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.

In the first talk I gave to an insurance audience, some nine years ago, I projected out a decade and confidently declared, "He who sells the least insurance wins." As a newcomer to the insurance world at that point, I believed that no one WANTED to buy insurance. People bought insurance grudgingly, because it filled a need or, in many cases, because they were required to. I believed that what people did want to buy was protection, and, as someone with a long background in innovation and in writing about digital technology, I believed that insurers could use their vast stores of data and hard-earned expertise to reduce the risks people faced -- and make a lot of money doing so -- rather than wait for a loss to occur and then make people whole. 

What's become known as "predict and prevent," as opposed to the traditional "repair and replace" model for insurers, was hardly original with me, and I'm just one of many who have increasingly leaned into the model. But I'm struck by a recent confluence of events. The Institutes is developing a podcast series on "predict and prevent," in which CEO Pete Miller will interview thought leaders on the topic. (You'll be hearing much more about this from me shortly, as well as from other arms of The Institutes.) And annual reports on the industry from both Bain and McKinsey in the past week have singled out "predict and prevent" as a major theme for 2023. 

As Sherlock Holmes would say, "The game is afoot."

I'll have to wait until it is launched to provide details on the podcast series at The Institutes, which is being honchoed by ITL's old friend Paul Winston, by Matthew Kahn of the Risk & Insurance Group and, of course, by Pete Miller. In the meantime, I'll steer you toward some smart reading on the subject, including the Bain and McKinsey reports.

For the Bain report, the firm surveyed nearly 30,000 customers in 14 countries and found, according to a summary, that consumers "overwhelmingly want risk prevention and mitigation services from their insurers. In Brazil, 97% of survey respondents indicated interest in risk prevention, as well as 81% of respondents from Japan. Additionally, more than 40% of millennials are willing and interested in paying for life insurance that includes risk prevention."

The McKinsey report says, "Commercial carriers must expand their offerings beyond risk transfer to services that mitigate or prevent risks. For example, in cyber, the most engaged commercial carriers help clients reduce cyber threats and improve risk selection by providing threat intelligence, data center diversification, consulting, and employee training. Many commercial carriers also partner with cybersecurity firms to offer end-point protection or multifactor authentication. Insurtechs, in particular, can leverage this opportunity to offer cyber protection products as a 'vaccine' against risks—in other words, the more that individual companies protect against cyber risks, the lower the risk exposure for the industry as a whole....

"Similar mitigation and prevention solutions can help clients become more resilient to NatCat risks. For example, leading commercial carriers have been working with governments and regulators to ensure that building codes are fit for purpose and adequately address local catastrophe risks. In addition, commercial carriers can help manage clients’ exposure by providing extreme weather warnings (such as for floods or hail) or by advising large fleet owners (such as marine and aviation clients) to relocate their fleets based on upcoming extreme weather events. Commercial carriers can also leverage their expertise to help clients develop supply chain resilience or navigate the jungle of environmental, social, and governance (ESG) and enterprise risk management (ERM) frameworks, as well as supplier certificates."

(The McKinsey report includes a number of other striking observations, including about how much specialist carriers have outperformed their more diversified peers and about the opportunities being created by the transition to net-zero. I give the report a hard read every year.)

Beyond the Bain and McKinsey reports, I recommend an interview I did late last year with Sean Ringsted, an executive vice president at Chubb, who has been a driver of "predict and prevent" for some time. Among other smart things, he said: 

"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. When you think about fire, everybody knows the value of smoke alarms. Now think about water. You can use sensors to detect and manage water leaks in the same way. And they’re a major contributor of loss rate in buildings, both in frequency and in severity. It’s not just the cost, either. It’s all the headaches that go along with water damage that can be prevented. You don’t have to get new carpet, worry about mold, deal with the loss of business income. The value proposition is much less about claim payment and is much more service-driven, to prevent the loss.

"You're starting to see applications for worksites. IoT devices can improve safety for workers on degree of bend and lifting heavy objects. Think about sensitive or valuable machinery that you can monitor for temperature and vibration and make sure they’re well-functioning.

"Just the ability to monitor temperature fluctuations and humidity can have a significant bearing on the value of something such as marine cargo or fine art."

If you've stuck with me this far, you might also be interested in a "future history" of insurance that I wrote a year and a half ago for Six Things, where I laid out a vision for where "predict and prevent" could take us by the end of the decade.

I may have been too optimistic nine years ago about how quickly we could get to "predict and prevent." I'm usually too optimistic, even though I allow for the fact that I'm too optimistic. But I'm excited to see the progress.

Cheers, 

Paul

P.S. Yes, I know that the line, "the game is afoot," originated with Shakespeare, not Arthur Conan Doyle, but a lot more people have read Sherlock Holmes stories than have read Henry IV, Part 1, and even more have seen the various TV series and movies where Holmes used the line. 

The insurance sector frees businesses and individuals to conduct their day-to-day tasks without constantly worrying about risks they might encounter, enabling growth for organizations as well as the economy at large. 

But, while being protected by insurance provides peace of mind to numerous individuals and businesses, insurance companies themselves are at increased risk of fraud. According to the Association of British Insurers (ABI), detected fraud comes to over £1 billion in costs yearly, with undetected fraud adding a further £2 billion in the U.K. alone. 

Online threats are becoming increasingly prominent, to the point where £4 million is lost to fraud daily just in the U.K., jeopardizing the entire economy. Learning about online risks and how to protect from them is no longer an option but a priority, especially for insurance companies.

Annual Losses of Over $300 Billion

As more companies embrace digital transformation and transfer their operations online, the frequency of cyber attacks will only rise. While financial institutions such as banks and fintechs are more likely to be targeted, insurance companies are also high on the list as insurance fraud is steadily becoming one of America’s largest crimes, with at least $300 billion stolen each year. While this number seems high, the cost is even higher considering all additional expenses connected with increases in premiums, legal costs and law enforcement expenses or even dealing with consequences of reputational damage and customer retention.

The most significant danger of insurance fraud is its range, as it can span from opportunistic claims by policyholders to fraudulent claims orchestrated by crime rings. Just consider how much damage the crime ring of conniving doctors and healthcare providers from Queens did when they fraudulently billed an insurance carrier for months of treatment and extensive testing. The broad span of these fraudulent activities makes them harder to predict and detect, which is why implementing an effective fraud prevention strategy is more important than ever. 

This is especially important as insurance companies need to pay the claims as quickly as possible while maintaining the balance between investigating potential fraud and ensuring genuine claimants do not suffer in the process. By prioritizing their fraud prevention strategy and embracing new trends, insurance companies can take the proper steps in preventing fraud while ensuring that legitimate claimants stay satisfied with the service.

Fraud Trends Affecting Insurers in 2023

As digitization is changing the demands and needs of customers, every business industry had to adapt to the changes. The insurance industry has always been among the first to accept changes that can help it grow, and digitalization was no different. It allowed insurance companies to launch new business models and optimize revenue streams. Not only can they now offer online insurance sales, but there are companies that exist solely online, offering quick and efficient service to their customers. 

While using big data and AI strategies made it easier for insurance companies to ensure customer satisfaction, their growing online presence also increased the risks of fraudsters using the same technological developments to exploit them. For example, it has been alleged that fraudsters are using deepfake AIs to create synthetic identities – and the prevalence of ChatGPT is expected to exacerbate this. Staying informed about the rising fraud trends affecting insurance companies and adapting your fraud prevention strategy accordingly can be the only thing that stands between you and fraudsters.

1. Identity Theft and Synthetic IDs

Both of these fraudulent activities happen when fraudsters pretend to be someone they are not, to exploit innocent victims. With identity theft, fraudsters can use stolen personal details to conduct their schemes. While similar, synthetic identity fraud brings a different type of danger.

Synthetic identity fraud is a new sophisticated type of financial crime that many companies are still not ready to fight. It happens when fraudsters create fictional identities by combining stolen personal information and fake details. As the identity they are using doesn't actually exist, the fraud attempt can fly under the radar. It is predicted that synthetic identity fraud will grow from $1.8 billion in 2021 to $2.42 billion in 2023, making it the number one threat fraud executives are concerned about in the near future.

2. Money Laundering and Terrorism Financing

Around 62% of global insurance firms have been exposed to fraud or financial crimes in the past 24 months, making money laundering a growing issue. Criminals always find different ways of exploiting unsuspecting companies, and the insurance industry offers them few options. For example, they can launder money by opening an insurance policy using dirty money, after which they submit a fraudulent claim and quickly receive the funds through insurance funds. Another option is opening a life insurance policy, as they offer highly flexible options, allowing them to deposit and withdraw large amounts of cash with a slight loss. Not only will insurance companies be at a financial loss due to paying out a fraudulent claim, but they most likely weren't following AML regulations, leaving them subject to hefty fines.

3. Ghost-broking

This happens when fraudsters pretend to be insurance brokers to sell policies to actual customers while buying those policies from your company. When innocent customers discover the scam, they will come after your company, which might result in reputational damage. 

See also: Global Trend Map No. 11: Fraud

How to protect your insurance company from fraudulent activities

Fraudsters and cybercriminals are constantly searching for ways to commit their malicious actions, while experts continue to come up with new methods of detecting and preventing them. 

This is why it is essential to use cybersecurity solutions such as know your customer (KYC), credit card fraud detection or identity verification. The first thing any insurance company should do is to use the power they have, the data. 

Your potential customers are required to provide you with specific data during the onboarding process, which can be used to confirm their identity if used correctly. By using device fingerprinting during sign-in, you can make sure those logging on are who they say they are, and catch multi-accounting attempts. The process continues once the customers are onboarded, as the accounts are continuously reviewed to verify there are no discrepancies or unexpected changes that might indicate an account takeover. 

Digital footprint analysis is another incredibly useful tool. Using the data the customer has already submitted, such as their email address and phone number, data enrichment solutions source additional information from across the web in real time. For instance, SEON uses over 50 social media and online platforms to tell insurers not just whether the customer is legitimate but to also help gain alternative data on them and even segment them. For instance, you can see if someone travels a lot and stays on Airbnb, if they subscribe to several streaming services and so on -- helping assess their financial situation using openly available data. On the flipside, if someone doesn’t have a digital footprint, that’s a high risk signal and you shouldn’t trust them without investigating.

Velocity checks are another fraud prevention strategy you should aim to use. Velocity checking allows you to analyze data points to determine patterns of standard user behavior, allowing you to recognize any deviations from those patterns that can indicate fraud. These patterns can be anything from multiple accounts being opened from the same IP address or a certain account using several invalid payment details, indicating card testing. Using velocity checks can prevent multi-accounting and account takeovers.

Insurance companies need to ensure they stay compliant with anti-money laundering regulations. Staying compliant will prevent your company from being exploited by criminals while avoiding paying hefty fines or even having a license removed -- and there is AML software to help with this, too, such as tools that check PEP, sanctions and crime watchlists to help companies be compliant with the due diligence part of AML.

Determining the most common risks and identifying any vulnerabilities fraudsters might exploit while using fraud prevention solutions, you can stay ahead of scammers and fraudsters. 

Change 'Beyond Recognition' Coming Up?

The insurance industry is constantly growing by adapting to new customer demands and technological trends. By accepting the changes and offering new services, insurers can attract more potential clients. The insurance industry landscape will continue going through monumental changes as technology advances, with 67% of insurance industry leaders predicting that current business models will change beyond recognition within five years. By establishing effective fraud detection and prevention, you can ensure that your business lives to see the changes.

In this article, discover how insurers are paving their way to success in 2023 with artificial intelligence (AI). Being an insurer in today’s environment is tough, but utilizing the right technology makes it all the more simple. With increased industry pressure, we’re in a moment of time where AI is the only solution for the growing workload.  

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