This is already happening, I met the founder of http://wesavvy.com/ recently which uses your phone to track exercise and reduce your insurance premium.

When you use a phone to track exercise and reduce insurance premiums, that's a good thing, it encourages (or at least rewards) people who exercise and become healthier and might need less medical care.

When you use social networks to track and monitor who your friends are in order to approve you for credit, that causes a different set of rewards and incentives. It rewards you for choosing who you are willing to be friends with based on their creditworthiness. It punishes people who have associations with people with poor credit.

It essentially keeps good people down too. If you are a role model in your group of peers. If you're the guy out of your group of friends who got an education and got a steady job. If you pay your bills and don't carry debt, and you want to buy a house and have the money and responsibility to do so, you should be allowed to. When you do that, it shows those friends what you can do, and it allows you to move forward.

On the other hand, if you get an education, get a job, pay your bills, and don't carry debt, but when you go to buy a house your mortgage application is denied simply because you have some friends who are struggling on facebook, what is the impact of that? It just causes you to stop moving up. Maybe it discourages you. Maybe it makes you realize that the world doesn't really want you to be better than what your friends have become.

What the problem is has less to do with being judged by your actions, but rather being judged by the actions of those you associate with.

My understanding of the idea, which may be rubbish, runs as follows.

1. Find a way to identify good risks - in this case regular teeth brushers, or occupants of a crack-house that share a toothbrush.

2. Hence, offer lower premiums to low-risk customers than those companies that charge an average premium to average-risk customers.

3. Get a few customers together and make sure the shareholders of the polyopoly dental insurance mammoths get wind that you are thieving their customers. Panic sets in among the incumbents. Innovation!! Drat!!

4. Get bought out for a Unicorn bill before you even pay a dental claim or cover your costs.

To your specific point, in my country we have the concept of a "no claim bonus" where the insurance premium is drastically lower if there is no claim made in a year - not sure whether there is a similar practice in the US.

You can clock up several years of no claims bonuses, and the discount increases with each year.

Interestingly, the no claims bonus can be insured. Now, generally only risk averse people will insure their no claims bonus - and these people also tend to drive more risk aversely and hence have less accidents (or perhaps less likely to make claims - who the hell knows).

So, the very fact that somebody wanted to insure their no claims bonus should in theory give them a discount on their premiums. But you cannot offer a discount for an extra feature! This means you have to dive into your generalized linear model and fiddle with a couple of parameters to make sure there is some sort of nominal charge for the insurance on the no claims bonus.

The whole point being that just because data is available does not mean I can use it even though it may be statistically significant for me to use it.

Again, I am not sure of insurance regulations so there may be a possibility around using more data, if available, in insurance models.

The problem is that you can't eliminate risk[1][2], you can only shift it to someone else. But, we now live in a time in which people with the most powerful computers can shift all of the risk away from them. Consider where that risk ends up getting shifted.

[1] http://c2.com/cgi/wiki?YouCantEliminateRisk

[2] Well, science probably does eliminate risk and uncertainty, but that's a totally different enterprise.

Now, unless they choose just to not pay out, they can still reduce their risk levels below threshold of the industry. That's what actuarial science is founded on.

Oh, you mean "that branch of science that everyone ignores because it's politically unpalatable?"

"Gee, we promised the moon for our pension obligations and funded them at an absurdly low level, and now we're bankrupt? I don't know how this could have happened!" ~ Municipal governments

Yes, the pool is not always large enough, so you can throw it into a reinsurer from the insurance company. Yes, the reinsurance pool isn't always large enough, so you can retrocede to a few other reinsurers for diversification.

That pool isn't aways large enough, so you can securitise away the tail risks and aggregate loss risks into a cat bond, or a pandemic bond, or a longevity swap, or something fun.

These will then in turn be bought up by pension companies, in order to diversify against their market risks, and the needle returns to the start of the song, and we all sing along like before.

At a conference in 2007, I learned that health care companies were already exploring data they could get from those free get-a-discount grocery store cards. Unfortunately that's about as much as I know about it. I wish I would have asked the lecturer for more information at the time.

Does your insurer offer lower premiums if you get a "black box" attached to your car and can demonstrate you drive safely? Asking because I'm curious -- car insurance rates for young men are very high and this was mentioned as a possible mitigation.

Statistically, you're extra experience (and safe driving record) makes you a much, much safer driver and insurance companies know this.

The trouble is that the situation you describe is idealised and probably unachievable. In the real world, it seems more likely that a different, more complicated set of strict automated rules will be created, and it will simply create different loopholes through which some innocent people fall and get treated unfairly as a result. There will just be a lot more loopholes with fewer people falling through each one, making the system as a whole less accountable.

I learned a useful lesson just after I graduated from university. I had a decent job offer, I wanted to consolidate my modest amount of student debt into a sensible place as the student banking perks were expiring, and I wanted a small loan to buy a car to commute to that new job (which was far cheaper than either moving or taking public transport). I went to the bank I'd been with for years as a student, with all the paperwork including the signed contract for the new job, and explained what I was looking for. The guy I was speaking to looked a little sheepish, said that he thought what I was asking to do seemed perfectly reasonable... and then off the record suggested I didn't formally apply for it, because he already knew the computer would say no. My new job didn't start until the following week, and apparently that would mean the computer would have considered me to have no income at that time and so all the application would have done was get an automatic refusal and a mark as such on my credit record.

I think the moral of the story is that more data is only as useful as the analysis you make of it, and trying to codify and automate matters as complex as a typical adult's financial affairs is unlikely to lead to a reliably good analysis. In fact, I think it's even the law in my country these days that any such automated decision has to be reviewed by a real human on request, which might or might not be worth much in practice but does give some idea of the scale of the problem.

Why? Because I'd never gotten a credit card before. Had I simply moved existing purchases onto it, and taken the same (zero) revolving debt, I would have appeared as much less risky. [1]

What's worse is that when I went to the "what's my FICO"/credit report sites, they would consistently say that my credit score should be 740, even though this never translated into any observable consequences in terms of ease of getting loans.

And what made that even worse was that there were actual critics of the subprime practices then that refused to believe this was happening, that anyone classified as subprime must have deserved it in some way, even after I offered to forward this information over!

[1] Yes, I know, I should have known to pointlessly get a credit card and switch which buckets expenses go in, which is somehow informative about my credit risk.

My favourite thing about capitalism is that you actually only have to consider whether or not you're comfortable with this policy. If you don't like it, by no means do you HAVE to take a loan. You DO have to buy insurance in many situations, but at that point it's no longer a true free market anyway.

This is blatantly apparent in the health industry, where if you're a cash patient that knows the right magic incantations, you can get 90% of the bill waived, and if you don't know those incantations, you're forced into bankruptcy with hundreds of thousands in medical debt. The American health system is despicable and must be rectified.

But that's all the more reason why insurance companies want (and IMO should have) better insight into who you are: so the risk is more accurately quantifiable.

The specific incantations are different for every provider or hospital. Sometimes you can get it just by saying up front "I'm paying cash today." Sometimes you have to go through a complicated Patient Financial Services system to get the bill reduced, and then you have to say the right words to the right people if you want reduction.

A massive bulk of "medical" labor goes into these cat and mouse games between patients, insurers, providers, and facilities. They're all trying to figure out how to maximize their profit and/or savings and it gets very complicated.

If insurers learn that other people, even cash patients, are getting "a better deal", they'll punish the provider and/or facility by removing them from the network, thus cutting the patient traffic. When providers and facilities bill insurers, they expect to get maybe 10%-20% of the billed amount, so they rack the cost of everything up through the roof so that they'll be OK with the pittance they get in return. And that's the tip of the iceberg. There are a lot of people whose jobs are dedicated to nothing more than these billing shenanigans.

While this particular application mentions loans, credit scores are used for a lot more things than loans. It would be interesting to live in a world where you can't get a roof over your head because your deadbeat brother has a terrible credit score.

You surely can find other cases in which you end up paying more than the average. In the end, what matters is information asymmetry in any negotiation. In those terms, the consumer seems to be in an increasingly weaker position with the recent technological changes, social media, etc.

As a consumer I don't think that allowing market micro-segmentation is a sensible strategy. It's more something that I don't know very well how to stop, and it worries me.

Basing credit scores off of other people's credit scores is about as rational and efficient as basing my temperature and blood pressure readings on the average of my friends' readings.

Doesn't the ACA prohibit this. I thought they were now only allowed to base price on Age, Sex, and smoking status.

(And not to belabor your example, but the person in the wheelchair has to actually be unable to do the job even with "reasonable accommodations" from the employer. It's not enough to say "it seems like it might be dangerous" or "we don't have ramps")