The possibility of moral hazard leading to a claim may be
significantly mitigated when a customer follows the standards
mandated, allows the usage and behavior to be monitored, and
adapts behavior to react to reinforcement. This may cause a substantial decrease in the claim losses that are generated because of
controllable behavior-related factors, and the claims that arise are
more likely to be genuine claims resulting from pure risk events. The
claims that arise in spite of strict adherence to procedures may be
settled on a fast track without any restrictions. Insureds will benefit
as insurers relax the restrictive risk management techniques that
they have traditionally applied as a proxy
for containing moral hazard. For example,
in case of genuine claims, deductibles may
be lowered or eliminated, and a claim won’t
necessarily result in a rate hike. If no claims
arise during the policy period, customers
may get higher premium discounts.
Customers who do not follow the procedures may be proactively nudged to rectify
their behavior. Failing to take remedial steps
may be considered as not following the
principles of loss minimization and hence
an incidence of increase in hazard. Insurers
may enforce the risk control measures that
exist today in an effective way. The risk may
either be immediately suspended, exclusions
may be imposed to control the exposure, or the risk cover may
be restricted to only fortuitous losses. Repeated inaction or inappropriate action to actionable alerts will be considered a mistake,
and newly defined mistake exclusion provisions may be invoked
to deny claims. For those cases in which there were instances of
moral hazard aberrations that did not result in a claim, the violations may be treated as intentional and appropriately weighed
while considering the policy for renewal.
The Path and the Future
Considering the possibility in the reduction of loss frequency and
severity, insurers are strong advocates of connected insurance.
For example, insurance companies such as Progressive, Allstate,
Nationwide (auto); State Farm, Liberty Mutual, American Family
Insurance (home); John Hancock, Sureify, Phoenix (life); and Cigna,
Humana, UnitedHealth, Oscar (health), are enticing customers
with tangible financial rewards to embrace connected insurance.
These insurers are offering discounts in the cost of devices or/and
premiums for installing them (home) or for displaying positive
behavioral traits (auto, life, and health). When the measured behavior is less than optimal, insurers are merely reducing or denying
the additional financial rewards. Currently, these programs work
on a reward/no reward basis, with no penalty for bad behavior.
As the growth is still in the early stages, insurers are not following
the “bonus-malus” system, which is to reward good behavior and
impose restrictions for a negative one. However, as the ecosystem
matures, insurers may start imposing the risk-control practices
As of now, the growth of the connected ecosystem may be limited
because of concerns with respect to data sharing. Distributed ledger
technology (DLT) provides an immutable and append-only ledger,
Currently, connected insurance is targeting only personal lines, but with the
growth of the industrial internet of things,
But that future, if it comes at all, is a long way off. Until then,
the technologies that are changing the world are already making
their mark on insurance as we know it—it’s time to think about
SRIVATHSAN KARANAI MARGAN works as an insurance
domain consultant in Insurance & Healthcare Innovation Lab at
Tata Consultancy Services Ltd.
Foundations of Risk Management and Insurance 2nd Edition; Editor:
Charles Nyce; American Institute for Chartered Property Casualty
Underwriters/Insurance Institute of America; 2006.
Insurance Handbook—A guide to insurance: what it does and how it
works; Insurance Information institute; 2010.
The possibility of moral
hazard leading to a claim
may be significantly
mitigated when a
customer follows the
allows the usage and
behavior to be monitored,
and adapts behavior to
react to reinforcement.
This article is solely the opinion of its author. It does not express the official
policy of the American Academy of Actuaries; nor does it necessarily reflect
the opinions of the Academy’s individual officers, members, or staff.