and critical illness policies. Michal Nejthardt, Head of Business Development at Munich Re of Africa (MRoA), told attendees at a recent client life seminar that big data was revolutionising risk rating and pricing methodologies across the life insurance industry. Munich Re is at the forefront of incorporating physical activity data in both its global and South Africa reinsurance operations.

This data is useful because healthier policyholders live longer and therefore contribute to the risk pool for longer. “Physical activity is beneficial to individuals – it improves life expectancy and thus reduces mortality and morbidity rates,” said Dr Andreas Armuss, Chief Medical Director, Munich Re. A life insurer can offer benefits to active policyholders because the link between physical activity and improving mortality rates is clearly documented. But the impact on morbidity rates – which apply when assessing critical illness policies – is less clear. There are not yet enough studies to conclusively link fitness to improved morbidity due to the dozens of illnesses that are covered on a typical critical illness policy.

Studies also show that the highest improvement in mortality rates coincide with moving an insured from being inactive to being moderately physically active – the benefits continue as the level of physical activity increases, but to a lesser extent. Dr Armuss thus warned overestimating the positive impact of increased levels of activity, especially in the critical illness field, when pricing risk.

There are a wide range of factors that inform activity-based insurance pricing methodologies. Reinsurers must consider the source of data (smartphone, wearable device or third party application); the quality of physical activity and how the physical activity is measured, among others. The preference at this stage is for a combination of smartphone and ‘average steps per day’ largely due to the greater penetration of smartphones among potential policyholders. Munich Re has additionally created three country categories based on the average level of in-country fitness. South Africa falls into the worst of these categories with an estimated 4700 average steps per month per person.

Armed with this information the reinsurer can rank policyholders based on physical activity data. Munich Re uses the following rankings as a starting point for discussions with its customers: Non-preferred lives (fewer than 7500 steps on average per day) and four tiers of preferred lives, including Tier 1 (7500-10k steps); Tier 2 (10-15k steps); Tier 3 (15-20k steps); and Tier 4 (more than 20k steps). A typical discount in Tier 1 ranges from 5-8% of reinsurance premiums with higher discounts applied to Tiers 2-4. “We will typically cap the overall discount offered to our life insurance clients because we do not have long term data to support the benefits of the highest activity levels – the application of too high a discount for Tier 4 might not be sustainable,” said Nejthardt. He added that the industry had enough experience with physical activity data to confidently apply discounts to both mortality and critical illness risks.

The discount referred to above is given against the reinsurance premium charged by Munich Re to its life insurance clients. Insurers will pass on this discount through a range of incentives to policyholders including individual premium discounts; improved sums insured; non-cash benefits; or boosting linked investment policies, to name a few. Insurers can also use the physical activity data to identity good and bad risks at underwriting or policy renewal stages.

Wearable devices no longer feature on Munich Re’s 2019 Tech Trend Radar because of their widespread adoption by insurance and reinsurance firms. Nejthardt observed that ‘wearable devices’ were dropped from the 2019 radar because the technology had become part of the business of reinsurance – and was here to stay. He singled out digital ecosystems – described as collaboration between digitally savvy firms to create new solutions that add value to their mutual customers – as the top trend to watch among the 46 tracked by the radar.

Digital ecosystems are coming to prominence due to the mid-2019 implementation of the European Unions’ Payment Systems Derivative (PSD2) regulation. This regulation lifts barriers to e-commerce, especially in the financial services sector. “Digital ecosystems introduce efficiencies across the core functions of insurance and reinsurance businesses and will prove fundamental in taking insurance business forward,” concluded Nejthardt. “The goal is to provide an integrated insurance solution within a digital ecosystem and to leverage data from various sources to improve customer experiences”.

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