The end of uncertainty

Uncertainty is a key part of life. Do we know how to live without it?

Dateline 20 November 2005

What would happen if it was known, for certain, whether or not a particular house would burn down over the next 12 months? The answer is that domestic fire insurance would cease to exist. You would not be able to insure a house that was certain to burn down and would not wish to insure one that was certain not to.

Of course, this type of certainty is never likely to arise, but the areas of uncertainty can certainly diminish.

Take the example of crime. You can now ‘mash up’ – to use the awful techie phrase - crime reporting statistics with other data to produce increasingly sophisticated estimates of the likelihood of a crime occurring at a particular address.

Take the example of medicine. Genetic testing can determine who is particularly prone to a great many conditions and who is not. The Irish proverb ‘he who is born to be hanged has no reason to fear water’ is coming true. If you are overwhelmingly prone to cancer but not to heart disease then it may be pointless to worry about your cholesterol levels.

At first, these trends will benefit the insurance industry. They will be able to exclude from your policies any eventuality that is likely to happen to you. The cancer victim will be insured against heart disease and the heart patient against cancer.

But mash ups are an Internet based technology, available to consumers as well as insurance companies. As the mapping techniques become more sophisticated the rational person will, to paraphrase Groucho Marx, refuse to join any insurance policy that would have him as a member.

Some areas of life will remain unpredictable with true certainty. Chaos theory suggests that anything involving weather or human behavior falls into this category. We cannot tell, with certainty, whether your house will be burgled. But it is possible that the grey area of uncertainty will shrink to the point where there is no viable insurance industry. Already flood insurance is falling into this category. People in flood plains can’t get it and people on mountain tops don’t want it.

So how can we pay for healthcare? Health savings schemes - where you invest money, but can only draw out your own investments, not money invested by others – seem one option, but would leave many people unable to pay their bills. And why not simply consolidate your investments to cover any eventuality, whether health, crime or accident related?

The compulsory insurance schemes of Europe also do not seem to offer a solution. One way or another you have to persuade people – either as voters or as customers – to pay for cover they don’t need, if there is to be money in the pot for those who do need it. This is going to get harder, and in Europe will take the form of taxpayer revolts instead of commercial decline for the insurance industry.

There is no simple answer. Insurance has been a powerful force in western economies for centuries. If Lloyds of London had not insured shipping, America might never have been colonized. The major investors on every stock exchange in the world are insurance funds. But it is an industry we may have to live without.

Copyright © Quentin Langley 20 November 2005

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