Pushing at boundaries and challenging traditional notions is what innovation is all about. Rethinking something that people have taken for granted for too long can open opportunities for enhancing service, increasing efficiencies and generating revenue.
Take claims. The idea that the claim settlement should reflect the insured loss has held sway for a great many years. Is it time for innovators to knock this one off its pedestal?
It looks like that time has come, for insurers in the U.S. are starting to turn to claims optimization.
To explain this, I should start with the perhaps more familiar concept of price optimization. The price version has the insurer setting the premium for insuring a risk according to what the policyholder is prepared to pay, rather than the level of risk that the policy is presenting. It involves using big data to work out the price at which particular types of customer will start to look for alternative quotes, and then progressively raising the premium to just below that amount.
See also: Innovation Challenge for Commercial Lines
A leading figure in the U.K. insurance market recently described price optimization to me as “recognizing the true lifetime value of the customer and reflecting that in a better price.” It’s a nice quote, so long as you’re the insurer on the receiving end of that "lifetime value" and that "better price" and not the customer paying for them.
I’ve yet to hear how that description fits in with the regulator’s interest in fair outcomes for customers. It would struggle to do so, for reasons I explain in this paper
I wrote for the U.K.’s Chartered Insurance Institute last year. In short, the nature of insurance makes price optimization highly questionable on ethical grounds. It’s hardly surprising that a recent PwC survey
found that 72% of insurance CEOs think it will be harder to sustain trust in a digitized market.
With claims optimization, insurers would seem to be abandoning all remaining hope of sustaining trust in a digitized market. Claims optimization involves using big data to establish the amount that a particular claimant would be prepared to accept as settlement of the claim. So if all those algorithms pinpointed the claimant as someone in financially tight circumstances, then the settlement offered to that claimant would be optimized to reflect a greater and more immediate need for cash. This would involve tweaking the comparative speed of a cash settlement versus a replacement service and setting relative offers to achieve the optimized position.
This still falls neatly within that description of optimization as “recognizing the true lifetime value of the customer and reflecting that in a better price.” Indeed, an insurer happy to optimize on price would hardly need to bat an eyelid at optimizing that other value determinant: claims expenditure. After all, the insurer would say, if a claimant is prepared to accept that lower settlement, why shouldn’t the insurer offer it?
Let’s be quite clear: Claims optimization is an exploitation of the unequal balance of information and economic power between a consumer and an insurer. It is unprofessional, and it is unethical.
Might this view perhaps point to me being a naysayer on innovation? Not at all – I have a postgraduate degree from one of the earliest courses in the U.K. on the study of scientific and technological innovation. That course taught me to recognize the multi-sided nature of innovation and to see that it is not some nature force of business evolution, but a mix of social, economic, philosophical and technological drivers.
See also: The Great AI Race in Insurance Innovation
Despite what vendors of "big data solutions" say about optimization, it is not a natural next step for underwriting and claims. It is home to a number of quite radical assumptions about what insurance is there to do and how it should do it. It would be nice to see some of those assumptions brought out into the open and debated, but, unless Andrew Bailey at the FCA follows through on some of his hesitations about price optimization, then I fear such a debate is unlikely.
I have heard some chief executives at leading insurers wonder whether price optimization was the right thing to do. If, as it would appear, they no longer have any such qualms on the pricing side, then it is but a small step to their being equally relaxed about using it on the claims side. In that case, I look forward to listening to them explain their reasoning for doing so on a public forum like, say, the BBC Radio’s Today program