The all-knowing insurance company

Tyler Cowen flags the launch of Young Marmalade, a British auto insurance company that installs a black box in drivers’ cars and sets premiums based on how safely they drive. But don’t think of this as an interesting curiosity with unusual appeal to economists. This is a signal of where the business of insurance — auto, health and otherwise — is heading right now.

(Jay LaPrete - AP)

Young Marmalade’s pitch has everything to do with price. “The free installation of a black box can cut your insurance premiums in half,” the company writes in an announcement of its launch. “By monitoring the driving behavior such as acceleration, braking, what time of the day the car was driven and at what speed, Young Marmalade provides affordable, telematic insurance premiums.”

This is a hyper-specific use of an age-old insurance practice known as “rate setting,” where companies use various metrics to figure out how much risk a given subscriber poses, and then sets premiums accordingly.

Traditionally, insurance companies have had to rely on general demographics in figuring out what to charge subscribers. Teenagers pay more for auto-insurance because they, statistically speaking, get in more accidents. On the health-care side, Americans pay more for individual policies because they tend to have greater medical needs.

As individualized data becomes easier to obtain, those general estimates are becoming a relic. In auto insurance, that happens when a black box is mapping a driver’s every turn. In health care, it’s a greater reliance on health metrics and genetic markers to estimate how likely an individual is to get sick — and how much they should have to pay for that. We’re just at the beginning of learning what data-driven health insurance looks like.

In some cases, it can look like a good thing, giving individuals a financial reward for engaging in healthier behaviors. At the Cleveland Clinic, for example, a smoker can get a lower insurance premium if he enrolls in a smoking cessation program. The health-care system has managed to slow the growth of insurance premiums using these kinds of techniques.

But there’s also a significant amount of worry about how insurance companies could use data to discriminate against subscribers for factors they can’t control, such as a genetic risk marker for a given disease. To that extent, Congress passed legislation in 2008 that precludes employers’ health insurance plans from charging higher premiums based solely on a genetic risk factor.

That law still leaves insurers some wiggle room. They can track individuals’ weight, blood pressure and cholesterol levels as a gauge of one’s healthiness. Sometimes those metrics are within an individual’s control; sometimes, even with significant effort, they won’t budge. And there’s worry, among consumer advocates, that making these metrics more accessible could leave those with risk factors facing higher insurance costs — even when those factors may be outside of their control.