A Contract-Based Insurance Incentive Mechanism Boosted by Wearable Technology

Traditional health insurance schemes make contracts with periodic premiums according to the health conditions of customers. Insurance companies are thus seeking an incentive for a healthy lifestyle of customers. Nowadays, more and more people want to gather metrics associated with physical activity. High quality and quantity information introduced by wearable devices may indicate the potential risks of acute conditions. Therefore, wearable technology brings new opportunities for insurance companies to change the interaction way with customers and to improve risk management for users. In this article, we investigate the problem of incentive mechanism design for the insurance market boosted by wearable technology. Designing an effective incentive mechanism is challenging since both the insurer and the users are selfish and rational parties who try to maximize their own utility. There exists an information asymmetry, i.e., the insurer is unaware of the intrinsic physical fitness of each user (type of users). Inspired by the contract theory, we design a series of optimal insurance contracts with different premium discounts and recommended exercise levels targeting different types of users. We first analyze the scenario where the insurer knows the type of each individual, then move to the more practical case where the insurer has incomplete information of user types. We theoretically prove that the proposed contracts satisfy individual rationality and incentive compatibility, which enables the insurer to achieve utility maximization and each type of user to choose the most appropriate contract. We have conducted extensive simulations to provide insight into the performance under different scenarios. The numerical results verify that our contract-based insurance incentive mechanism maximizes insurer's utility and motivates users to exercise more.