Behavior-based Insurance in Life & Health Products

By 2035, at least 60% of health payers will offer some form of behavior-based insurance (BBI) alongside traditional coverage types. The penetration of BBI in life and health products in 2024 is low and will unlikely reach meaningful levels within 5 years.

What Sparked Our Interest In BBI for Life and Health Insurance

One of our health insurance clients has recently asked our opinion on extending its portfolio with a specialized BBI product, known in the life and health domains as PAYL (pay-as-you-live). One thing was sure – there are no market-available software tools to enable the model with minimal investments, and we are looking at the development of a complex custom solution. Before defining the probability of success and estimating the potential returns, we needed to answer the following questions:

• How does the competitive landscape of the health BBI market look?
• What is the consumer demand for PAYL products?
• When is the right time to enter the niche?

This sparked our research, where we discovered the current state of BBI and gained insight into the PAYL market dynamics. To project PAYL adoption patterns, we analyzed how BBI evolved in other domains, studied statistical data from reputable sources like FIO and NCBI, and looked into insights from early adopters. Our team also gathered first-hand opinions of insurance experts and studied consumer sentiment towards BBI to map the needs and potential pains of PAYL users.

Facts and Opinions Behind Our Prediction

Seeking PAYL adoption patterns in motor UBI

It may be hard to believe, but the PAYL market appeared so scarce that we had to look into a different insurance domain – motor insurance – to find patterns and make a prediction. We expect that some of the historical usage-based insurance (UBI) trends in motor insurance will be mirrored in the PAYL field:

• 90% of the US motor insurance market leaders currently offer some form of UBI products. UBI accounts for 60% of total auto policies written.
• Around 26% of all US motor insurance customers hold UBI policies.
• BBI in motor insurance hasn’t replaced traditional coverage options and is offered both as a standalone product and in combination with traditional policies.
• The growing adoption of UBI was largely fueled by advancements in technologies, such as AI-powered data analytics, IoT/telematics, and blockchain.

Technology maturation

Next, we explored technological maturity, a critical driver shaping how swiftly PAYL insurance gains widespread adoption among payers. Our assumption was the technology’s maturity level was low to medium, and research by thought leaders proved our point. For example, in its Hype Cycle for Digital Life and P&C Insurance 2023, Gartner says that the tech-driven panoptic personalization approach, a concept close to BBI in life and health, will reach mainstream adoption not earlier than in 10 years.

At the same time, some of the technology solutions enabling the PAYL model are more mature than others and are much closer to mainstream use in insurance. For example, AI-powered analytics are projected to be widely adopted within 2 years, and IoT and insurance telematics solutions – in 2–5 years. These should be a near-term priority for insurers seeking to proactively build up a technology basis for PAYL operations.

Demand for PAYL products

We found that customer demand is in place to justify the PAYL launch and economic feasibility. Growing premiums and complex buying journeys associated with traditional products push insureds to seek more affordable and personalized solutions. According to Capgemini, 75% of consumers prefer innovative life insurance options, with PAYL among the most popular alternatives to traditional policies. Accenture found out that demand for PAYL and UBI is comparably high (62% of consumers interested in life BBI vs. 76% – in motor UBI in 2022),

One of the demand hindrances we discussed with our client was the insureds’ hesitation to share the necessary data. Surprisingly, it didn’t appear to be a roadblock. For example, Accenture, in its 2023 and 2021 reports, highlights that 50–70% of US insurance customers are ready to share their health data with payers to secure premium discounts, access budget-friendly tailored offers, save time and effort, and receive professional advice on loss mitigation.

A perspective of industry players

Among the insurance business and IT leaders who took part in our survey, there’s no unified opinion on the future of PAYL. Half of respondents believe that PAYL can become commonplace in life & health insurance by 2030, driven by consumers’ increased demand for personalized products. Another half doubts that PAYL adoption will grow meaningfully in the decade ahead, naming data privacy issues, lengthy and complicated insurance software revamp, and insufficient consumer incentives to switch to BBI policies among the major market holdbacks.

What Influence Should You Expect

The biggest benefits of the PAYL model go to insurers. Charging more for inept behaviors will let carriers dynamically respond to risks and reduce loss ratios, while incentivizing healthy behaviors will pay off via a cut in claim volume and an increase in health-conscious clientele.

The niche is warm but spare, and few competitors are on the horizon. For now, Discovery, a South Africa-based insurer, is the only large health BBI provider worldwide. Discovery’s unique offer and well-designed franchise program gave the company a sure start: its Vitality products have attracted more than 35 million insureds globally.

PAYL’s potential impact on the bottom line will vary depending on the business size. Taking John Hancock Life Insurance, the only US firm offering PAYL coverage, the revenue looks compelling even for a large payer: based on ScienceSoft’s estimates, the PAYL program brought the company $312 million in 2023 alone.

The opportunities are exciting, but the efforts will only pay off for insurers who consider the potential downsides and are equipped to address them. First of all, launching PAYL will entail investments in modernizing existing IT systems and developing new BBI-specific solutions. Digital transformation may span 2–3+ years.

Insurers will also need to implement advanced fraud detection tools to recognize suspicious manipulations with wearable data. One respondent of our survey expressed a concern that users can potentially cheat the BBI model, for example, by sharing their wearables with more physically active friends. How to combat such fraud with technology, if anyhow, is an open question.

Moreover, insurers should be prepared to tackle potential social risks of PAYL products, such as misinterpreting and mispricing behaviors, unintendedly discriminating against low-income clientele, and fostering a tyranny of self-measurement. As a solution, researchers propose to factor in policyholders’ social contexts and life conditions in addition to the health state. Such an approach, however, exacerbates data privacy concerns.

PAYL insurance customers will benefit from lower premiums and greater control over their coverage spend. PAYL rewards look truly promising: Platinum members of the Vitality program, for example, saved 40% of their annual premiums, or a total of around $55 million, in 2023. In addition, the 2024 Vitality Impact Study indicates improvements in policyholders’ physical activity levels, diet, and smoking habits.

Yet, it’s unlikely that all consumers will reap equal financial benefits from PAYL products. Looking at the experience of BBI in motor insurance, many insureds are dissatisfied with their experiences, citing ambiguous behavior assessment processes, the pressure of constant surveillance, and the inability to achieve the intended premium discounts as the most frustrating aspects. For PAYL insurers, such feedback signals the need for transparent, non-intrusive controls and realistic incentives to introduce superior CX.

Healthcare providers indirectly win from the growing adoption of PAYL. The industry can expand e-collaboration with insurers to use policyholders’ dynamic health data for preventive care.

Since the PAYL model relies heavily on advanced automation technology, technology vendors should expect increased demand for specialized PAYL solutions in the way ahead.