Today’s Distribution

What Will Insurance Look Like In 20 Years?

How big data and AI will alter the course of the life insurance and benefits market

by Bob Gaydos

Mr. Gaydos is the founder and CEO of Pendella, an insurtech focused on innovations in product distribution. Visit www.pendella.com.

Today, the insurance industry stands on the precipice of a new era, one that will be defined by highly personalized insurance plans. As professionals deeply entrenched in this industry, we must confront what this change will mean… both for ourselves and our clients.

Already, this transformation is well underway, and the driving force is the approaching obsolescence of employer-sponsored health insurance. Once that comes to pass, it will open the door to unprecedented personalization for every type of insurance product.

But to ensure a smooth transition, insurance carriers will need to embrace the advanced power of big data and artificial intelligence (AI) at every level of their business operations. Without these instrumental tools, it simply won’t be possible to survive in this new personalized insurance landscape.

The Future Of Employer-Sponsored Health Insurance

I happen to think that employer-sponsored health insurance, which has long been the bedrock of employee benefits, will probably not exist 20 years from now. That may sound extreme, but the numbers speak for themselves.

The cost of family coverage rose by 43 percent between 2012 and 2022, more than double the rate of inflation for the same period. Assuming things continue at this pace, employer-sponsored contributions will eventually surpass employee salaries, at which point I think it’s safe to assume that employers are going to balk.

From where I sit, there are only two plausible scenarios to this impending collision between escalating costs and budget constraints. The first scenario is that more employers will switch to providing coverage through the individual coverage health reimbursement arrangement (ICHRA). This would allow employees to purchase their own health insurance on the Affordable Care Act (ACA) marketplace, for which employers can then reimburse them up to a defined amount.

However, switching to an ICHRA model doesn’t fix the cost of health care, it just fixes the employer’s cost. The employee is still left with the burden of spiraling health costs on the individual marketplace. For ICHRA to truly work, there would need to be price stability across all 50 states. That is simply not possible given how different the health insurance market is in each state. In short, ICHRA might look good on paper, but it doesn’t work in practice since all you’re doing is sending the employees to a broken marketplace.

This is why I think the more likely scenario is that employers will eventually abandon sponsoring health insurance altogether. They’ll just exit the market and refuse to continue playing this game of paying ever higher health premiums every year. When that happens – and I feel confident in saying it will – the federal government may be forced to step in and extend Medicare to all. Such a move would be politically difficult, but it may be the only way forward in the face of a mass exit of employers from the health insurance market.

Moreover, if we did have Medicare for all, health insurers would be thrilled as it would put them in the supplement business rather than the primary insurance business. For instance, the biggest issue with Medicare is that it has endless out-of-pocket expenses. But if tomorrow we had Medicare for all, everyone would have the option to buy a private supplement plan to cover those out-of-pocket expenses.

As for employers, an expansion in Medicare would be extremely welcome as it would free them from having to worry about health insurance, leaving them with a clean slate to reimagine employee benefits.

A New Approach To Employee Benefits

Where would employers direct benefits funds if employer-sponsored health insurance was no longer sucking up all the resources? The obvious answer is that the focus would switch to all the non-health insurance products, such as life, disability, vision, and dental. These insurance products cost only a fraction of what it costs to fund a health plan. Moreover, their premiums only increase by regular inflation or less, making them a bearable expense for employers.

As for employers, an expansion in Medicare would be extremely welcome as it would free them from having to worry about health insurance, leaving them with a clean slate to reimagine employee benefits...

Another thing that would change is that employers would switch to a defined contribution model.

Currently, we live in a defined benefit world when we should be living in a defined contribution world. What I mean by that is, if I’m an employer, I can either define the benefit and contribute towards it or I can define the contribution and let the employee choose the benefit. The latter is a far better setup for everyone, and employers have known this for decades. The only reason they haven’t yet embraced a defined contribution model is because it shifts the burden of future health insurance cost increases to employees.

But if health insurance were out of the picture, defined contributions would become a viable model. And the easiest vehicle for setting up defined contributions is the lifestyle account. For example, an employer might set the defined contribution to the lifestyle account at $4,000. Employees can then take those funds and choose their own benefits. That opens the door to significant personalization in the types of insurance an employee would like, and personalization of the terms of each chosen insurance product.

And, keep in mind, benefits are more than just insurance products. There’s also a wide range of wellness perks that can be highly attractive to employees. Lifestyle accounts will allow employees to select the benefits they desire most. Looking for financial management counseling? It’s yours. Need access to a mental health therapist? You’ve got it. I fully expect that the range of options for wellness benefits will dramatically expand in the coming years, as they are already proving highly effective at attracting and retaining talent.

Looking further ahead, it’s reasonable to expect that lifestyle accounts are just scratching the surface of what’s coming. Taking the focus off health insurance could lead to the market putting all its effort into finding new and better ways to personalize benefits. For example, a typical dental plan today includes basic coverage, major coverage, preventive care, and orthodontia. In the future, it may be possible for an employee to super customize what those benefits include, and which providers will cover each one. The same is true for all types of insurance products.

The Role Of Big Data And AI

To make all this personalization possible, though, carriers will need to increase their reliance on big data and AI for underwriting. Almost every carrier in the U.S. already knows this, but most of them aren’t yet at a point where they can totally rely on big data and AI. Instead, they’re mostly just using these tools on an individual basis because the data pool isn’t big enough to accurately predict behaviors long term.

But if suddenly every employer in the U.S. stopped sponsoring health insurance and switched to defined contributions through lifestyle accounts, the carriers would have more direct contact with the end users and could collect more data about them. That would dramatically increase the data pool that carriers have to work with. As a result, carriers would be able to accurately predict the number of people who would spend X amount of money on a particular benefit. From that, carriers could then accurately predict their risk spread and avoid adverse selection. I’m not exaggerating when I say that this capability would completely change the entire approach to underwriting.

Moreover, there’s no way to bring true personalization to an insurance product without big data and AI. Big data allows a carrier to segment applicants into market personas, such as single parents, families, young, and old. With those personas, a carrier can then make better risk assessments and product recommendations. Theoretically, this kind of personalization has always been possible, but it was never practical due to the massive amounts of paperwork and personpower it would have required. But now with AI and big data, the whole process can happen automatically.

In this new insurance landscape, I’m confident that personalized benefits through defined contributions will take over the benefits landscape. This process is already well underway and will undoubtedly pick up speed as employers realize the need to drop health insurance.

As such, carriers should prepare for this coming transformation by devising new ways to bring more personalization to their products, and by leaning more heavily on big data and AI. That’s my vision for the next 20 years.