Following his induction into the Insurance Hall of Fame at the Global Insurance Symposium held by the International Insurance Society last year, I sat down -- via Zoom, of course, in these pandemic days -- with Greig Woodring for what I thought would be some reflections on the history of the life insurance industry. After all, Woodring was the longtime CEO who built RGA into a giant with approximately $3.5 trillion of life reinsurance in force and assets of $89 billion. 

In fact, he led us into a fascinating discussion of the future of life insurance, based on some developments in genomics that could make life insurers partners in health and greatly reduce (and eventually even eliminate?) many cancers as a cause of death among their clients.

Here is a lightly edited transcript of our discussion:

ITL:

You’re often eloquent about the sweeping changes in life insurance that you’ve witnessed in your distinguished career, but I’d like to zero in on the opportunity you’re pursuing now, to exploit the extraordinary progress in understanding the human genome. You—and I—think genomics will have a profound effect on life insurance, among many areas, and I’m hoping to explore the opportunities. 

Greig Woodring:

Our increasingly detailed understanding of genetics and how it affects our health will turn a lot of the life insurance selection process on its head. The change will accelerate when the cost of sequencing a person’s genome drops from $1,000—roughly where it is today—to $100, which will be so cheap that pretty much everybody can have a copy of their genetic information. And the drop in cost isn’t that far off.

Many have gotten some information from some of the consumer tests, the 23andMe-type tests, and there's going to be a time in the near future where you get all the information about your genome from advanced genomic sequencing.

Life insurers can also use genetic information to improve the health of existing, in-force policyholders, for the benefit of all. The interests are perfectly aligned. Life insurers want their policyholders to live longer, just as they themselves do. 

Many researchers believe, and are intensively investing money and effort, in the pursuit to extend the maximum human lifespan beyond the 100-year or 115-year mark to maybe 120 to 150. But who wants to live to 150 unless they're healthy? So, life insurers may be well-positioned to extend the “healthspan” of their policyholders. Life insurers should be concerned about the health of their policyholders more actively.

Life insurers will have to get up a genomics learning curve. They haven't really begun that yet. And I think the understanding and usage of genetic information will separate companies that are successful in this next wave from the ones that fall behind a bit.

ITL:

I can imagine an adverse selection problem. I mean, if I'm the one who pays $200 to have my genome sequenced and interpreted, I’m going to know much more about my likely lifespan than an insurer can, without access to that information. Does that seem to be a big problem, or do you see ways around the adverse selection issue?

Woodring:

I think that is a serious problem. Insurers will have to deal with that whether they want to or not. When consumers know their genetic information and can decide whether to buy life insurance, and how much, based on that information, the underwriting process needs to adapt. In the near future, clinical grade genomic information will be inexpensive and widely available.

ITL:

Tell us a bit about Genomic Life, a company that you’ve been involved with for several years now and that I think illustrates the kind of opportunity that genomics will create, whether for insurers or for others.

Woodring:  

Genomic Life is a service company, not a life insurer. A product that we're offering first and have been for a couple of years now with good success is a cancer product. If someone gets cancer, we'll sequence the cancer to help inform precision treatment, and we will provide a cancer support specialist and concierge navigation services that help them get through the disease and its emotional body blows. We'll get our members into clinical trials at a much higher rate than they would if left to their own devices and steer them to the best cancer centers. 

It's very difficult to navigate through the labyrinth of a disease like cancer in the environment that we have for healthcare delivery in the U.S. market. So, we help people get through that.

ITL:

And, at least as I see it, that sequencing of the cancer’s genome is just the start. AI will kick in, in terms of the analysis of people’s genomes and what they say about, among other things, propensity for certain diseases, as well as in terms of possible treatments for diseases. A business owned by Google showed earlier this year that its AI could determine how proteins fold, more accurately than the chemical process that had been used up until now—and that cost hundreds of thousands of dollars and required more than a year just to determine the shape of a single protein. The final shape of a protein—and not just the string of amino acids that compose it—determines so much about how that protein acts. And once you can do this kind of analysis, about the shape, in a computer rather than in a lab, the pace of analysis kicks into an exponentially faster gear. 

Woodring:

I agree. That was a really big deal, even if it was little-noticed outside of the world that follows those sorts of things. If you think about the rapidity of the development of COVID vaccines, the same mRNA technology that was used for that could be used to develop cancer vaccines. 

That is extremely possible and a logical next step. There are people working on it right now. So, don't be surprised if there's a whole host of cancer vaccines coming in the next couple of decades.

ITL:

Are all these developments in genomics a separate stream that branches off from what you've done in life insurance or do they then feed back into life insurance?

Woodring:

It all feeds back into life insurance. Think about a life insurance company with a million policies. Those million policies are going to get 50,000 cancer cases a year. Now imagine we can keep each of those 50,000 people alive for an extra two years. What is the value of that to the insurance company? And we think that is doable, today.

We're just touching the surface of dealing with cancer today compared with when you have liquid biopsies [blood tests that can detect a broad array of cancers] and other genetic-based tests coming along that will lower the death rates. 

We'd like to get to the point of helping insurance companies largely eliminate cancer among their policyholders as cause of death. And right now, for most of them it’s a leading cause of death; underwriters don't screen out cancers as well as they do, for example, cardiovascular deaths. 

You’ll be able to tell your policyholder base that, look, we’ll help you increase your health lifespan, at least partially, as best we can. This is a good message for a life insurance company.

ITL:

Fascinating. That feels like a reasonable place to end things. But do you have any parting words? 

Woodring:

As you said, artificial intelligence has a big role to play. As you begin to use artificial intelligence in combination with genetic information, I think we'll find doors to rooms we didn't know existed. So, I'm really excited about the future of life insurance, and in a different way than it's been in the past. Not only protecting you and your family from the adverse effects of premature death but helping maintain you in the best position to live a healthy, long life. 

If that's what a life insurance company becomes, I think that everybody will be excited.

COVID-19 changed everything, including insurance. New risk opportunities emerged with each lockdown that included increased cyber threats among a dispersed workforce. With risk evolving at such a rapid rate, one can’t help but wonder: Does the average founder of a small to medium-sized enterprise (SME) understand their risks and business insurance? Do SME clients understand the importance of risk transference should a data breach occur? 

My team at Embroker conducted a survey of 500 SME owners, CEOs and tech startup founders and found a discrepancy between what founders know about risk and the actions they have taken to mitigate that risk. Embroker found that only 22% of owners and founders say they have read and understood all of their policies. 

The good news is half of the owners and founders rely on a broker to sign up for coverage, which may improve their understanding. Embroker research also shows that SME owners lack an understanding of insurance industry standards regarding risk mitigation and often look to brokers for better education. 

Trusting Brokers 

The report shows that 25% of owners and founders rely on the broker to fully research and price out their options. One in five admitted to not knowing how their insurance purchases are handled.

Almost one in three (29%) SME owners allow their insurance to auto-renew without making changes, while 74% of tech founders either engage with a broker or have someone internal to assess their needs and options upon renewal.

See also: A Commentary on Agents & Brokers

Cyber Risk

As business threats intensify and concern grows, both owners (46%) and tech founders (57%) fear they don’t have sufficient coverage in the event of a ransomware attack. But the concern about this risk remains low: 63% of SME owners believe they are unlikely to face a data breach or ransomware attack.

Tech founders, on the other hand, are more aware of cyber risks than other industry business owners. 58% of tech founders believe they are likely to face a data breach or ransomware attack. However, tech founders are still not securing coverage, with only 34% having cyber policies. Why is this? 

It’s likely tech founders don’t understand how transferring their risk in the event of a cyber attack can dramatically help their business, or they accept the popular assumption that obtaining cyber insurance puts you at greater risk of an attack. This is simply not true. Here’s the reality: It’s not if a company will face a cyber attack, but when.

We now know that COVID-19 pandemic created a dispersed workforce and thereby created more opportunities for hackers to spot weaknesses. Ransomware-as-a-service is becoming an increasingly common tool. According to ABC News, cybercrime is up 600% as a result of the COVID-19 pandemic. 

To learn more about the business insurance approach for SME owners, CEOs and tech founders, download the full report here.

Without a doubt, artificial intelligence (AI) is a valuable driver of innovation in today’s insurance industry. Unfortunately, the predominant attitude toward AI in our culture still hangs on a suspicion that people will lose their livelihoods as their jobs are taken over by autonomous machines. Many fear that we’ll lose some piece of our humanity as more and more important decisions are delegated to AI algorithms.

In fact, there is good reason to be cautious when it comes to AI, but that doesn’t mean we should shy away from using it. Indeed, we need to approach this technology with a keen attention to the importance of the human element.

Like so many other things, AI is what we make of it. It has the potential to improve our lives in meaningful ways. If we don’t act with clear and thorough deliberation, though, it also has the potential to do harm. Insurers must take care that their AI initiatives are deployed and governed in ways that support people. That means enhancing the quality of life for the employers and front-line workers whose livelihoods we safeguard. It also means empowering the claims managers and other professionals who bring that critically important human touch to our business.

AI Misconceptions

In the popular imagination, AI is imbued with almost magical powers — the ability to digest vast amounts of data, ponder the implications of that information and draw meaningful conclusions from it. Pop culture portrays AI as being fully autonomous, assuming decision-making powers and depersonalizing our lives and our relationships in the process.

Yet even tech giant Facebook is learning that a “set and forget” approach to AI generally doesn’t work well. As early as 2014, the company was using AI to categorize images, sift through content and identify material to be flagged as inappropriate. The company has been under fire from multiple directions for its sometimes overzealous policing of content as well as its apparent inability to flag truly objectionable material.

In the end, Facebook’s problem is a human one. Some critics argue that the company aims to maximize user engagement at the cost of all else and that its content must be regulated more carefully. Others argue that Facebook is too quick to block content that it doesn’t like. Both concerns speak to problems that require human solutions — not technical ones.

That leads to a fundamental question: “How can AI best serve human needs?”

AI Reality

Today, AI can very effectively support human decisions, primarily by shedding light on important matters that require attention. Most current AI applications consist of machine learning algorithms designed to perform clearly identifiable tasks based on a set of predefined business rules.

Those business rules are created and shaped by human beings. They must also be monitored and governed continuously, with a sharp eye toward the ethical implications of AI applications. Attention to the human element is essential.

The good news, though, is that human beings remain in charge. The future is in our hands. AI is a very powerful tool, with the capacity to dramatically improve people’s lives. We have the capacity to continue steering our AI initiatives in a direction that aligns with our moral and ethical priorities.

See also: How to Use AI in Claims Management

AI Supports the Human Element

Truly effective AI programs aren’t about replacing people. Like any other tool, AI can enhance the effectiveness and efficiency of the people who make our industry run smoothly.

In claims management, machine learning algorithms are most frequently deployed to aid in fraud detection, but AI is increasingly being applied in far more sophisticated ways, as well, such as matching injured workers to the medical providers most likely to help them recover quickly and completely. It’s helping claims managers to effectively handle heavy caseloads by watching for meaningful changes to each case, flagging noteworthy changes and bringing them to the attention of a human being who can assess them further and take action.

For heavily burdened claims managers, AI serves as a kind of intelligent assistant, relieving them of many of the tedious elements of monitoring cases while ensuring that nothing slips through the cracks.

Consider the case of an injured worker whose medical case has just taken a wrong turn. The details are buried in the physician’s notes, but the claims manager responsible for the case simply hasn’t had time to read the report yet. AI can spot that problem immediately and bring it to the claims manager’s attention. The vital human element is still there, but now it can be better-informed and more effective. The claims manager can act promptly, steering the case toward a better medical outcome.

AI can match injured workers up with the providers most likely to deliver positive results. That’s not simply a matter of ranking physicians based on their overall track record, though. AI can digest the details, including the type and severity of the injury, the patient’s medical history and other factors to deliver a nuanced recommendation as to which providers are most likely to help the employee recover quickly and completely.

The data fully supports this approach. When AI is applied to the task of matching insured workers with the best providers for each case, top-ranked recommendations result in under 28 days of missed work, whereas the lowest-ranked quintile shows an average of over 570 days of missed work.

Think about what that means to an injured worker and their loved ones. It’s the difference between short-term injury and chronic pain. For many, it’s the difference between dignity and depression.

This, in the end, is what AI is capable of. It’s true that we should proceed with caution. Like any other technology, AI has the capacity to deliver tremendous benefits, but it also has the potential to be misused. We all have a responsibility to see that AI is done well, that it has a humanizing influence, not a dehumanizing one. In the process, we can improve the lives of insured employees, claims managers and other stakeholders.

As first published in Claims Journal.

How Important Is the Human Touch Really? Paul Carroll, Editor-in-Chief of ITL While ITL serves as a platform for the varied insights and opinions of others, they tend to coalesce around certain themes: on the need to innovate, on the importance of moving faster than the industry historically has, etc. It’s not often that I see articles with almost opposite points of view, let alone have them arrive on top of each other, but that’s what occurred with two of the six articles I highlight below. One argues that the human touch is overrated these days, that what clients really want is much more ability to self-service. The other says, among many other things, that “two in three consumers are resistant to the idea of purchasing insurance or filing claims on a website or app without speaking to a human being.” Who’s right, and who’s wrong? Well, I have my own opinion on that. continue reading > Podcast Alert Join Denise Garth for an all new podcast featuring Vantage Risk's Gail McGiffin where they discuss what are the underlying drivers in commercial/specialty lines segment, how data is driving the volution of underwriting, and insights in how to change your mindset to achieve speed to market. Register Now SIX THINGS Human Touch: How Crucial Is It Really? by Jeff Kroeger According to Gartner Predicts, today’s customers manage 85% of the relationship with an enterprise without interacting with a human. Read More Consumers Wary of AI-Driven Insurance by Pat Howard 83% of consumers wouldn’t feel comfortable if their home, auto, or renters insurance claim was reviewed exclusively by artificial intelligence. Read More Ready...Set...Grow!  Sponsored by Intellect SEEC In this webinar, ITL Editor-in-Chief Paul Carroll sits down with Jim McKenney, chief strategy officer and products business head at Intellect SEEC, and Sandeep Tandon, CTO of Intellect SEEC. Read More What Is 988? Future of Crisis Services by Sally Spencer-Thomas There will soon be a three-digit hotline for mental health emergencies -- 988 -- that will greatly simplify and improve assistance. Read More Commercial Insurers Shift Tech Priorities by Heather Turner 13 “transformational” technologies, working with foundational technologies, are moving the industry into the new digital-connected era. Read More 3 Key Themes for Check-ins With Clients by Peter McMurtrie A national survey finds business owners want easy claims processes, need help with risk management and value guidance from agents. Read More How Fort Worth Drove Down WC Costs… by Scott Roloff, Bill McCallum, Jody Moses and Mark Barta ... while improving care for employees. The secret? The city sent them to the best doctors. Read More The Virtual Insurance Agent Sponsored by Creative Virtual  With conversational AI, insurance companies can deliver easier and more convenient digital support to customers, improve agent experience and productivity, and reduce contact center traffic. Read Now MORE FROM ITL December Focus: Smart Home "Even before a commercial version of the internet browser was invented in the early 1990s, the rich, geeky types I dealt with in my travels at the Wall Street Journal were figuring out ways to wire their homes to ward off possible intruders." Read More Global Insurance Forum Experts Series   Sponsored by International Insurance Society  Over this six-part series, hear from industry leaders about building an innovation culture, leveraging data for success, and more. Watch Now Partner with ITL to create expert thought leadership content. Custom Content Promoted Content Display Advertising Custom Webinars Monthly Topic Sponsorships ITL Partner Packages and more Learn more and get the 2022 Media Kit GET INVOLVED Write for Us Our authors are what set Insurance Thought Leadership apart. Get Started SPREAD THE WORD Share Share Tweet Forward

 

Good news: It looks like 2022 could be a great year for many agents and brokers.

An Aon survey of more than 500 agents and brokers that was published late last year found that "about 70% of agents expect their business growth to be on track in the new year, while nearly 20% expect that growth to be 'off the charts.'"

The thinking seems to be that agents not only survived the pandemic but have used the time profitably, to fine tune their businesses in ways that will appeal to customers and increase business.

Product expansion will be a leading strategy for growth, with the top three specialty lines that might be added being: 1. catastrophe (commercial and personal/private coverage); 2. healthcare (beyond allied health); and 3. nonprofits.

With Zoom fatigue pushing agents to rely less on webinars and virtual events, 40% of agents expect social media to give them the biggest marketing boost in 2022. Email blasts were in second place, at 22%. 42% said they want to explore video marketing more this year.

I'll add an observation of my own: After years in which everyone talked about how insurers would disintermediate agents and brokers, carriers seem to be increasingly to be committed to working with agents and brokers rather than trying to go around them and get to customers directly.

Now, disintermediation hasn't gone away, and every part of the industry will remain under pressure to cut costs, but carriers are trying to find ways to work with agents and brokers to create a smoother experience for customers. Agents and brokers who lean into that new interest figure to prosper.

If you're interested in exploring that topic, I highly recommend two recent articles: "Insurers Must Bond With Agents," by Denise Garth at Insurance Thought Leadership, and "Customer Experience: Insurance Brokers as Customers," by Ralph Mucerino at the International Insurance Society.

Here's to a prosperous New Year!

 Paul Carroll

Editor-in-Chief, Insurance Thought Leadership

What to Understand About Gen Z

The Future of the Independent Agent

How to Build a Healthy Prospect Pipeline

The New Mandate: Video or Vanish

Accountability Is Not a 4-Letter Word

The Virtual Insurance Agent

In February 2015, Anthem disclosed that criminal hackers had breached the company’s servers and potentially stolen 37.5 million records containing confidential personal information (CPI). This was a catalyst for insurance regulators that ultimately resulted in the creation of the Insurance Data Security Model Law that is now being adopted by states across the U.S.

Similarly, in the summer of 2020, the discussion by regulators regarding race and its role in the design and pricing of insurance became the catalyst to move forward on defining the regulatory expectations for using artificial intelligence (AI) in the insurance industry. As regulators and insurers work to understand the level of regulatory oversight that will be needed for AI innovation, we can find a path forward by looking to the work regulators accomplished regarding cybersecurity.

The Making of a Model Law

Although state insurance regulators were already discussing the protection of consumers’ CPI, the Anthem breach placed a laser focus on data security. Just two months later, in April 2015, the National Association of Insurance Commissioners (NAIC) issued and adopted the “Principles for Effective Cybersecurity: Insurance Regulatory Guidance.” These principles included ideals such as establishing a minimum set of risk-based cybersecurity standards, establishing appropriate regulatory oversight, requiring incident response by insurers, requiring insurer accountability for third parties and service providers, incorporating risks in insurers’ enterprise risk management processes and identifying material risks for the insurers’ boards of directors.

Over the next 18 months, the NAIC used these principles to draft a model law to establish standards for data security and standards for the investigation of and notification to the state insurance regulators of cybersecurity incidents. During this process, the drafters quickly recognized that insurers came in different shapes and sizes, used data differently and had different levels of systems and expertise.

Such was also true of regulators. As cybersecurity is not inherently an insurance-only issue, an expert in insurance regulation was not inherently an expert in cybersecurity. Additionally, departments of insurance were not uniformly staffed with cyber experts. The new law needed to strike a balance to ensure appropriate regulatory oversight while adapting to limitations on both the insurance and regulator sides of the equation.

In October 2017, the NAIC adopted the Insurance Data Security Model Law, which tackles a highly technical domain of a similar level of complexity as what we will soon face with AI. In the law, I see five actionable areas of regulation:

1. Proactive identification and mitigation of risks
2. Continual monitoring and reporting of potential risks
3. Accountability for third parties
4. Compliance certification to regulators
5. Transparency on significant events to regulators and opportunity to remediate

Additionally, the model law provides the insurance regulator the power to examine and investigate insurers while at the same time providing confidentiality protections for the information provided by insurers.

In adopting this model law, regulators successfully balanced maintaining significant regulatory oversight with placing the responsibility of compliance and notification of non-compliance on the insurers, which employ the necessary expertise in cybersecurity. The result was a model law that allows regulators and insurers to prioritize the protection of consumers’ CPI through an appropriate allocation of resources and expertise.

A Parallel Path for AI

Just five years later, regulators once again find themselves addressing a quickly growing, high-impact technology that is not inherently an insurance-only issue: the use of AI. This brings the familiar challenge of insurers that are at different levels of engagement in AI, including different levels of systems and expertise. It also once again highlights the challenges for regulators with strong expertise in insurance regulation but not necessarily in the nuances and risks of AI. As regulators look at creating model regulation, they will once again need to strike that balance of ensuring appropriate regulatory oversight while recognizing limitations on both sides of the equation.

See also: Boosting Cyber Hygiene With Insurtech

As they did with cybersecurity, regulators have adopted high-level guiding principles regarding AI. The NAIC's Principles on Artificial Intelligence are intended to establish guidance for AI use and assist regulators in addressing regulatory oversight of insurance-specific AI applications. This time, though, the regulators also have the benefit of a potential road map to help navigate the development of a well-defined regulatory approach.

When overlaying the NAIC principles on the five regulatory areas I outlined above, a path forward quickly develops that emphasizes the importance of the key principles of accountability, compliance, transparency and safe, secure, fair and robust outputs.

1. Proactive identification and mitigation of risks

A company should have systems and resources in place to proactively comply with all applicable insurance laws and safeguard against AI outcomes that are either unfairly discriminatory or otherwise violate legal standards.

2. Continual monitoring and reporting of potential risks

A company must have a systematic and continuous risk management approach to AI. This includes a system to analyze AI outcomes, responses and other insurance-related inquiries. Risk management should include reporting to the board of directors any material risks and mitigation plans.

3. Accountability for third parties

A company must ensure that any third parties it engages to facilitate the business of insurance are also promoting, monitoring and upholding the principles.

4. Compliance certification to regulators

A company should annually certify to the applicable regulators the existence of proactive identification systems, mitigation, monitoring and reporting of risks, as well as compliance with legal requirements.

5. Transparency on significant events to regulators and opportunity to remediate

A company should have in place systems to record data supporting AI final outcomes and should be able to produce data to ensure a level of traceability. Any unintended consequence should be remediated when identified.

And, as was done in the data security model law, a similar AI model law can provide the insurance regulator the power to examine and investigate insurers while at the same time providing confidentiality protections for insurers’ proprietary algorithms.

While at times, regulating and managing risks of AI feels overwhelming and unknown, these are not completely uncharted waters. By adopting this model framework for AI, both regulators and insurers could embrace a comprehensive approach that would allow consumers to benefit from innovation in AI while establishing important consumer protections and trust.

As first published in Digital Insurance.

For as long as weather and natural catastrophe risks have existed, insurers and reinsurers have been responsible for the commercial assessment of natural disasters, primarily through underwriting and reserves management. Today, amid increasingly devastating consequences and rapidly rising costs of climate-related perils, (re)insurers are expected to play a larger role in helping society mitigate the effects of climate change, build resilience to its effects and support the transition to a low-carbon economy. 

(Re)insurers have an opportunity to lead on these issues and strengthen their position in the marketplace by taking an enterprise-wide approach to climate change, not only when it comes to underwriting but also on investment decisions. Climate change is going to affect different parts of the business, so it is important to take a holistic view of the business approach. 

By understanding and managing climate risks on the assets and liabilities sides of the balance sheet and advancing climate-awareness in their own organizations, insurers can navigate climate change. With this in mind, Wellington Management and Willis Towers Watson recently collaborated to produce a pragmatic guide for insurers and reinsurers to help them steer their organizations through the challenges of defining, quantifying and managing climate risks on the journey to net zero.

Increased frequency of extreme weather 

Climate change risk consists of three broad related categories of risk — physical, transition and liability risks. The risks are related — with acute physical risks (hurricanes and floods) and chronic ones (like droughts and rainfall) fueling transition and liability risks, such as carbon emissions regulations and legal actions brought about by those suffering damage from climate change. 

While the impact of climate change will vary by peril and geography, analysis by Wellington and Willis Towers Watson shows that there is evidence that some events that used to be thought of as 1-in-100-year hurricanes 20 years ago now have a 40%-plus chance of occurring sometime between 2031 and 2050.

Assessing probability over time requires calculating the cumulative percentage risk of an event’s likelihood for a given period period. The longer the period, the more likely a “rare” event is to occur, and the greater the impact minor increases in probability have.

Wellington’s work with Woodwell Climate Research Center found that for parts of the U.S. Atlantic & Gulf Coasts, where climate is forecast to have the biggest impact, what was considered a 1% (1-in-100) event in 1990 is now estimated to be a 1.9% (1-in-53) event now and by 2040 could be a 3.2% (1-in-32-years) event. This means that over a period of 20 years the chance of being hit by a hurricane in one of these areas most affected by climate change could increase from 32% to 48%. This represents a 48% increase in probability compared with today.

The probability of an event does not necessarily align exactly to the probability of loss. Building resilience within portfolios and mitigation measures go a long way toward tempering the impact of frequency and severity changes.

See also: Time to Move Climate Risk Center-Stage

A strategic response to climate risk

The continued mischaracterization of rare climate events as one-time occurrences rather than part of a changing pattern may be a reason why climate risk often remains abstract, hampering preventative behavior, policy change and asset repricing. If insurers better understand climate probabilities, particularly the cumulative risk of occurrence over multi-year periods, they will better appreciate the severity and more accurately reprice these risks.

Until then, the increasing volatility of loss-causing climate-related events along with growing financial risks to assets in investment portfolios present a dual threat.

When defining transition risks as the effects on companies as economies decarbonize — effects such as policy regulation, litigation, adoption of alternative energy sources and shifting consumer preferences and behaviors — physical risks are manifestly the cause of these transition risks.  Any approach that independently buckets physical risks as potential underwriting liabilities, and transition risks as investment risks that lower security values, requires a paradigm shift.

To better understand the multi-dimensional nature of climate risk and how it affects different parts of the business, the insurance industry needs to up its game and be more strategic. This means taking a whole balance sheet view of the risks and opportunities and requires insurers and reinsurers to develop scenarios of temperature change over a given time horizon, and considering optimistic and pessimistic assumptions about worldwide paths (orderly vs. disorderly) to reaching climate goals.

Each category of risk can affect both sides of the balance sheet — and should influence strategic business decisions about product development, capital management, investments, acquisitions and divestitures. A more strategic approach to climate risk and resilience means starting by understanding baseline enterprise risk and then developing climate scenarios that insurers and reinsurers can integrate into their risk models.

Gaining a clearer understanding of climate risks and building scenarios are just two of eight key challenges we have set out in our joint report that insurers need to address if they are to better appreciate the severity and more accurately reprice these risks, and ultimately play a larger role in helping society mitigate the effects of climate change. Other items on the to-do list outlined in the report include stress testing asset portfolios, developing climate-aware investment strategies and – importantly -- holistically integrating asset and liability strategies.

There is a lot to consider as insurers and reinsurers work to develop their own views of risk in line with their baseline underwriting and investment portfolios, and to translate climate risks under different scenarios into adjustment factors for models they use today. For example, there are also indirect climate risks to consider for insurers invested in industries like auto manufacturing, semiconductors, construction or other industries that rely heavily on water. Water scarcity could mean higher operating expense, lower output and ultimately a drag on GDP growth.

Another indirect risk relates to migration. Wellington’s climate research team believes that climate migrants will abandon vulnerable rural areas for urban ones, driving economic consequences. Some countries could see sovereign debt downgraded as a result of climate risks, and higher borrowing costs could ultimate lead to further impacts — unemployment, inflation, social unrest.

At the same time, as with any form of risk, climate uncertainty and the wide range of outcomes associated with climate change also present opportunities to develop a sustainable, progressive and commercially successful strategy for the business. For example, providing new risk mitigation strategies and transfer solutions through re/insurance products, as well as promoting risk awareness and resilience at source to tackle the aforementioned challenges. Within asset classes, sectors and regions, assets with material climate-risk exposure will likely struggle with higher costs of capital, while sustainable alternatives could capture a “green” market premium and accrue more value long-term. For example, by overweighting assets that contribute to the low-carbon transition (renewable energy, large-scale battery storage, water management, electric network utilities).

JANUARY 2022 FOCUS OF THE MONTH

PARAMETRIC INSURANCE

FROM THE EDITOR

When you strip insurance down to its essence, there are just three components related to indemnification. There is a client/contract. There is a yes/no mechanism for determining whether a payment is triggered to that client under that contract, as well as the amount. And there is capital, whether from an insurer, a reinsurer or the capital markets. That's it: a client, a judgment mechanism and money.

And when industries go digital, as insurance is, they get stripped down to their essentials, which can be recombined in new, even surprising, ways. Look at photography. For more than a century, since George Eastman patented the first roll of film and founded Eastman Kodak in the 1880s, photography was associated with its physical manifestations--the cameras, the film, the chemicals and the prints. In the digital age, photography is stripped down to its essence: an image. Cameras now are built into almost every conceivable type of device, especially smartphones, and images are shared without ever getting near a chemical or piece of paper. As a result, profits and market value have moved away from the physical manifestations, including Kodak, and to Facebook/Instagram, TikTok, etc.

This is where parametric insurance comes in. By having a simple yes/no metric, such as a temperature that rises above a certain level or drops below a specified level for an agreed-upon amount of time, parametric insurance removes the need to have an adjuster go into the field to inspect, say, crop damage and offers a path to accelerated digitization for insurance. The approach both cuts costs and greatly speeds payment--offering benefits both to insurers and customers.

As always, there's complexity to parametric insurance. Almost nothing about digitization is as simple as the theory suggests. Remember when ATMs replaced bank branches? When travel websites eliminated travel agents? Yeah, neither do I. But parametric insurance has great potential, which I hope you'll explore by reading this month's interview and by exploring the the links we've provided, including to the six articles below.

Cheers,

Paul Carroll, ITL’s Editor-in-Chief

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INTERVIEW WITH HENRY GALE

As part of this month’s ITL Focus on parametric insurance, we spoke with Henry Gale, parametric insurance research lead at Instech London, on the prospects for this increasingly popular approach to insurance.

“We've just seen more and more products being announced, more and more startups emerging and getting investment, more partnerships and more adoption as bigger insurance companies get involved, as well. If you like, 2021 was a big year of announcements, and we’re looking to 2022 as maybe a year in which some of these products scale and we see success in parametric insurance”

Henry Gale 

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As part of this month’s ITL Focus on parametric insurance, we spoke with Henry Gale, parametric insurance research lead at InsTech London, on the prospects for this increasingly popular approach to insurance. In addition to the interview, you can check out these recent posts from InsTech London:

How we spot parametric insurance trends

and

Best of both: bundling parametric with indemnity insurance

ITL:

At InsTech London, you put a clear stake in the ground a year and a half or so ago and declared that parametric insurance was a real breakthrough. Do you still feel that way?

Gale:

We do. We've just seen more products being announced, more startups emerging and getting investment, more partnerships and adoption as insurance companies get involved, as well. If you like, 2021 was a big year of announcements, and we’re looking to 2022 as maybe a year in which some of these products scale and we see greater success in parametric insurance.

For specific examples, I'd steer you to a report we released last year that profiled over 50 companies in parametric insurance; we'll update that later this year.

ITL:

Is there a particular area, such as agriculture, where you expect to see the breakthroughs?

Gale:

Catastrophes have always been the biggest area of parametric insurance. There's still potential for growth in that area. So that will stay the dominant trend, both for agriculture and for other areas.

It's been interesting to see new distribution methods to get farmers in different parts of the world better-insured. In addition, there’s lots of potential in things like travel insurance, event insurance, or cyber business interruption.

ITL: 

What are some of the new forms of distribution?

Gale:

When it started, parametric insurance was very much concerned with big corporate risks and reinsurance. The innovations in the last few years have been expanding that to smaller and medium businesses or even to individuals. And all of those need quite different approaches to distribution.

With corporates, they are becoming more and more aware of parametric insurance, especially for traditional catastrophes like hurricanes and earthquakes. The challenge will be maybe making them aware of the potential with other natural perils, and getting brokers more involved in selling parametric insurance. For smaller and medium businesses, there are less established distribution routes to parametric insurance. So people are looking at whether you can do embedded insurance or go through brokers.

In almost all cases, parametric insurance is still best combined with indemnity insurance. For instance, you could take a deductible buy-down approach. If you’re a big corporate, you might have a high deductible on your earthquake risk but achieve that deductible by taking out a parametric insurance policy against earthquakes. You get an instant payout and then the rest of your damage gets covered by the other policy.

One trend that I was looking at recently is combining parametric triggers into an indemnity-based insurance policy; products that are partly parametric based on some events but also indemnity in other realms.

ITL:

Do you have a favorite example?

Gale:

One recent example that we found very interesting is that Vave, an MGA that Canopius set up, is going to be including extreme-temperature insurance in its policies. Whether it's because of a cold snap or extreme heat, anyone who's insured on those commercial property policies will get an automatic payout, as well as being covered for everything else that they have in their commercial property insurance.

ITL:

Parametric has always been intriguing to me, partly because the payout can be so quick and partly because you just take the expense of the claims adjustment process out of it. Do you have a way of quantifying those gains?

Gale:

In terms of the speed of payout, it depends on the sort of product and the amount of money, but we’re seeing companies make payments in hours. And, if you’re insuring large corporate risks, it's a big improvement to be paying the claim in days or weeks rather than in months or longer.

Parsyl, which has collaborated with Lloyds, insures vaccines and seafood and other perishable goods. When the shipment reaches its destination, if the sensor in the cargo shows that the temperature has gone above a certain level, spoiling the batch, the person receiving the shipment scans the QR code. In July, Parsyl paid a claim in eight hours.

ITL:

Is there a particular part of the world where parametric insurance seems to be happening faster?

Gale:

There are regional patterns. In Africa, there's potential for ensuring smallholder farmers, and we’re seeing several parametric programs in action. There's also agricultural parametric insurance happening elsewhere in the world, like India. In terms of catastrophes, the U.S. is always going to be a big focus, as well as Latin America. There's quite a lot of initiatives to insure vulnerable people in the Caribbean or South America against the risks associated with earthquakes and hurricanes. Some of the other applications, for non-damage business interruption or flood risk, apply quite universally.

ITL:

You’ve mentioned a couple of companies. Are there others to watch?

Gale:

Descartes Underwriting has managed to scale up its underwriting for parametric insurance against climate and catastrophe risk for large corporates. Generali is the insurer behind them. Global Parametrics has been structuring a lot of solutions to help vulnerable communities across the world. New Paradigm Underwriters handle large risks against hurricanes and earthquakes in the U.S.

ITL:

What haven't I asked you about that you think is important for people to understand about parametric insurance?

Gale:

Insurers are looking at opportunities for parametric insurance in areas other than climate and catastrophe, such as business interruption and cyber. Finding a scalable product for small and medium businesses is a big opportunity for insurers to write new business.

 

While ITL serves as a platform for the varied insights and opinions of others, they tend to coalesce around certain themes: on the need to innovate, on the importance of moving faster than the industry historically has, etc. It's not often that I see articles with almost opposite points of view, let alone have them arrive on top of each other, but that's what occurred with two of the six articles I highlight below.

One argues that the human touch is overrated these days, that what clients really want is much more ability to self-service. The other says, among many other things, that "two in three consumers are resistant to the idea of purchasing insurance or filing claims on a website or app without speaking to a human being."

Who's right, and who's wrong? Well, I have my own opinion on that.

Basically, I think that both articles make important points but that the right answer--as you've seen me say many times now about almost all things digital--needs to be a hybrid based on constant, small tests. Those tests will let you gradually find your way to the right approach, for now, and to let you keep adapting as your customers and competitive environment change.

Personally, I'm big on self-service. I have zero interest in talking to an agent of any company about anything if I don't have to. So, I resonate with the statistics in "Human Touch: How Crucial Is It Really?": that "90% of consumers expect a brand or an organization to offer a self-service consumer support portal"; that "today's customers manage 85% of the relationship with an enterprise without interacting with a human"; and that "73% of all consumers say that valuing their time is the most important thing companies can do to provide them with good customer service."

I have no reason to doubt any of those stats, and I suspect that many insurers, while moving in the self-service direction, still lag well behind their customers' desires.

At the same time, as "Customers Wary of AI-Driven Insurance" argues, based on an extensive survey by Policygenius, "despite faster claims turnaround times, the potential for lower rates and other AI-enabled transformations, customers still value a human touch." The survey found that "83% of consumers wouldn’t feel comfortable if their home, auto, or renters insurance claim was reviewed exclusively by artificial intelligence" and that, after a loss, only "around 43% of homeowners would agree to let a drone evaluate their property rather than a human." Policygenius also reports that "72% of consumers wouldn’t be comfortable purchasing insurance online without ever speaking to a real person, and 64% wouldn’t feel comfortable filing a claim on a website or app without human interaction."

If you pay attention to all the stats, you can find your way to a middle ground. You let customers handle as many of the routine matters on their own as possible--updating policies, determining when a payment is due, etc. But you make sure a human is always on call, at least during business hours, and you introduce a human into every process that might require advice or any sort of emotional support, whether that's as fraught as filing a claim might be or as straightforward as assuring someone they've made the right choices as they've done research and chosen insurance coverages online.

But that's just the broad outlines of a hybrid. There's a lot of play in the details. Preferences will vary based on the age of the client, the income, the education level, the location, the... who knows what else?

The best way to see what customers want is to offer them options and then watch and listen to how they react. Do agents need to be monitoring all changes that clients make to their policies online, including to coverages, or just some? Is there some way to give clients freedom online but then ping agents about where they might way to follow up? What is the best way to help people do their own research online while introducing agents at just the right time and in just the right way to turn a search into a sale?

I encourage you to click on and read the first two articles below so you can make up your own mind. But my mantra on innovation for 25 years has been, Think Big, Start Small, Learn Fast. So, while I think the statistics in the articles are very helpful--I wouldn't have published them otherwise--they're just the starting point. The only way to learn what the right answer is for you is to test and learn, then test and learn some more and some more and some more.

Cheers,

Paul