Tuesday, 4 October 2016

Could your social media posts make insurance more expensive?

James from my ECON110 class pointed me to this insightful Tamsyn Parker article in the New Zealand Herald with the above title. Parker writes:
Could that Instagram image of you bungy jumping in your 20s result in having to pay higher insurance costs in the future? One insurance expert thinks so.
Michael Naylor, a senior lecturer in finance and insurance at Massey University, says people should expect insurers to mine their social media accounts in the future to determine how much they will charge for insurance premiums and if they will pay out on claims.
"People have to be aware everything they do on social media can be effectively public.
Why would insurance companies want to mine social media data to find out about us? It's because of the adverse selection problem. An adverse selection problem arises because the uninformed party (the insurer) cannot tell those with 'good' attributes (low-risk people) from those with 'bad' attributes (high-risk people). To minimise the risk to themselves of engaging in an unfavourable market transaction, it makes sense for the insurer to assume that everyone is high-risk. This leads to a pooling equilibrium - low-risk people are grouped together with the high-risk people and pay the same premium, because they can't easily differentiate themselves. This creates a problem if it causes the market to fail.

I've written about how the insurance market fails before (this comes from a post about health insurance, but it equally applies to accident insurance or life insurance - see also this post on adverse selection in life insurance):
In the case of insurance, the market failure may arise as follows (this explanation follows Stephen Landsburg's excellent book The Armchair Economist). Let's say you could rank every person from 1 to 10 in terms of risk (the least risky are 1's, and the most risky are 10's). The insurance company doesn't know who is high-risk or low-risk. Say that they price the premiums based on the 'average' risk ('5' perhaps). The low risk people (1's and 2's) would be paying too much for insurance relative to their risk, so they choose not to buy insurance. This raises the average risk of those who do buy insurance (to '6' perhaps). So, the insurance company has to raise premiums to compensate. This causes some of the medium risk people (3's and 4's) to drop out of the market. The average risk has gone up again, and so do the premiums. Eventually, either only high risk people (10's) buy insurance, or no one buys it at all. This is why we call the problem adverse selection - the insurance company would prefer to sell insurance to low risk people, but it's the high risk people who are most likely to buy. 
In order to solve an adverse selection problem, the uninformed party can try to reveal the private information - we call this screening. Mining people's social media posts could reveal to the insurance companies which people are high-risk and which are low-risk. They can then separate the two groups, and we move from a pooling equilibrium to a separating equilibrium. High-risk people will pay higher premiums, and low-risk people will pay lower premiums. Or, as noted in the New Zealand Herald article linked above:
[Michael Naylor] predicts it will be one to three years away in New Zealand and says it may not come from existing insurers but new entrants to the market who will use personal data to cut insurance premiums for less risky customers.
That could leave old-style insurers with more risky customers and the prospect of rising premiums to cover their costs.
He says the change could have implications for people who seek adventure when younger and record it all on their social media pages.
"Of course the internet doesn't die."
They may have to prove they no longer undertake those activities to get insurance in the future or sign exclusion agreements meaning they won't be covered for certain activities, says Naylor.
So, if new insurers use social media mining to offer cheaper insurance to low-risk people, you can bet the large incumbent insurers will follow suit soon after, because insuring low-risk people is much more profitable than insuring high-risk people.

So for now, before you apply for life insurance (or health insurance, accident insurance, or even car insurance), it might be best to lock down your social media accounts. Or at least delete any references to the risky exploits of your youth.

If everyone locks down their social media accounts so that insurers can't access them, things start to get interesting. Will insurers simply ask to see your past social media posts? If I was an insurer, I would. People who say 'no' to such a request are more likely to be high-risk (because low-risk people would have nothing to hide), and the insurer could price their premiums accordingly. Essentially, low-risk people could signal that they are low risk by making their past social media posts available to their insurer, and reap the reward of a lower premium. In fact, low risk people could probably do this right now.

[HT: James from my ECON110 class]

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