Insurance can (and should) do more than predict the future

In bounding deep into the insurance industry (or as deep as not yet three years can get one), I have discovered something everyone already knows. People are terrible at thinking about the future. From behavioral economics to university research into the psychology of extended warranty buyers, there is ample evidence that most people are unable to tell the difference between tomorrow and ten years from now, and human emotions generally conspire to ensure that organized group wielders of spreadsheets (the Delphic oracle of the underwriter, actuary, and finance analyst) will be able to pull any thickness of wool over most consuming eyes. Is it better for me to pay a dozen dollars today (and again about every thirty days) to ensure that my tendency to drop my phone is guaranteed to be paid for by someone else (minus that tricky deductible)? Should I pay a little extra to guarantee that I can pay for the medical bills of someone who slips on my front steps? Thinking of the things that could go wrong in the future makes the human brain pretty much fall apart – particularly if that brain is trying to guess the cost of the wrong thing. It’s why there are computers that make predictions about the financial burden of bad things and their likelihood, and then test those predictions against time and reality. The often-maligned insurance company, guessing and checking individual and social failures – hailstorms, lawsuits, car crashes, sickness, death. Hari Seldon these companies are not; predicting the weather even ten days out remains pretty tough. But the spreadsheet shamans are getting a bit better at seeing auto accidents coming (turns out bad drivers get in more of them), making progress on plumbing disasters (automatic water shutoff and pipe photography), and identifying roofs likeliest to blow off on satellite. Again, nowhere near psychohistory, but better on so many levels than “this zip code seems a little safer than that one”. What insurance companies are finding is the magical force that is cause and effect. Rather than merely bringing in lots of money just in case, looking at some models of history, and rejecting customers that seem risk-y, insurers must find the specific cause(s) of a bad outcome. Was it the homeowner’s bad credit that caused a house with a bad circuit breaker to burn partially down? Probably not, unless an unpaid electrical contractor could be found on that report. Did the company’s revenue predict the number and settlement sizes of all those sexual harassment lawsuits last year? Not unless it was too small to qualify to be listed on Glassdoor (where in fact there were seven reviews that mentioned a certain randy manager, one of them from an interviewee even). Now insurance companies could simply put their new physics of loss cause and effect pricing risk more precisely. That would be good for their shareholders and good for those who keep the potential causes of risk in their lives (or companies) low by good fortune or hygiene. But to get back to banal my banal discovery about the challenges people have in conjuring up an accurate image of the days that lie ahead, insurance companies could do a lot for their dismal reputations by becoming supportive predictors, preventers, and mitigaters of bad events. Why not create an ever-improving data set of human health outcomes and their causes and set to work funding or enacting proactive solutions to those causes? The same thing could be affected in the case of death if you’re listening, life insurers. Or why not become the leading researchers and producers of unbelievably hail/wind/hurricane proof roofs? You already know what situations caused them to break. You could become the go-to risk managers for companies too – no more retainers to litigation-oriented law firms or emergency public relations companies when the very insurers that pay the bill (and often investigate thoroughly before doing so) in the event of a nightmare are conducting nightmare avoidance drills. You can do better than merely financializing risk and investing your surplus, insurers. Don’t just watch history unfold from the top of your tower, change it before it happens.