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Will insurance become redundant as things get safer?

If you look at your LinkedIn feed or type the word ‘insurance’ into Google from time to time you will come across the most persistent memes or ideas of recent times: that insurance is about to become irrelevant.

Wednesday, August 3rd 2016, 1:22PM 3 Comments

by Russell Hutchinson

There are two different versions of this. One says that driverless cars will destroy the vehicle insurance industry. The other says that ‘when they find a cure for cancer’ people will live to 100 and so ‘won’t need insurance because there will be very few deaths’.

Rubbish.

Insurance is as prone to disruption as any other business. I myself have been working hard to introduce new, sometimes disruptive, technology to the sector. I say that only to remind you that I am no ‘head-in-the-sand’ luddite. I do not look at the future, screw up my eyes, stick my fingers in my ears, and shout ‘can’t see can’t hear’.
I am confident that insurance will not disappear with the doubling, say, of lifetimes because it has happened already.

Around 1800 the UK and the Netherlands were the richest countries in the world and life expectancy at birth was close to just 40 years. Today it is close to around 80 years. Death amongst those aged between 20 and 40 has become so rare as to have effectively ended. Have life insurance sales collapsed? No, they have not. So other factors must be in action.

One is that as we live longer the definitions of our lives change. Once upon a time a person of 60 was rare, and revered, as being of great age and experience. Today I know people of 60 with young children and new businesses. When they think of it at all they expect to live to 90. Many will do so.

If you think you are going to live a long time the very much smaller chance of dying early represents a greater loss. In 1805 a woman dying at age 30 was probably losing only a little more than a dozen future years. Today a woman dying at 60 is probably losing more than 20 future years, in which she would expect to work for as much as 10 of them.

Her expected income in that time, of course, is a relative fortune compared with her compatriot of 200 years earlier. With more at stake she will likely maintain more cover for longer. In 1805 almost no 60 year old women had life insurance. Today many have such cover. Insurance does have to change, but it cannot expect longevity alone to destroy it.

Now let us consider the vehicle industry. Although I do believe self-driving cars will devastate a lot of the current infrastructure it will not fundamentally eliminate insurance. Once again the principle of catastrophic risk remains. If your fleet of 100,000 driverless vehicles all suddenly stop working due to a system-wide virus you can bet on a lot of angry commuters billing you for their time. Those few occasions when a car does have a serious accident which kills someone will also be subject to greater claims – at least in countries which do not have statutory limits to such claims.

But there will be many fewer reasons to go to the panel and paint shop – so loss adjusters and repair dimensions of the wider insurance infrastructure will surely give way to legions that work on coding and road network enhancements necessary for our new robot cars to shepherd us around during our long lives.

 

Tags: Russell Hutchinson Russell Investments

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Comments from our readers

On 4 August 2016 at 8:50 am Observer said:
Life expectancy will change, but not everyone will live to 90 or 100. So life insurance will still be needed . Russell, as you point out, the loss if one dies young is greatly increased.

Insurance providers need to look at products that will provide affordable cover to greater ages. What about a stepped premium product to age 65 and level premiums thereafter?
On 4 August 2016 at 10:37 am w k said:
re life insurance: "there is nothing more certain than the certainty of death. and there is nothing more uncertain than the uncertainty of its timing".
On 20 August 2016 at 12:15 am Chatterbox said:
Insurance is supposed to remove uncertainty in life; but its the most uncertain product ever to exist with all the weasel words and denial of claims. Insurance these days undermines certainty with a flawed concept designed to generate premium income for years based on a promise that has no certainty.

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