Demutualization of risk
The process by which ever finer, data-driven rating segmentation shrinks risk sharing between policyholders until some profiles become uninsurable or unaffordable.
France's law of March 4, 2002 on patients' rights bars insurers covering death or disability from taking into account the results of a genetic test, even one supplied by the policyholder, and from asking for one. Lawmakers saw the problem coming: a test that predicts a disease before symptoms sorts policyholders more finely than any questionnaire. Demutualization is the process by which rating segmentation, fed by ever finer data, shrinks the share of risk pooled between policyholders, until some profiles become uninsurable or unaffordable. Insurance rests on pooling among people who do not know which of them will suffer the loss. Each new variable, an address down to the meter or recorded driving behavior, moves part of the randomness toward near-certainty, and a certain loss is no longer insurable. Segmentation still has its logic, which actuaries defend: the insurer that rates more finely than its competitors captures the good risks and leaves them the adverse selection. The law sets a few limits. The Court of Justice's Test-Achats ruling of March 1, 2011 banned sex as a factor in premiums and benefits from December 21, 2012. Genetics is closed off in France by the 2002 law, codified in Article L. 1141-1 of the Public Health Code. Beyond that, markets have built collective answers: the French natural catastrophe scheme of 1982, with a surcharge at a single rate set by the State, or in the United Kingdom the Flood Re scheme, opened in April 2016 for flood-exposed homes. Climate risk is now where the question bites hardest, with areas whose technical cost exceeds what a household can pay.
A riverside house flooded three times in ten years would carry a technical flood cost out of all proportion to that of its hillside neighbor. Priced on that risk alone, it would become unaffordable; in France, the natural catastrophe cover, with its uniform surcharge, keeps it inside the home policy.
demutualization of risk, risk demutualisation, hyper-segmentation, loss of risk pooling, uninsurability from segmentation
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