Bringing Long-overdue Innovation to a Premium Pricing Model

April 22, 2015 Life Health Pro

By Warren S. Hersch

Auto insurers offer premium discounts to their customers for taking actions that might reduce the number and size of policy claims: taking a defensive driving course; or installing an anti-lock brake system and daytime running lights.

Rewards that link premiums to policyholder behavior have, however, been noticeably lacking in the life insurance space. Life companies issue a policy and, based on a single point-in-time assessment as to the insured’s mortality risk, collect the contract-prescribed premiums.

That’s now changing. At an April 8 dinner I attended, John Hancock Financial unveiled an initiative that promises to transform a largely passive relationship between insurer and insured to one where customers are rewarded over the life of a policy for healthy living.

Developed in partnership with The Vitality Group, a provider of incentive-based wellness programs, the solution avails policyholders of opportunities to save on their annual premiums and earn rewards and discounts by taking steps to improve their health.

With financial stress cited as a common workplace distraction, a financially-focused wellness initiative will become a higher priority among businesses.

How the program works
John Hancock policyholders take an online Vitality Health Review to determine their “vitality age.” An indicator of health that may vary from the policyholder’s actual age, the vitality age can be lowered by policyholders as they pursue wellness-related activities: exercising, getting an annual health screening or securing a flu shot.

As part of the program, policyholders receive personalized health goals and can log their activities using online and automated tools. One that John Hancock is giving to policyholders for free is Fitbit, a high-tech wristband that tracks the user’s number of steps walked, quality of sleep and other personal metrics.

The device transmits this information to the insurer; this data, when combined with other health-related activities, earns “vitality points” for the policyholder. These points, in turn, can be redeemed for rewards (e.g., retailer discounts). Depending on the insurance contract purchased, customer can also cut their annual premium by up 15 percent — a potentially significant sum over the life of a policy.

During the dinner, John Hancock described this “smart life insurance” program as a representing a paradigm shift for the industry. By tying the ongoing cost of premiums to certain activities, the company expects that policyholders will become more actively involved in maintaining their health long-term.

Result: a win-win for both parties: for policyholders who will enjoy lower premiums and a better quality of life in their golden years; and for John Hancock, which should be able to reduce death benefit claims and enjoy increased loyalty among customers who see the company as taking an active interest in their financial and physical well-being.

Assessing the impact
In debuting its alliance with Vitality, John Hancock joins a growing number of companies that are tapping into behavioral economics concepts. A key one: “present bias” or the use of short-term incentives to satisfy an individual’s need for immediate gratification. The difference in this case is that incentives aim to promote positive, long-term outcomes.

In the life insurance space, John Hancock’s initiative follows a path blazed by the South Africa-based insurer Discovery Ltd., originator of the Vitality program. The company’s health/wellness incentives and dynamically priced premiums have yielded a 68 percent lower frequency of death claims for “highly engaged clients” than for those who are “not actively engaged.”

Results like these are drawing the attention of other life insurers globally. Yet questions remain, like how many policyholders will pursue wellness programs and be sufficiently disciplined to sustain healthy activities for the long term. To have a measurable impact on an insurer’s bottom line, the adopters can’t be an exemplary few.

With financial stress cited as a common workplace distraction, a financially-focused wellness initiative will become a higher priority among businesses.

Another issue concerns the unsettled state of behavioral economics. As a guest at the John Hancock dinner pointed out, the field — and assumptions about how people will act in a given scenario — are still evolving. An incentive implemented to advance certain objectives can lead to unexpected or contrary results.

Also to consider: the extent to which the onset of non-communicable diseases will flow in future years not from behavior-driven choices — a white paper distributed at the dinner pegs this at a whopping 67 percent — but from environmental factors. These range from soil contaminants and air pollutants to climate-change and the growing “electro smog” generated by wireless and mobile devices.

These caveats aside, John Hancock’s announcement is to be applauded. For the company is (in the U.S.) spearheading an initiative that brings much-needed innovation to the life insurance industry’s pricing model. For that reason alone, that rollout will bear close watching.

 

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