Artificial intelligence is an awesome tool--if you recognize its limitations and work around them. Google didn't. And it paid dearly. 

As you may have read, Google executives gathered on Feb. 7 to tout Bard, what's known as a "generative AI," a la the more famous ChatGPT, as the future of the company. The problem: Google had launched an ad that morning bragging about Bard's ability to answer questions in ways that "can spark a child's imagination about the infinite wonders of the universe." To demonstrate, the ad showed Bard being prompted with the question, "What new discoveries from the James Webb Space Telescope can I tell my 9-year-old about?"--and then completely fabricating an answer. 

Bard's responses included the claim that the telescope took the very first pictures of "exoplanets," or planets outside of earth's solar system, which were, in fact, first photographed almost two decades ago. Oops.

The obvious error on such a high-profile effort knocked $100 billion off the market value of Alphabet (Google's parent) the next day, and the stock has continued sliding, losing roughly $100 billion more of market value since then. 

Wags on social media noted that Google could have avoided the error by, well, just Googling Bard's claims. And that's actually the approach that I recommend for the foreseeable future: Go ahead and start using ChatGPT, Bard and the other generative AIs in all sorts of ways--and many spring to mind--but be aware that they are just providing a rough draft that shouldn't see the light of day until it's vetted by a real, live human being you can trust not to just make stuff up. 

An article in Fortune says ChatGPT is already being widely deployed, despite being so new:

"Business leaders already using ChatGPT told ResumeBuilder.com that their companies already use ChatGPT for a variety of reasons, including 66% for writing code, 58% for copywriting and content creation, 57% for customer support, and 52% for meeting summaries and other documents. In the hiring process, 77% of companies using ChatGPT say they use it to help write job descriptions, 66% to draft interview requisitions, and 65% to respond to applications."

A large law firm is using ChatGPT "across its network of 43 offices to automate and enhance tasks, including contract analysis, due diligence and regulatory compliance." And I can imagine plenty of similar uses in insurance: pulling together files for underwriters, preparing claims reports, helping monitor compliance and so on. 

But that Fortune article also quotes the CEO of OpenAI, the developer of ChatGPT, as saying it shouldn't be relied on for "anything important," and I certainly would err on the side of caution for now--as Google surely wishes it had.

The issue with large language models like those used for generative AIs like ChatGPT and Bard is that they don't know much about the real world. They've just been fed unimaginable amounts of text and learned to imitate it. You give one a prompt, and it figures out what word is most likely to go next and then next after that and after that... and on and on and on. The results are scarily impressive but have a tenuous relationship with reality, which is why Bard claimed that the James Webb telescope discovered exoplanets, why ChatGPT has claimed that the most-cited medical journal article of all time is a piece that doesn't actually exist, why ChatGPT told a friend that he was married to a number of women he'd never met, had children he'd never had and wrote books that didn't exist. 

It's certainly possible to connect generative AIs to, say, the universe of Google and give it access to a wide array of facts, but that creates its own problems, as Microsoft learned in 2016 when an earlier AI became a racist pig in a few days after scooping up all kinds of garbage online. Those risks should get innovated away in time -- my old friend Andy Kessler makes a compelling case in a recent column in the Wall Street Journal. But, for now, it's safer to constrain these AIs to a discrete set of data, such as is available to an underwriter or claims agent. 

It's also important to see the results from these generative AIs as what they are: a very rough draft. 

Now, as someone who has spent decades doing his thinking with his fingers on a keyboard, I can tell you that even a very rough draft can be extremely valuable. Perhaps the key insight from one of the best books on how to write, "Bird by Bird," by Anne Lamott, is that you have to allow yourself to write crappy first drafts. (She uses a more colorful term.) But professional writers typically find that very hard to do. They're editing as they're writing and can't get out of their own heads long enough to let the words just flow. I tell people that 90% of my time writing is spent not writing -- but the house sure gets clean when I have a big deadline coming up. Something like ChatGPT can address that problem, because it does a great job of organizing a set of facts in a coherent flow. At that point, the writer can look at it and say, "Like this, hate that, let's move this around a bit," and so on. In fact, having AI do the first draft clears the way for another of Lamott's key insights, that you have to be willing to "kill your children." (I told you she was colorful.) She means you have to be willing to slash away even at words you've slaved over and fallen in love with. And it's a lot easier to be ruthless about cutting something you haven't written.

The writer still has to provide the insight, the personality or whatever else a piece requires, but generative AI can take a big chunk out of a part of the process that I, at least, find painful. And the same should be true for many preparing reports and doing other kinds of work in any number of fields.

This kind of collaboration between AI and human is already done in other fields. For instance, AI is often used to screen mammograms before a radiologist reviews them. The AI can spot abnormalities so tiny that a radiologist might miss them and can also let the radiologist know which areas to zoom in on and which mammograms to focus on. The radiologist makes the call but gets a big assist from the AI.

Quantum computing also shows how powerful an unsteady technology can be when combined with error correction. Qubits only stay in a quantum state for a fraction of a second and are more likely to produce errors as they fall out of that quantum state, But researchers are finding ways to correct those errors on the fly and use conventional computers to verify results, letting quantum computing advance at startling speed.

My mantra, as always, is, Think Big, Start Small, Learn Fast. Just be doubly sure in the case of generative AI that you do your learning in private, not in public, as Google did. 

Cheers, 

Paul

P.S. My favorite example of "killing your children" is the short story, "The Swimmer," by John Cheever. It began as a full-length novel, but he killed so many of his words and ideas that it became a 3,500-word story that is regarded as perhaps his best. I have no idea how he had the mental fortitude to do that, but I respect the effort mightily. 

My friend Adrian last month shared a McKinsey deck from 1993. (You can find it here.) One of the last paragraphs of the 38-page paper says: "These principles are obvious. Why do so few companies follow them? Because the senior management commitment required is substantial while the payoff is down the road." That line has aged really well!

It is a pity for an insurer not to use data and technology to do their job better nowadays. All the insurers (that survive) will be #insurtech: meaning players using technology as the key enabler for achieving their strategic goals. So, let's take a look at the current state of insurtech to see why you should focus your innovation efforts on the basics of the insurance business.

Since the beginning of the year, we have seen a new report almost once a week about the 2022 funding to insurtech startups:

• FT Partners
• Gallagher Re
• CB Insights

The insurtech index (HSCM Public InsurTech Index ) has performed pretty badly:

And you can find analysis saying that it is the worst-performing segment among all the fintech segments:

See also: Telematics Consumers Are Ready to Roll

At least, the insurtech listed segment has shown a perfect correlation with fintech: As I anticipated in the newsletter edition last June, the market has NOT turned its back to insurtech!

The drop in the evaluations is not about insurtech, it is more about fintech.

Looking at the individual securities that make up the HSCM Public InsurTech Index, we can appreciate a diversified spectrum of performances.

Source: Google Finance

Let's take a closer look at one of the outliers: Kinsale Group, a specialty line insurer known...for frequently beating analyst expectations.

This 14-year-old insurer has generated a TSR (total shareholder return) of 43% a year for the past five years. Their market cap is almost $7 billion today, and they underwrote about $800 million in premiums with fewer than 450 employees in 2021.

Is Kinsale Group an insurtech? Was HSCM right when it decided to include them in the basket of the insurtech index?

• The answer depends on your definition of insurtech. If you mean "players with a bloody loss ratio," no, they aren't. Their combined ratio was an awesome 80% in the first nine months of 2022.
• Instead, my definition of insurtech is "players using technology as the key enabler for achieving their strategic goals." So, they definitely are an insurtech player. One with solid insurance foundations.

Looking at their recent analyst presentations, you can feel it:

Source: Kinsale Group

Source: Kinsale Group

Kinsale's story is about the focus on the basics, and yours should be, too. Your insurtech approach makes sense only if it allows to overperform the traditional approach on one or more of these KPIs: stronger underwriting returns, leaner capital or higher asset leverage. 

Let's look at a (BIG) failure. In one of the first editions of this Insurtech Facts & Figures newsletter, I analyzed Root, a player known for being telematics-based. I concluded by affirming that "Root is not using telematics data well for pricing and risk selection. Moreover, they have even denied the usage of telematics data for claim management and for changing driver behaviors."

Looking at their last shareholder letter it seems they got it, gave up on their telematics approach and pivoted to embedded insurance:

• Telematics is mentioned two times, the first on page 14 of 24. UBI is not even present.
• Embedded is mentioned 18 times in the first 14 pages.

To have completely missed the development of adequate telematics capabilities -- while burning $1.5 billion -- has not been the only sign of Root's poor governance: There is the recent story of about $10 million diverted, according to a recent lawsuit, from advertising to buy luxury homes by an ex-executive at Root. Well, this $10 million represents less than 0.7% of the cumulative losses, but more than 12% of the Root market cap on Feb. 10.

To make even more evident the missed opportunity in Root's journey, I want to show the contrast with a telematics-based MGA that is doing pretty well: High Definition Vehicle Insurance (HDVI).

At the IoT Insurance Observatory peer discussion last September, Todd and Chuck presented their telematics approach to achieving a loss ratio 20 percentage points better than the average U.S. commercial auto business:

• continuous underwriting obtaining relevant up-front self-selection, and more accurate pricing of the risks;
• risk mitigation while drivers are driving, and a structured driving behavior change program;
• usage of telematics data for a proactive and enhanced claim process.

HDVI is going through a journey where the company's processes are designed to exploit the value of telematics data, the telematics competencies are further developed and this improves the key profitability drivers of their commercial auto insurance business.

See also: Driving Into the Future of Telematics

Swiss Re together with the IoT Insurance Observatory did a survey on 10,000 policyholders around the world. The key takeaway has been that -- everywhere -- policyholders are ready to adopt telematics: 54% are absolutely positive about telematics, and only 21% are against it. Here are the results.

If you are a personal auto insurer, this is a concrete opportunity

However, you should not create a telematics program because it is cool or because some of your competitors have introduced oe. You should identify how to use the telematics data to affect your key profitability drivers, and you should adapt your business processes to do it. Step by step, you will develop the necessary telematics capabilities for achieving the results you are looking for, and you will start to do more with this data...creating a virtuous circle.

In a nutshell, be more like HDVI and less like Root.

Nobody wants to hear those words: “Rejected,” ‘”Detained,” “Do Not Enter,” “Banned.” That’s especially true if your business depends on imports into the U.S. You very much don’t want a Detention Letter from Customs and Border Protection (CBP). However, a new trade law has importers taking notes on how to comply with the Uyghur Forced Labor Prevention Act (UFLPA).

The act bans the import of goods or commodities from China that are produced with forced labor. Effective last June 21, the act mandates a “rebuttable presumption” that any products made wholly or in part in the Xinjiang Uyghur Autonomous Region (“Xinjiang”), or by any Chinese company on a U.S. list of entities involved in the use of forced labor, are made with forced labor and banned from importation into the U.S. To date, this is the only federal law in the U.S. focused specifically on Environmental, Social & Governance (ESG), and it passed by overwhelming majorities in both houses of Congress.

Expansion of the global economy and the devastating impact of the COVID-19 pandemic on supply chains contributed to enhanced risks and probabilities that forced labor has penetrated a vast majority of company’s supply chains. Forced labor is in everyday goods, from the foods you eat, to the clothes you wear, to the car you drive, according to current research on global forced labor.

Over 27 million people around the globe are trapped in forced labor. The links between forced labor, products and abuses is not just in Xinjiang but has spread throughout the global economy. A high percentage of the world’s luxury items, cotton, textiles, minerals for EVs, tomatoes and spices, beryllium in electronics, aluminum in automotive parts and polysilicon in solar panels, for instance, are produced in or sourced from the Xinjiang region. The UFLPA guidance points to the International Labor Organization’s (ILO.org) list of forced labor products and countries, as many goods are transshipped and raw materials from Xinjiang are mingled with goods from other countries that make their way into the U.S. Thus, forced labor is hidden in supply chains.

Since the UFLPA went into effect, importers have been caught off-guard and detained by CBP for suspicion of forced labor in their shipments of goods. Importers are incurring expenses like inspection fees, storage, attorney fees, re-export or destruction of goods and business disruption, to name a few. The trade ban only gives importers 30 days to present clear and convincing proof, to address the presumption of forced labor. So, for example, around many ports, warehouses are filled with solar panels, as polysilicon used for solar cells is mined as quartz in Xinjiang.

Is this kind of supply chain disruption insurable, you might ask? The short answer is “yes.” For example, a new insurtech, FloraTrace, has designed a parametric insurance product for importers. The payment trigger is receiving a UFLPA Detention Notice from CBP. The insurance offsets the many expenses incurred for hidden forced labor. FloraTrace also uses isotopes and chemical analysis technology to verify origin of raw materials, so importers can illuminate their supply chains and make decisions for remediation, decoupling or diversifying their suppliers to pursue sustainable sourcing practices. 

See also: Adding ESG to Investment Practices

A recent wave of regulatory pressure and requirements for ESG due diligence are necessitating active supplier risk management across emerging focus areas such as human rights abuse in supply chains. The new law mandates that importers trace their supply chains down to the raw materials. A recent Deloitte study interviewed hundreds of businesses and found that only 10% have good visibility deep into their supply chains, so there remains a lot of work to do to address hidden forced labor risk.

Changing sourcing patterns is complex and an intertwined, global issue that will not be solved overnight. But resilience in supply chains can occur, and companies can recover…and even thrive with active risk management and risk transfer solutions to move toward greater sustainability.

Rising losses in the property and casualty insurance sector can partly be attributed to the increasing frequency and intensity of large natural disasters, as well as the movement of populations to regions more susceptible to catastrophes. However, an often-overlooked yet significant factor is the lack of granular and accurate information about potential hazards – and exposure to loss at every insured location.

From a risk/analytics perspective, it’s clear that the industry needs to improve its methods of evaluating, underwriting and pricing property risks – and more precisely choose and price policies according to actual risk.

The root cause of the issue is the inadequacy and ineffectiveness of conventional, territory-based definitions and pricing methods. Insurers face the challenging task of striking a balance between having territories big enough for credible statistical analysis and small enough to encompass regions with uniform exposure to risk.

The limitations of territory-based rating can become a thing of the past as a result of substantial advancements in Geographic Information Systems (GIS) and Geospatial Artificial Intelligence (GeoAI) – and the increased access to location-specific data and risk scores that these technologies can offer.

See also: How Geospatial Data Lowers Traffic Risk

Geospatial Hazard Rating leverages these technologies to provide location-specific data and hazard scores. These scores rely on complex calculations, made rapidly with the assistance of GeoAI, and delivered in real time through application programming interfaces (APIs). Geospatial Hazard Rating is produced for each individual address by aggregating historical data and events for a given peril within a specific geographical radius instead of relying on much larger, arbitrary and less accurate territorial boundaries.

The increased detail and accuracy of Geospatial Hazard Rating provide a range of benefits over territory-based ratings, most notably:

1. Accuracy in Risk Assessment — Geospatial Hazard Rating can isolate the geographic distribution of risk at the individual residential or commercial property level, as opposed to the much larger area municipal, ZIP code and census block boundaries used in territory-based methods. As such, insurers can precisely understand, underwrite and price a specific property’s risks.
2. Increased Premiums Without Rate Changes — Another benefit is the ability to respond to changes in risk levels without rate changes. When a specific area starts to see more damaging events, the corresponding hazard scores for those specific addresses will increase and result in a corresponding increase in premium at renewal, making some rate changes for an entire territory unnecessary.
3. Fairness and Accuracy in Pricing — With such accuracy comes the ability to tie higher risk probabilities to higher premiums -- and lower risk probabilities to lower premiums automatically when Geospatial Hazard Rating are updated at acquisition or renewal.
4. Supporting Data for Rate Changes — Although Geospatial Hazard Rating will make it less necessary to seek rate changes for geographic changes in risk, in the event a rate change is needed, insurers will have the very detailed data needed to justify the change.
5. Speed and Efficiency of Risk Assessments and Policy Quotes — With specific hazard ratings for every peril for every customer and prospective customer address, Geospatial Hazard Rating enables insurers to greatly increase the speed at which they undertake property assessments and policy quotes.
6. New Risk Insights — Because geospatial data is highly structured, highly objective and collected at a high scale, insurers gain increased abilities to analyze data and identify risk insights that are not possible with traditional territory-based rating. 
7. Loss Prevention — As geospatial data can help discover trends and patterns in specific locations, insurers can help customers better understand their risks and ways to mitigate them. By providing risk insights, carriers are able to engage customers in the risk management process and build relationships, while promoting loss avoidance.
8. Reduced Losses and Expense Ratios — Although it is early in the adoption of geospatial data, the business use cases for such applications point to a real and significant opportunity to reduce losses and improve combined ratios by better aligning price with risk – and eliminating the burden of administering territories.

These benefits collectively present a significant opportunity for property and casualty insurers: By shifting away from traditional territory-based ratings, each property can be evaluated accurately and equitably based on its actual exposure to loss.

After Tesla and Ford announced they were cutting the sticker prices for some of their electric vehicles (EVs), many people began asking whether that means the price to insure them would follow suit — but the answer isn’t clear-cut. 

At the core, insuring an EV is the same as insuring an internal combustion engine vehicle. There is the liability portion, the comprehensive and collision portion. And the pricing comes down to the complex web of underwriting connecting the vehicle and driver’s details, along with specific geographic risks. 

Even still, insuring electric vehicles for now has been costlier than comparable gasoline vehicles. Part of that is sticker price, for sure. EVs do tend to cost more. But for now, at least, they can also cost more after a claim. 

Part of the post claim economics comes down to market forces. Because EVs make up a tiny portion of the number of vehicles on the road right now, there aren’t very many certified EV mechanics. There are more than 200,000 ASE-certified car technicians in the country but only a few thousand who are certified for EVs. 

That means the few who are certified are able to command a premium for their services – driving up post-crash repair costs. 

The same goes for aftermarket repair parts. Although supply chains are easing, in general, making aftermarket parts more accessible for most vehicles, the same can’t necessarily be said for EVs. 

Without a huge fleet of EVs on the road, few manufacturers have the incentive to make generic replacement parts specific for them, meaning that most repairs have to be done with the more-expensive OEM components. 

Higher repair costs translate to higher costs post claim, which translate to higher premiums for EVs. 

And then there is the battery question. Because the batteries represent such a large percentage of the cost of the EV, any damage to the battery pack could lead to an insurer totaling an otherwise low-mileage EV. That is a phenomenon many Tesla drivers have been seeing as their low-mileage vehicles get into seemingly small crashes, only to be totaled by the insurer. 

From an insurance agent perspective, educating EV drivers about the risk of totaling their vehicle presents a good discussion opportunity to pitch a gap policy — particularly if the driver is still upside-down on their auto loan. 

But that doesn’t translate to lower costs in the short run. 

Many analysts don’t believe the premium discrepancies between EVs and gasoline vehicles are here to stay, though. 

For one, battery prices are coming down rapidly. One MIT study showed that since they were first commercially produced, lithium-ion batteries have plunged in price by 97%. And though that decline has tapered off of late, and batteries even saw a slight increase in cost in the past year, the long-term trajectory of the cost per kilowatt hour should continue to fall fast, meaning the most costly component of an EV shouldn’t continue to be cost-prohibitive, at least in the long term. 

The other reason EVs shouldn’t be more costly to repair forever is that once market forces make labor and spare parts more abundant, there are just fewer failure points on an EV than on an internal combustion engine. 

By most counts, typical gasoline-powered vehicles have more than 2,000 moving parts, to only a few dozen in a typical EV. With fewer places to fail, and all things being equal, repairing an EV will eventually be on par or less expensive than a gas-powered equivalent vehicle. 

See also: Focus on Evolution, Not a Revolution

Another phenomenon potentially pushing down EV premiums in the medium term is better claims data. Tesla is pioneering two programs in that area. One program is in their white-label insurance program, where Tesla partners with insurance carriers in several states to offer Tesla-branded insurance. 

They are using that insurance relationship to aggregate post-claims data and feeding that back into their engineering process. After Teslas get damaged, the engineers evaluate whether changes to their design could have prevented that damage in the first place or at least made it easier to repair after the fact. 

The other area Tesla is using data to potentially drive down insurance costs is by anonymously aggregating driving behaviors of Tesla owners. The theory is that the suite of safety features standard in a Tesla could make them safer to drive than a similar vehicle from another manufacturer and thus less likely to get into a crash in the first place. 

As that data gets incorporated, it is possible that premiums could end up coming down, as well. 

More costly vehicles tend to be more expensive to insure. So, on its face, Ford and Tesla dropping their MSRP could theoretically end up bringing down their premiums. But when it comes to meaningful decreases in EV insurance premiums, market forces, rich data and better supply chains for basic components may make the bigger difference and could even mean EVs could end up being the less expensive vehicles to insure before long

The metaverse was one of the major themes at CES2023, as evidenced by a wide range of sessions and tech solutions. The keynote from the Consumer Technology Association identified metaverse as one of the top themes, with the tagline of “Closer Than You Think.” I believe there are arguments both for and against the near-term emergence and impact of the metaverse. But first, it is important to define what is even meant by the term – and there is no universal agreement on the metaverse concept. We will explore the concept in this blog, as well as the implications for the P&C insurance industry. 

My definition of the metaverse is as follows, although others may have different views. The best way to think of the metaverse is as a set of collective virtual worlds. By collective, I mean that multiple people can join and collaborate in the same virtual space. This differentiates the metaverse from virtual reality applications used by a single individual via a VR headset. Some think of the world painted by the novel Ready Player One as the ultimate metaverse. In some ways, that is appropriate, but the reality is likely to be very different. The Ready Player One world is gaming-centric. Games will certainly be a leading component of the future metaverse. However, the metaverse will have the most impact and value when it includes shopping, traveling, learning, telehealth, virtual meetings, social interaction and other aspects of life – all within virtual worlds. In essence, the metaverse will become the next generation of the internet.  

What is necessary for this to become a reality is the acceleration of immersion technologies that were on full display at CES2023. Technologies addressing every human sense – touch, smell, taste, hearing and sight – were prominent at the event. A second critical success factor is the maturity and broad availability of content creation platforms. There were many solutions featured at CES, and the sophistication (and content libraries) are rapidly increasing. Ultimately, there need to be realistic virtual worlds for people to inhabit and actively participate in the wide variety of activities envisioned.  

Despite technological progress, the idea of millions of people immersed in virtual worlds seems like decades away. Remember that Ready Player One was set in the 2040s. However, consider these statistics:  

• The U.S. has 164 million gamers today, with about 60% being more serious gamers. As immersive experiences improve and virtual worlds become even more realistic, these gamers will be the first true inhabitants (if I can call them that) of the metaverse. (Source: The Consumer Technology Association, 2022).  
• A recent McKinsey study finds that the average person expects to spend almost four hours a day in the metaverse in five years. Gen Z expectations are closer to five hours, while Baby Boomers are a bit less than two hours a day. Whether this comes to pass or not, it is still remarkable that the expectations are this high.  (Source: McKinsey Metaverse Consumer Survey, February 2022).  

So, what will it be? Metaverse adoption and implications in the next decade, or is the true metaverse a couple of decades away? My view is that it probably trends toward the latter. Much like the evolution toward an autonomous vehicle future or the emergence of a true general artificial intelligence, the metaverse is likely to evolve slowly over the next couple of decades. The tech is evolving rapidly, but the content and user adoption may take a while before it becomes pervasive. There will certainly be implications in the next decade for gaming and other specific areas, but it seems unlikely that the average person will be logging into virtual worlds and spending hours every day in that timeframe. 

See also: The Metaverse and Financial Services

How should insurers think about the metaverse? Despite the press and the hype around this topic, I do not think it is something that should be high on the priority list for insurers. To be sure, the industry should track developments and consider future implications. But for now, the focus should be more on virtual and augmented reality for use cases such as training and healthcare. It is fun to think about, and the metaverse may dramatically alter human existence in the future, but that future is a ways off.

The use of telematics to monitor consumer driving behaviors is becoming table stakes in auto insurance, yet the technology also offers strong opportunities for enhancing the policyholder experience. Leading carriers are now evolving their use of telematics to differentiate their usage-based insurance (UBI) products to provide a robust, seamless user interface, streamline claims handling and influence the policy buying experience.

Carriers Exploring New Ways to Aid Policyholders via Telematics 

As carriers look for ways to expand the use of telematics in usage-based insurance (UBI) products, one notable area they can add value is emergency assistance. Telematics can provide critical location details in case of a medical emergency, regardless of whether a vehicle accident has occurred. The same information makes it easier for drivers to summon help when they have a flat tire, are locked out of their vehicle or have run out of gas. These capabilities are present in vehicle telematics platforms such as Subaru’s Starlink or Infiniti’s InTouch systems, and carriers such as Nationwide are also now offering sophisticated roadside assistance platforms that enable aid to be summoned and tracked for a variety of needs. 

There are also an increasing number of carrier and vehicle telematics integrations. State Farm and Ford have recently teamed up to connect State Farm's Drive Safe & Save program, with specific eligible Ford and Lincoln vehicles to further leverage telematics services. General Motors and OnStar have also partnered with American Family to underwrite insurance policies that use telematics. These integrated systems monitor critical vehicle data and can notify a policyholder when preventative maintenance may be due or recommended. They can also be used to rapidly identify the implications of an accident and any related repair requirements.

In addition to monitoring driver performance, auto carriers can also use telematics data to coach customers on safer driving behaviors and to offer driving safety tips. State Farm, for example, offers its Steer Clear app to drivers under age 25, including educational modules on topics such as using Bluetooth while driving, distracted driving when texting or playing games and handling special driving situations. The app also supports reporting to a driver “mentor,” such as a parent or guardian. These types of instructional capabilities are becoming more sophisticated and personalized, helping carriers strengthen policyholder loyalty.

See also: Telematics Consumers Are Ready to Roll

Collision Detection and Claim Submission - Where the Rubber Meets the Road

Innovation in telematics tools really comes to the rescue when the unthinkable occurs. These robust applications can use data collected from vehicle sensors to analyze the extent of damage to a vehicle and to assess the likelihood of severe injury to passengers after a collision. According to Keynova Group’s Q3 2022 Mobile Insurance Scorecard, within the last two years, several large insurers—including Allstate, Farmers, GEICO and USAA—have introduced telematics solutions encompassing accident detection, roadside assistance and claims filing.  Allstate and GEICO further advance policyholder adoption by embedding the accident-sending telematics technology directly into their primary servicing apps, where users have the benefit of finger-tip access to key policy details, information about their driving behaviors, as-needed accident and claims assistance and streamlined claims filing requirements.   

To support claim submission after an accident, telematics can reduce the amount of information that a policyholder needs to submit, potentially eliminating the need for an onsite insurance inspection and speeding the claims process. Further integration between carriers’ and vehicles’ telematics systems will reduce accident inspection requirements and help to identify issues that would be difficult to detect visually. In addition to supporting precise location details, capturing the time of day via the telematics solution can be used to indicate whether driver fatigue may have been a factor in an accident, and data indicating safe driving behaviors might suggest a reduced chance that the driver was at fault. Maintenance details could also highlight other possible contributing factors for evaluation. 

New Models for Selling and Purchasing Vehicle Insurance 

The connection between vehicle telematics systems and insurance also supports embedded insurance sales opportunities. For example, General Motors recently began to roll out an integration of its OnStar telematics and connected-car services with insurance underwritten by American Family. GM also plans future use of an in-vehicle camera that tracks drivers’ eye and head movements to help the company set appropriate rates for each individual driver’s insurance coverage. Tesla also now sells insurance for some of its models in several states, employing a safety score derived through a UBI application built into the vehicle to determine a monthly price for the driver’s insurance. These types of embedded integrations of the vehicle and its driver’s insurance will become an increasingly prevalent aspect of the policy purchasing experience as telematics continues to influence and monitor driving behaviors as well as the vehicle itself.  

Use of carrier telematics systems can also be encouraged by offering no-risk trials. At least one major U.S. auto insurance carrier – Progressive – now offers policyholders the option to test-drive its telematics-based driving application. Users simply download the app, register for the Snapshot Road Test and then drive for 30 days. At the conclusion of the road test, users receive a no-obligation, personalized policy quote based on their specific driving behaviors—information that the carrier would otherwise not have access to. Expect to see more carriers offering options like this as they see value in detailed advance knowledge of their potential policyholders driving behaviors and, in turn, as consumers recognize the multiple benefits they can leverage by using telematics technology.

Auto policies backed by telematics are expected to continue to expand their variety of capabilities. As these telematics applications continue to be updated, more consumers will embrace the technology to save money, and insurers will become more adept at using telematics to differentiate their products, reduce risks and expenses and continue improving the policyholder experience.

Findings from the latest Shift Technology Insurance Perspectives report show that underwriting professionals are under incredible pressure to meet customer expectations for quick application approvals, while keeping their portfolio as profitable as possible.

To meet these goals and to be sure applications themselves are legitimate, underwriters must be confident that the applicant is who they say they are. It also must be clear that the applications do not contain misrepresentations or omissions, which may lead to premium leakage or other losses at the time of a claim. And underwriters need to know that the applicant hasn’t already tried to scam them before – an issue costing the insurance industry over $40 billion yearly, as reported by the FBI. 

According to the report, the most prevalent risks underwriters are facing today include hyper endorsement, misrepresentation and applications from known fraudsters, as well as criminal networks and the schemes they perpetuate, such as Ghost Broking. Let’s look at a closer look at these schemes.

Hyper Endorsement and Policy Hijacking

• Risks associated with hyper endorsement include markers such as unusually high endorsements after policy creation for different types of exposures; for example, adding numerous vehicles right after inception. 
• Policy hijacking involves insured contact information being fraudulently overhauled, usually shortly after policy creation, as well as duplication of personally identifiable information, like a shared email address, across unrelated policyholders. 
• According to the report, this type of activity occurs in one out of 100 policies. Shared email addresses pop up in one out of every 400 written policies, which typically signals identity theft. 

See also: 3 Paths for Insurtechs in 2023

Misrepresentation, Criminal Networks and Fraud Schemes

• Misrepresentation, also known as "false declarations," include examples such as listing a false location where a vehicle is kept or excluding driver history, which occurs in one percent of cases. Having full visibility into the declarations made on a policy – or connecting the dots between multiple endorsements within a singular policy – can be what separates a good underwriting decision from one that hurts the bottom line. 
• The insurance industry is also operating in a global climate of economic uncertainty, which helps to create an environment where the propensity to commit fraud increases. Not only are normally honest people more willing to “play with the facts” to secure a better premium, but truly sincere applicants may also be tempted by offers that are “too good to be true” in an effort to save a little bit of money each month. And in this financial climate, bad actors have become adept at building out their networks. 

Underwriting risk has the potential to cost the insurance industry more than $50 billion in losses per year and, as the research shows, can occur at any time in the policy life cycle, which is a major contributing factor to why underwriting risk can be so difficult to detect. The sheer number of quotes, applications and policies being handled, and the different types of fraud (hard, soft, agent gaming, etc.) that can be committed, add difficulty for underwriting professionals trying to spot suspicious activities. Paying close attention to addressing these risks will help underwriting professionals navigate the evolving fraud landscape and protect their bottom lines. 

To read Shift’s findings, download the full report here.

If you were to ask us to describe the transformational activity of commercial lines insurers in the past few years, "acceleration" would be the first word to come to mind. But in 2023, another word may be more accurate – "adapting." Economic pressures, such as inflation, are driving commercial lines insurers to rethink their strategic initiatives and adapt to new priorities. Consider the results from a new SMA survey that shows that 12% of commercial lines insurer executives say their businesses are just in sustaining or surviving mode this year following a challenging 2022. The silver lining, however, is that insurers are inching back toward more aggressive strategies, with 30% indicating they are transforming. Although less aggressive than pre-pandemic levels, progress is underway.

These findings and more market insights are featured in SMA’s new research report, "2023 Strategic Initiatives: P&C Commercial Lines.” The report includes the results from a survey of insurer executives about their strategic plans in 15 initiatives (seven traditional and seven transformational), as well as the biggest drivers for technology investments this year. When analyzing the research from two lenses –trends in small commercial and mid/large commercial – SMA uncovered several major themes that define how commercial lines insurers are approaching strategic initiatives today, including:

• Balance is vital: Commercial lines insurers are more focused on efficiency and growth via their current business model, resulting in some insurers decreasing investments in specific strategic initiatives. 
• Significant shifts in the workforce: Insurers across the industry adopted new workforce models during the pandemic, most prominently the hybrid model. In 2023, many are developing more comprehensive plans to address the continuing changes in the workforce and the evolution of roles.
• Mid/large commercial insurers are more aggressive: SMA’s research suggests that the mid/large commercial segment has become more aggressive with investing and executing several strategic initiatives, whereas small commercial insurers have become more conservative. However, it’s important to note that mid/large commercial insurers overall are earlier in the transformation journeys than their small commercial peers.

See also: A Frenzy of Activity in Commercial Lines

As the commercial lines ecosystem continues to evolve, small and mid/large commercial insurers must balance internal strategic goals with changing policyholder and agent expectations, business optimization and cost containment amid economic uncertainty. However, the commercial insurance industry is well-positioned for future success as long as companies continue to innovate and transform in a rapidly changing world.

Disruptive technology trends such as artificial intelligence (AI), the Internet of Things (IoT) and cloud computing will be key drivers in 2023 for growth and change and enhancing workflows. Some of these include automated solutions for claims processing, improving the frictionless customer experience and offering personalized products and services. 

While some of these digital transformation solutions are already employed by some carriers, we see them becoming more and more commonplace throughout the industry. Insurers looking for a competitive edge should consider embracing these five insurance trends.

1. Instant Payments

Because payments are a critical part of insurance transactions, enabling instant payments will become integral to a seamless, digital insurance experience. Allowing for immediate funds availability, Real-Time Payments (RTP) also provide instant confirmation, settlement finality, simplified reporting, automated reconciliation and information integration. Payments can be made around the clock, 365 days a year, 24 hours a day. That can be a significant benefit to small businesses and independent contractors.    

And it’s not just the ability to move money quickly. There is the information and related documentation associated with the payment, such as remittance information. Each payment transaction can provide a wealth of data. The Clearing House reports that new document exchange services will provide added value via access to PDF or XML documents such as bills, invoices and remittances as part of an RTP payment or request for payment message. Another distinguishing attribute of RTP is the ability for bidirectional communication within the secure system. 

Instant insurance payments have already gained traction as policyholders demand fast claims payouts and convenient premium payments. Indispensable in a CAT situation due to its flexibility and speed, instant payments is a trend that will continue to grow in 2023. Expanding concerns around both data privacy and fraud prevention, however, mean security will be a priority for instant payments.

2. Embedded Insurance 

Digital disruptions like embedded insurance are significantly changing the insurance distribution landscape. According to Lightyear Capital, the U.S. market value for embedded insurance was $5 billion in 2020 and is projected to rise to more than $70 billion in 2025.  

To thrive, insurers must rethink distribution channels to better align with customer needs and purchasing expectations. Embedded insurance enables carriers the ability to offer an easy and cost-effective buying experience with personalized products and services that meet the needs of their customers, which is key to staying ahead in 2023. 

See also: Digital Self-Service Is Transforming Insurance

3. Parametric Insurance

One new model capturing the attention of carriers wanting to offer coverage in new ways is parametric insurance, an index-based solution that pays out claims based on an event itself rather than actual losses. By leveraging IoT and real-time analytics, carriers can quickly track and determine payouts, giving customers transparency while making the claims process quick and effective. 

Per Henry Gale, parametric insurance research lead at Instech London, insurers can pay claims in days, if not hours, depending on the product and amount of money involved. For example, perishable goods insurer Parsyl, in collaboration with Lloyds, used smart sensors to identify a temperature issue with cargo that spoiled a batch. That claim was paid within eight hours.  

Per Swiss Re, the global parametric industry generated $11.7 billion in 2021 and is estimated to rise to nearly $30 billion by 2031. Due to its straightforward nature and quick payouts, interest is continuing to grow, with parametric product sales increasing 40% year over year as of August 2022. 

4. IoT and Loss Prevention

According to Statista, Internet of Things (IoT) devices worldwide are forecast to amount to more than 29 billion in 2030. The potential for the insurance industry is immense. In the property sector, IoT technology like smart leak detectors are helping homeowners and businesses prevent losses. And NerdWallet found that most insurers will now offer price reductions for certain smart home devices, with discounts as large as 13%; some insurers are even offering programs to make the devices themselves more affordable. 

IoT adoption will be important for carriers to not only provide incentives with premium reduction and lower deductibles, but to also introduce new pricing tools such as a separate rating model for a water protected building. Per Sean Ringsted, EVP and chief risk officer at Chubb: “The IoT is very exciting. It creates this value proposition where you can go beyond the “repair and replace” model for insurance and get to “predict and prevent” because you have so much information available to you in real time, not just after the fact.” 

5. Cloud Technology Transformation and Adoption

One of the most significant technology initiatives going strong in the insurance industry is cloud technology. Leading carriers are using cloud technology to bolster digital capabilities and better service their customers.  McKinsey reports that cloud services are projected to experience 32% annual growth by 2025. 

Despite tremendous cloud investment, however, many insurers end up creating hybrid operating systems with remaining pieces of legacy technology that prevent realization of the full potential of cloud technology.  Challenges exist that include cost, complexity, capacity requirements and lack of technical skillsets. As Celent reports, the choice comes down to the risk to maintain and the risk to migrate. The risk to maintain legacy cores is increasing as total cost of ownership becomes more burdensome and the lack of flexibility and agility affect the ability to compete.

See also: Ready for Era of Real-Time Payments?

Are You Ready for 2023?

Digital transformation is no longer an option for insurers -- it is necessary. With challenges such as inflation, rising interest rates and climate change, the insurance industry needs to be agile, innovative and empathetic to their customers. Adapting to these five trends will likely lead to growth and success.