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The value of the price signal, versus the challenge of affordability

Arguably the most interesting question and answer at the FSC's breakfast event 'Risking Everything' was the last one. A member of the audience (who works at a bank, incidentally) highlighted the problem of affordability. Tim Grafton from the insurance council highlighted the value of the price signal. Both raised important issues. It felt like questioner and responder talked past each other a bit, yet progress in our insurance market relies on some degree of acceptance and change on both sides of this divide. A price signal isn't a price signal unless it changes behaviour. That means, by definition, some people have to find insurance cover un-affordable in order to change their behaviour: like not buying our building property in areas increasingly likely to be flooded, and choosing a smaller, better built property in an earthquake zone. But there are parts of the picture missing in this. Insurers must accept the need to be more efficient. Government can help too - zoning and planning permission has to do some work too, not just leave it all to the insurance industry to bring the bad news. 

We have a similar, but largely uncovered example in the life and health insurance sector. Rates must reflect risks otherwise there is no price signal. The essence of programmes like AIA's vitality is that changes in diet and exercise create changes in health that pay dividends to both insurer and client - and result in lower premiums. That fact means acceptance that some people who are more likely to claim, and therefore more expensive to insure, must get charged more. If this seems obvious to my insurance readership, it is worth pausing to wonder: why isn't it obvious to some clients, politicians, and media? Perhaps we need to take a leaf out of Tim Grafton's book and talk about the price signal, and then extend the argument to acknowledge our need to become more efficient, and describe the future. Where we are going, I hope, is a world where more people take better care of themselves and health services and insurers helps them to do so. There is plenty of room for improvement. 

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