Customer data deficit the Achilles’ heel for life insurers
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27 March 2025
by
Patrick Buncsi, FST Media
Article link:
https://fst.net.au/financial-services-news/life-insurers-information-gaps-could-be-its-achilles-heel/
Despite their enormous information advantage, bigtech firms – including AWS, Meta and Google – have yet to make their long-anticipated move into the lucrative insurance space. However, Dr Doron Samuell, a Canberra-based academic, behavioural economist and former chief medical officer, has warned that traditional insurers, and particularly life insurance providers, may be on borrowed time, with bigtechs yet to fully realise “how truly profitable it could be”.
“They [the bigtechs] know so much more about people than you as insurers do. This, I think, is a material risk to the sector,” said Samuell, a University of Canberra researcher and adviser to the life sector and Insurance Council of Australia, speaking at the 2025 Future of Insurance conference.
“We don’t understand our customers very well in life insurance. When do we touch them, it’s when they’re applying, going through extensive underwriting, when we want them to renew their policies, or when there’s a claim.
“We don’t really know much about them: we don’t know much about their preferences, their risk appetite, their risk tolerance, and we certainly don’t know much about their honesty.”
The ‘information asymmetry’ – “the difference between what people tell us and what we observe in the records”, Samuell notes – is considerable.
For Samuell, whose current research seeks to address this dearth of quality risk data, honesty (or the lack thereof) from customers remains an “enormous problem” for life insurance businesses – one that many in the sector are unwilling (or perhaps unable) to accept or change.
With traditional life insurers arguably relying on faulty or incomplete customer data in their policy and claims assessments, this could open the door for data-empowered bigtechs to dominate the sector.
“Non-disclosure is a huge problem. What people tell us and what we observe in the records is often vastly different,” Samuell said.
Despite his self-acknowledged lobbying efforts to reduce these information asymmetries, he claims the life insurance industry “seemed to be conceding them at every point”.
For Samuell, the abundance of, and therefore reliance on, poor-quality datasets is likely due to one prevailing factor – an overreliance on advisers to acquire new customers.
While the number of direct sign-ups is increasing, the vast majority of life policies are still written through advisers. In fact, just a small handful of advisers remain responsible for the majority of new policies. A 2024 Adviser Ratings report found that just 480 advisers wrote half of all new business in the previous year (the remaining half was written by a pool of more than 5,800 advisers).
Samuell in his research found that advisers were the source of this data deficit – deficiencies that are, ultimately, leading to poor quality risk assessments.
He said: “The disclosures made directly to the insurer were sometimes double that made to the financial adviser”.
This, he noted, was a direct result of the adviser sales model for life policies.
“Advisers are mostly remunerated on what they sell. So unless they’re on a basic wage, if you don’t sell something, you don’t get any money.
“We understood that there was an automatic incentive for advisers to influence the results – perhaps none of you would be surprised by that, but you may be surprised by the magnitude of it.”
In effect, it is easier to close a sale when the demands on a customer or client (in this case, to supply sensitive health or lifestyle information) are kept to a minimum.
“The risk for financial advisers is that they will sell less, so they’re motivated to help you to decrease the disclosures.
“Old-fashioned classical economics is really helpful in this instance. And it’s really about utility maximisation,” Samuell said.
The cost burden of this information asymmetry, however, is enormous.
Samuell cited a MunichRe report, authored by their pricing actuary, which estimated that removing financial advisers from personal disclosure would allow insurers to decrease their premiums – “and maintain profitability”, he said – by 20 per cent.
“So why haven’t they don’t that? I found this realisation very painful: life insurers are prepared to allow their good customers to cross-subsidise their bad customers because their real customers are financial advisers.”
Bridging the information gap makes business sense
As cost-of-living pressures bite, and as more Australians seek to offload discretionary costs, Samuell warns that the current model which enables these costly information gaps or falsehoods may need a serious rethink.
“There’s going to come a time when people can’t afford life insurance and the risk products because we’ve got risk that can’t be priced. And it’s risk that can’t be priced both in dishonesty and things like risk preferences and risk appetites.”
He added: “It is a problem that can be solved relatively inexpensively over a relatively short period of time.
“And you don’t know what is already happening with potential competitors who may just come in and completely disrupt the market on this basis.”
He cautioned against following the lead of general and health insurers in aspirational cost-saving, who have sought to address the problem by retooling their products.
“The general insurers are turning to extremely heavy-handed remedies to save the state’s finances, and everyone’s gone off in the wrong direction. They’re thinking rehabilitation is going fix everything. No, it didn’t. That mental health first aid is going to fix everything. No, it hasn’t.
“It’s not a medical problem. It’s a social problem, and it’s an economic problem.
“And that’s the thing that the thing that the life insurance industry is facing down the barrel if there’s no interest in really understanding customers better than what they do.”
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