Friday Rant: Life Insurance — What's Wrong With Mining Social Data for Risk Assessment?

I suspect that life insurance represents the oldest form of hedge fund. It's basic premise has always been rather simple: Sell policy contracts to a large group of individuals for a specified annual premium based upon their personal age and observable health, then bank on the fact that the vast majority of those insured will live long enough for the cumulative investment value of their premiums to exceed the contracted death benefit -- or hope the insured cancels the policy before they die. Over the years, life insurance companies have further hedged their actuarial bets with family medical history, urine and blood tests, as well as habits such as smoking and hobbies like scuba and sky diving. So where does gathering an even greater cache of personal information cross the actuarial line? Or does it?

"The growing trade in personal information is the subject of a Wall Street Journal investigation into online privacy" according to today's issue in an article focused upon "a remarkable expansion of the use of consumer-marketing data, which is traditionally used for advertising purposes" and is now "being amassed about Americans [to predict] people's longevity." The article claims that what "makes the approach feasible is a trove of new information being assembled by giant data-collection firms. These companies sort details of online and offline purchases to help categorize people as runners or hikers, dieters or couch potatoes." Insurer's claim that using such data could drastically reduce the cost of underwriting and thereby lower policy costs to increase lagging sales "of life policies to individuals [that] are down 45% since the mid-1980s."

The rub appears to be one of applicant permission and that "information sold by marketing-database firms is lightly regulated ... [and whether] using it in the life-insurance application process would 'raise questions' about whether the data would be subject to the federal Fair Credit Reporting Act" according to Rebecca Kuehn of the Federal Trade Commission's division of privacy and identity protection. The Journal claims "The law's provisions kick in when 'adverse action' is taken against a person, such as a decision to deny insurance or increase rates." But while advocates "stress the databases wouldn't be used to make final decisions about applicants" it would be a very small step to use the same databases to determine whom to market to.

Social data mining and its use is clearly a matter of privacy. Most people probably feel they have nothing to hide. But what would your response be if you were asked to sign a release for a prospective insurer to obtain data about your on-line buying habits, magazine subscriptions, hobbies, TV viewing, eating and exercise habits motor vehicle reports and who knows what else? Your answer may not matter – George Orwell's 1948 prediction for the future was just 26 years early.

William Busch

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