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Wednesday, October 30th 2013

Big Data & Insurance

I like reading Mark Stephens (to separate from others who also use the Cringely persona). Every once in a while he strays into the intersection of his world and health care. In a recent post the argument seems to be that big data has allowed the underwriters to hyperspecifically target to deny or price out individuals at risk.

[I]n the 1990s something happened: the cost of computing came down to the point where it was cost-effective to calculate likely health outcomes on an individual basis. This moved the health insurance business from being based on setting rates to denying coverage. In the U.S. the health insurance business model switched from covering as many people as possible to covering as few people as possible — selling insurance only to healthy people who didn’t much need the healthcare system.

It’s a nice theory but I don’t think this has played a large role in the rise of the uninsured in America. I think its small potatoes in the factors that are driving such.

Many states have specific restrictions on the use of individual data in underwriting. New York and Vermont have essentially pure community rating (at least for some insurers). Many other states have other, less restrictive but still important limitations on the use of individual data in underwriting or on how it can be used to determine premiums. These include Maine, Rhode Island, Massachusetts, Connecticut, New Jersey, Washington, Oregon, Colorado, Minnesota, North Dakota, South Dakota, Iowa, New Hampshire, Montana, Nevada, Utah, Kentucky, Idaho, Louisiana. All of these restrictions put some brakes on the influence of big data in moving underwriting much. Not that such methods aren’t nowadays used by health insurance actuaries but the influence may be overstated.

The fact is that the majority of Americans continue to receive their health insurance through group plans, primarily through their employers. And most of those people get their insurance through large group plans where such individual underwriting has less to no influence on premiums.

The rise in the percentage of uninsured correlates nicely with the decline in employer provided insurance and that reflects the growing costs of premiums. Indeed the individuals buying insurance on the open market, those you would imagine most hurt by complex underwriting techniques based on big data, has remained relatively stable.

Source: U.S. Census Data

There are plenty of factors behind the rise in group premiums which have driven employers to drop health insurance as a benefit but I don’t think the use of big data by actuaries is a major one of them.