Fitbit, wearables, and the insurance data conundrum

Imagine you’re an exec at Fitbit. You brought the company public with a decent return for your investors. But now you have to live with the scrutiny of public markets, and they’re not pretty. The overall category of wearables has a bit of a problem currently, as it’s not quite clear whether it can support ecosystems in it’s own right, or whether it’s dependent on a larger ecosystem. As we’ve covered in the latest episode of Thingonomics (in German, out any day now…), even Android Wear isn’t selling well enough to convince Android OEMs to continue making them. Oh, and then there’s the attrition rate in wearables, which is awful, as this analysis by RockHealth from last year1 has shown. So, not a pretty business to be in.

So, what do you do? Withings, one of the main competitors in the wearables space got acquired by someone with more resources than you, and a track record of working with regulators to bring products to market. Their trajectory is clearly health-tech, and you really don’t want to deal with the FDA and the time and cost associated with bringing health products to market. You can’t outright compete with Apple, the elephant in the room, because you can’t fully tap into iOS, and Android Wear is a dud, as covered above. So you decide to do a corporate wellness program.

How this works is pretty straightforward. You partner with a large corporate to subsidise or buy your product for their workforce, for a whole litany of potential upside. But your clients are corporate, so what ultimately sticks is the vague promise of reduced health insurance premiums due to a fact of better overall health of their workforce by virtue of not sitting on their arse all day. That’s the rough outline. And it seems to be working.

Technology analyst group Gartner forecasts that by 2018, some 2m people will be required by their employer to wear fitness trackers. […] “But at the end of the day we wanted to encourage people to participate.” More than 2,500 employees signed up in the first week and he says the company is on course to easily beat its target of enrolling 20 per cent of SAP’s north American organisation in the scheme. “Being a data-driven tech company, from a demographics standpoint we think it’s going to connect with our employees.” […] SAP is one of a growing number of companies that hope they may eventually be able to improve their staff’s health enough to lower healthcare costs 2

And of course, incentivising your customers workforce can work wonders for your product sell-through. And if you have concrete financial upside associated with the use of your product, that helps solve some of that pesky attrition problem, too.

BP gives employees a lower-deductible on their health plan if they walk 1m steps in a year, validating the results using trackers.

Now, there’s a couple of problems with that approach, and their not exclusive to wearables, or healthcare. You see them crop up in pay-per-mile car insurance (or early-driver car insurance), for instance, too. The first is that if you just flip the rhetoric around, that discount you get for getting tracked is essentially a tax you have to pay for the privilege of not being tracked (or at least your tracking data not being shared with an insurance company). Looked at in this way, it becomes a lot less appealing and a lot more dystopian, and potentially discriminatory in ways that would be litigious if not done in a technologically mediated way.
But the second is more interesting, and more threatening to the self-interest of insurance providers themselves. Taken to the logical conclusion, you’d insure every customer according to their own risk profile. Low probability of having to fall back on insurance = low premiums. High risk - high premiums. Now, this is nothing new - insurers have worked this way for most of their existence. The level of granularity and the speed of data acquisition present what is perceived as new opportunities to the actuaries at insurers. And by virtue of this, you incentivise better, less risky behaviour, and drive down costs in claims. Here’s how Izabella Kaminska with the FT puts it:

The proposition here is simple. Soon enough, telematics companies will gather data from all our connected devices, fitbits and cars, scrutinise it intricately, then determine whether we are “good” or “bad” agents. Good behaviours will be rewarded with cheaper insurance policies, bad ones will be penalised. The relative cost of being a bad agent, meanwhile, will incentivise good behaviours, eliminating evil from our world forever. Amen. […] There’s only one problem. Personalising insurance contracts to this degree undermines the whole concept of insurance. Insurance doesn’t really work unless risk is pooled in such a way that good agents pay over the odds to the benefit of the bad ones. 3

In short: if there’s not some mismatch between premiums and claims for the individual, the insurance model doesn’t work. And while the prima facie argument of insurers is to improve behaviour of their riskier customers and thus improve the overall economics, it looks awfully close to trying to improve the premiums/claims ratio for individual customers. Now, this might draw regulatory ire, and the quoted FT piece hints at that. But at the core, going down this path makes insurers superfluous, in that with perfect information symmetry, the socialising aspect of it falls by the wayside, and they work much more like a savings fund. Now, why would you need the insurance overhead for that?

That argument isn’t to say that connected products cannot make sense for insurers or in improving workforce health, but you need to think about your objectives and your strategy. Going down the path of financial optimization ultimately isn’t going to work, and only going to add to a lot of insurers woes that come with increasing volume of autonomous and electric vehicles (which is going to be interesting in its own right) and constantly improving longevity and precision medicine.

Now, for Fitbit, which we started with, this all ain’t pretty, as it’s hard to see where their growth should come from. They don’t compete well on the top end of the market, and in the middle are an undifferentiated product with huge brand expense. They might be market leader in terms of volume in fitness trackers, but they fail to enable new ecosystems, and are more of a gateway product. People who stay with the category churn away to premium products (Garmin or the Apple Watch come to mind), and people who don’t into non-consumption. It’s hard to see how this could lead to a sustainable future for Fitbit.