Information storage occurs in bytes. First there were bytes, then kilobytes. Now? We have moved through terabytes and exabytes and we now measure data storage in yottabytes. What does all of this mean for insurance? Insurance loves the science of actuary. Actuary is the theory of large numbers. Give an actuary a sample with 1 million or more records, and they can reasonably predict things. They can tell you how many people will die, how many people will be in car accidents, and how many fires will occur. Historically, the theory of large numbers could tell you how many of these events would occur, but not to whom they would occur. Enter data storage and actuaries have more data around to plumb and review. They have determined new factors about traits we possess to better predict not only what will happen, but to whom.
When I first started to drive, car insurance was based on my age, where I lived, what I drove, and what my motor vehicle report looked like. Those are still important factors, but all of this additional data that can be mined allows carriers to understand characteristics that will make me more, or less, likely to have a loss. I call these “stability factors.’ The longer I go without a claim, the less likely I am to have a claim. This allows for carriers to provide “safe driver” and “accident forgiveness.” Some carriers provide renewal discounts the longer you are with them. Changing insurance carriers? Some carriers give discounts for the time you were with you prior carrier. Insurance companies love stability. Some give discounts if you review your insurance more than 8 days before the policy renews. Why? People who handle things before they are due are the same people who service their cars regularly, change the windshield wipers regularly, and that all translates to fewer claims and fewer claims means a lower premium.
Some carriers use credit while others use education. The average credit score has 350 unique aspects to it. Approximately 10 of those unique aspects tell whether I pay my bills on time. Paying your bills on time indicates stability and stability indicates the possibility of being involved in fewer accidents. On the other hand, some of these don’t make sense to me. I do not understand how I drive changes on whether I went to college. (Some of the brightest people I know didn’t go to college. Some of the dumbest people I know went to college.)
In the end, what we pay gets determined by an ever changing set of “underwriting” characteristics. The more we know about people, the more accurately what we pay will become. Prior to figuring out that smoking causes cancer, life insurance rates were all the same. Once they figured out the impact of smoking, non-smoker rates fell and smoker rates climbed. Those same things will continue as insurance companies continue to gather, store, and utilize all of the information that is available to them.
Stay tuned for the next installment that will deal with the smart house and accident avoidance technologies.