Fifteen Eighty Four

Academic perspectives from Cambridge University Press


An introduction to “Big Data and the Welfare State”

Torben Iversen, Philipp Rehm

A central function of the state is to provide insurance against the vagaries of life and markets, such as accidents, ill health, old age, or unemployment. Collectively, these mandatory risk pooling arrangements are known as social insurance, or the welfare state. According to influential accounts in the literature, the welfare state exists because (social) insurance cannot be provided effectively through the market due to incomplete and asymmetric information. While the assumption of incomplete and asymmetric information approximates the situation in the past, the information revolution is making it increasingly untenable. Our book asks what happens to the politics of social protection and to inequality when information about risks to health, employment, credit, life, and so on, becomes more widely available and shareable.

A hint of what is to come can be gleaned from the life-insurance market, where the information revolution is radically transforming the status quo. In 2018, John Hancock – one of the oldest and largest life insurers in the US – announced that it would discontinue underwriting traditional life insurance and instead would sell so-called interactive policies that “incentivize healthier choices linked to physical activity, nutrition and mindfulness” with customers’ choices being tracked by fitness and health data through wearable devices and smartphones. According to John Hancock, such policies are designed to “inform and reward customers for making healthier choices every day” and are “the only path forward for the industry.” Similar products – where insurance premiums are calculated based on individual behavior verified by trackers – have become popular in other areas as well, such as health and car insurance.

But it is not just insurance companies getting in on the action. The leading technology companies – Apple, Alphabet, Amazon, Microsoft, etc. – are all committing huge resources to develop a new data-based health industry, where, inter alia, doctors can interact with AI-enabled databases, and individuals can easily share their information with insurance companies. Similar efforts are underway in credit markets, where detailed information about credit history is linked to a trove of data on income, occupation, residence, and so on.

There is currently no integrated analytical framework within which to understand the consequences of Big Data for social policy and inequality. This book offers such a framework and applies it to the history of social protection, with emphasis on the knowledge economy and due attention to the role of national political and regulatory institutions. The book advances four main arguments. First, information about risks determines the economic and political scope for insurance markets and welfare states. The increasing quantity and quality of information not only makes individuals more aware of their risk profiles. Together with the increasing shareability of information, it also ameliorates the asymmetric information problem and hence makes robust private insurance markets viable. Second, the feasibility of insurance markets also depends on the capacity to redistribute from young to old generations. Therefore, some select social insurance domains will be less affected by the dynamics set in motion by the information revolution. Third, more information and the possibility of private markets polarize welfare state preferences. Fourth, because parties (still) represent constituencies with distinct income and risk profiles, politics (still) matters. Yet, we expect a new politics that increasingly focuses on the regulation of data and its use in differentiating risks.

Overall, then, the information revolution poses a triple challenge for the welfare state: Information directly increases polarization in policy preferences as people become more aware of their risk profile; information makes private markets more feasible; and private options further polarize preferences over mandatory risk pooling and reduces overall support for the public provision of insurance. These developments challenge the old status quo where, in an uncertain world, preferences tended to converge on a public system. Hence, we conclude that the information revolution increases inequality and threatens social solidarity and will lead to intense conflict over segmentation and privatization of the welfare state in many domains.

Big Data and the Welfare State by Torben Iversen and Philipp Rehm
Big Data and the Welfare State by Torben Iversen and Philipp Rehm

About The Authors

Torben Iversen

Torben Iversen is Harold Hitchings Burbank Professor of Political Economy at Harvard University. His most recent book (co-authored with David Soskice) is Democracy and Prosperity: ...

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Philipp Rehm

Philipp Rehm is Associate Professor of Political Science at the Ohio State University. His research interests are located at the intersection of Political Economy and Political Beh...

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