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The Insurance "Game" Has Changed – and Investors Can Profit

Companies / Investing 2015 Apr 28, 2015 - 02:09 PM GMT

By: Money_Morning

Companies

Shah Gilani writes: It's a great day when a mega-profitable industry that sucks money out of us for services we can't live without has to change how it lines its pockets.

That day has come for insurance companies.

We've been talking at length about the new economic Disruptors that are forcing change in everything from public policy to the financial markets.


Even the most powerful insurance carriers aren't immune and you can profit from their vulnerability.

Flo Knows…

Thanks to these Disruptors, you can bring down your cost of health and auto insurance – benefitting the consumer side of your personal ledger.

You can also bolster the investment side of your ledger, meaning you can make money by betting on the new insurance Disruptors and against insurance dinosaurs whose business models are under attack.

Let me show you what I mean…

In the good old days for insurance companies, auto and health insurers lumped all their customers together. If you were a good driver, you paid virtually the same rates as bad drivers. If you exercised and ate right, you still paid the same health insurance rates as fast food-eating chain smokers.

The reasoning is simple to explain. Insurance is about pooling risk and the dynamic of imperfect information – meaning that, as long as customers don't know how to assess what kind of risk they represent to an insurer, they can't negotiate the price they pay.

Insurers pool good drivers and healthy people with high-risk policyholders so that there will be enough money to pay claims – and still profit handsomely.

In 2014, U.S. insurance companies earned approximately $338 billion in profits. But that's all changing.

For a while, insurers have offered better rates based on an insured customer's good driving record or good health history. Still, history takes time to develop, so rates haven't come down that much. However, now smart devices, smartphones and wearables are changing the information-gathering dynamics and forcing providers to distinguish between low- and high-risk customers.

Auto insurers are already offering discounts and safe-driving rewards based on "dongle" devices an insured motorist can plug into a portal behind the dash of most new cars.

Progressive Corp. (NYSE: PGR) – known for its hugely popular fictional pitchwoman "Flo" (actress Stephanie Courtney) – also advertises "Snapshot" (a dongle) in the company's many TV and radio ads.

According to Autoblog.com, a popular AOL blog devoted to all things auto-related, "Progressive uses these devices as part of its Snapshot usage-based insurance program, which has been around since 2008. The dongle, which plugs into the OBD-II diagnostic port, collects data on how many miles are driven, what times of day a vehicle is in operation and how hard a driver brakes. In exchange for this driver data, prudent drivers can receive discounts as large as 30% off their premiums."

Allstate Corp. (NYSE: ALL) offers its customers "Drivewise." According to Compare.com, an insurance comparison website, "Drivewise tracks your driving habits via a mobile app or a small device installed in your car and then sends the data to Allstate. You can look at the data collected on Allstate's website, so you can analyze your own driving habits to look for problem areas and see how much you're saving. Allstate says Drivewise will not increase your rates, and could help you save up to 30% on your premiums."

Check with your auto-insurance provider and see if it has a device that can earn you discounts. If you decide to make that request, be sure to also ask about the cybersecurity on the devices and if the device can be hacked. Someone could remotely take over your car. (I'm not kidding.)

Unhealthy Health Giants

The health insurance industry is facing even greater disruptions from new technologies than its auto-insurer counterparts.

As I hinted in my column last week on healthcare Disruptors for my Wall Street Insights and Indictments readers, wearable devices are changing the landscape in medicine. And that includes changes with insurance costs and practices.

Dr. Benno Keller, head of research and policy development at Zurich Insurance Group Ltd. (OTCMKTS ADR: ZURVY), recently said that "this interaction with technology will inevitably generate an enormous amount of data about the wearer's choices and lifestyle, which insurers can use to refine their understanding of the risks faced by their customers. It would make it easier to predict outcomes and even push solutions to challenges that have yet to occur."

Insurance giants UnitedHealth Group Inc. (NYSE: UNH), Humana Inc. (NYSE: HUM), Cigna Corp. (NYSE: CIG), and Highmark Inc. are creating programs to integrate wearables into policy pricing and care dynamics.

Companies like energy heavyweight BP Plc. (NYSE ADR: BP) are encouraging their global employees to sign up for programs that use wearables to track the number of steps they take, how long they sit, and other activity measures to get them healthier so they can lower the cost of insurance they charge them through company-coverage policies.

Time's Running Out for Insurance Giants

The soon-to-be released Apple Inc. (Nasdaq: AAPL) Apple Watch may single-handedly change the face of insurance.

Some of the things the Apple Watch will track include your heart rate and other vital signs. It will count your steps, monitor your sleep, measure how much sunlight you get, and remind you about your weight. Everything the smartwatch will be able to do, in terms of monitoring your health, can be transmitted to insurance companies and provider servicing databases to better profile what kind of risk you pose to the insurance company.

If you want to save money on your health insurance, you'll be able to do so – if you don't mind sharing your personal metrics with your provider.

How much might you be able to save? In due course, a lot.

That's because there are already startup insurance companies like Oscar available in limited areas – "Disruptor" companies that are attacking the old insurance model to bring down premium costs for policyholders who demonstrate they are low-risk customers.

Late last year, in fact, Fortune described New York-based Oscar as a "hipster health insurance company" and a "web-savvy startup" – just the kind of Disruptor to take on the entrenched giants.

As these disruptions take hold, you are going to be better equipped to improve your own health with new technologies such as wearables.

You are going to be able to negotiate down what you pay in premiums for your insurance.

And, if you stay tuned here, I'll tell you the names of the new Disruptors that will be worth investing in – like the privately held Oscar, when it finally goes public.

I'll also spotlight which giant insurers are going to end up being burdened with bad risks, faltering profits, and falling share prices.

And some of those could end up as "short" candidates – underscoring the fact that Disruptors create profit opportunities on both sides of a trade.

Source :http://moneymorning.com/2015/04/28/the-insurance-game-has-changed-and-you-can-profit/

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