Not so long ago, many chief information security officers (CISO) and other information-security professionals were offended by suggestions that their organizations should buy cyber insurance. After all, CISOs reasoned, if they did their jobs well, insurance would be unnecessary.

Fast forward to 2021. There probably isn’t a single CISO who believes that their organization is immune to potentially devastating cyberattacks. Recent news of alleged Russian penetration of well-protected government agencies and major corporations is one more reminder that any and every organization is vulnerable. Still, many CISOs are skeptical of insurance's benefits and often are only tangentially involved in cyber insurance decisions.

CISOs are often concerned about perceived gaps in insurance coverage, about underwriting criteria that are misaligned with an organization's security policies and procedures and about the willingness of insurers to pay claims. Some concerns are valid. For example, if an organization’s hardware is damaged by a malware attack, not every policy provides “bricking coverage,” which pays to replace impaired equipment. However, many CISOs' concerns are based on now-outdated policy language and underwriting and claims practices. As cyber insurance has matured, underwriters are offering broader coverage with less burdensome underwriting requirements. Rather than avoiding claims, insurers are often trusted partners in responding to cyber events and managing their consequences.

Cyber insurance coverage may be more expansive now, but insurance buyers must still ensure that the protection they purchase is adequate and appropriate for their organization and its specific risk profile. In most large organizations, the risk manager buys cyber insurance. However, risk managers are rarely experts in network security and may not fully understand their organization's cyber risk profile and control environment. This may result in purchasing insurance that does not adequately cover significant exposures, while over-insuring low-priority or well-managed risks. To ensure that cyber insurance aligns with the organization's risk management needs, risk managers need to work with a broker who specializes in this type of coverage offering. Additionally, the risk manager and the broker need to include the CISO in the buying process. 

CISOs and risk managers have a common mission — to protect the assets of their organization. In many organizations, they haven’t effectively collaborated -- along with their broker and carrier partners -- to achieve their common goals. Even when insurance is recognized as an essential part of the overall cyber risk management strategy, organizational silos, the lack of a common risk vocabulary and differences in risk management frameworks can impede cooperation.

According to a SANS Institute report, Bridging the Insurance/Infosec Gap, "InfoSec and insurance professionals acknowledge they do not speak the same language when defining and quantifying risk, leading to different expectations, actions and justification for outcomes."

The SANS Institute does not offer a one-size-fits-all solution for closing the gap. Within an organization, successful coordination and cooperation depend on corporate culture, institutional obstacles and how motivated CISOs and risk managers are to cooperate on their common goal.

See also: How Risk Managers Must Adapt to COVID

A coordinated approach is more essential today than ever before. With so many employees working from home during the COVID-19 pandemic, using their personal networks and often their own equipment, IT departments and security professionals struggle to ensure network security. A survey of 250 CISOs by Resilience (named Arceo at the time of the study) found that cloud usage, personal devices usage and unvetted apps or platforms posed the most significant threats during this period of increased telework. 

With so many factors outside the direct control of IT and information-security professionals, insurance becomes essential. But cyber insurance policies can materially vary, and not all insurers offer enough of the right coverage to satisfy an organization's risk-transfer requirements. Once the corporate risk management and information-security functions are aligned, a broker can help navigate the universe of cyber insurance and help the client understand nuances in policy language to satisfy the organization's risk-transfer requirements.

The outcome is an integrated program where insurance from secure and knowledgeable carriers is fully aligned with the organization’s risk profile and information-security strategy.

There isn’t an insurance business in the land that isn’t talking about digital transformation. Whether talking about AI, robotics or platforms, the majority of the industry is confident it’s heading toward a brightly lit, digital future.

The motivation for transformation? We are told customers are demanding a better experience: an interaction that is quick, clean and gets the job done with minimal fuss.

But, for all the effort made, the customer experience in insurance is fundamentally the same as it was 10 or 15 years ago – it’s still based on call centers. I think that is because, while the stated driver for digital change may be the customer, its primary purpose has been to reduce costs.

That efficiency-first approach has resulted in many organizations looking to webforms to digitize their customer-facing processes.

Webforms do a decent job leveraging digitalization to automate the beginning of processes normally done manually. Yet any claim coming from a webform still requires the capable hands of an operations employee, who will perform the rest of the process and communicate the outcome to the customer. In addition, webforms can’t converse -- reducing them, essentially, to digital monologue. While customers want a quick, hassle-free experience, many want that done through conversation of some kind. Conversations are comforting, familiar and create a sense of engagement that a static form can never replicate. 

A true digital experience is one that takes all the benefits of a one-to-one conversation and automates it using conversational process automation (CPA). That is the world that webforms were trying to create but failed to produce because of the focus on efficiency.

Source

CPA leverages a chatbot conversational interface to deliver an efficient customer experience, thinking about the customer first while saving cost. It allows for the execution of high-value, customer-facing processes, integrated into insurance platforms and systems and complying with security and audit requirements.

CPA will, I believe, bring the digital change that so many seek. They can replicate the conversational style and effectiveness of a human call handler for the vast majority of recurrent insurance interactions – from quote and buy through to claim notification. 

CPA has the capacity to handle call volumes that only a very large, very expensive call center could match. Of course, there are limits to what CPA can currently do, but it is improving all the time -- getting smarter at predicting queries, reacting to something that doesn’t fit into the box and leading the customer through complex processes. Webforms, for all their value, can never do that. 

As we collect more and more data through CPA, performance becomes more accurate and, according to a report from IT advisory firm Gartner, by 2022 70% of white-collar workers will interact with conversational platforms on a daily basis. 

See also: Insurtechs’ Role in Transformation

The combination of process automation and superior customer experience will drive efficiencies. A recent report by McKinsey estimates that, in the claims process alone, automation could reduce the cost of that journey by as much as 30%.

For insurance to be part of that digital future and to reap its rewards, the industry has to have customer experience as its main motivator, replicating all the value that a one-to-one conversation brings and putting the customer in control of the experience while keeping costs to a minimum.

If we persist in letting costs saving alone drive transformation, we are going to end up with fancier, more expensive tools than webforms that will deliver marginal efficiency while continuing to leave customers frustrated. And that would be a failure of purpose and progress.

There’s a misnomer about internet leads, and it’s written all over Facebook and proclaimed by many agency owners, producers and industry gurus: “Internet Leads Suck!” Many of the big lead vendors add fuel to the fire with dubious pricing, odd delivery and questionable results. Is the contempt of web leads legitimate? How else can we actually grow our businesses?

My observation from interviewing hundreds of agents on the Insurance Dudes Podcast is that only the best of the best have effective processes to properly build a lead-closing machine — the majority, the naysayers, lack this systemization.

In addition, there’s a disconnect between agent expectations about various lead types’ performance expectations; many agents don’t even know what metrics they should track to effectively create a feasible cost per sale. 

This article, the first of three in this series, will shed some light on the proper tactics needed to support an effective strategy for developing an effective internet tele-funnel.

For the most part, agents who have not been successful with internet leads seem to point their finger in the wrong direction. Most agents, including me (for many years), blame the lead provider. A powerful shift occurs with the epiphany that the common denominator across success AND failure is the same: the lead vendors. 

Well, if some succeed, while others fail, with the very same lead vendors... the issue must not be the leads themselves, but the process by which the leads are worked.

Over the course of making over 13 million of dials, and seeing incredible results, I have seen that most agencies lack a systematized process to follow up on leads. 68% of the time (the first Alpha for you statisticians), your typical live internet lead will take between eight and 21 dials to close — this is the hard data. Using a data set of at least 90 days, these numbers consistently hold true. Because the bulk of leads closed require OVER EIGHT dials for new business to be won, it’s imperative that a highly organized and trackable process is in place. 

Understanding this need for dials, an agent must stay the course for at least a few months to know a true cost per sale. Considering that large companies will commit to a specific marketing budget for the long term, and only pivot once they have insight into performance, why is it that so many agents will eject after just a week or two? 

“Getting your toes wet” is not an option, as it will only lead to poor results. An agent must know the numbers, the spending required and the timeframe of the sales cycle to win with leads — and this framework holds true for any marketing.

Digging further into the 13 million-dial data set, we know that “good” leads have a first-day contact rate of about 15%. Intent, type, cost and everything don’t matter if the contact rate isn’t better than 15%. Let that sink in… to achieve a positive outcome for your tele-funnel’s entry point, the winning metric comes down to connecting on 15 out of 100 dials. This makes for a lot of down time for the people doing the dials, even with a fast (and fully TCPA compliant) dialer.  

See also: Despite COVID, Tech Investment Continues

Agents must break through and understand that the need to put the right players in the right positions is critical. In building your tele-funnel, dials are the highest-quantity activity, while requiring the lowest skill set. This knowledge is crucial to moving “leads that suck” from the first, second or third dial (the average times that average agents call leads) to making eight to 100 dials on a lead.

Once we had calculated the enormous number of daily dials required to reach our goal of $200,000-plus in premium per month, we knew mathematically that we needed 5,000 or more dials per day, as a team, just to hit all of our leads from today, yesterday and from the prior 88 days. 

We were in a race to move these leads — our agency’s latent equity — closer to a sale. We discovered that the more dials on a lead, the less it actually cost, because the potential to make contact, quote and close increased with each dial! 

With this realization, we sought to ensure we could guarantee making the dials we needed without burning out our agents and ensuring they were on the phone doing their most important activity, quoting, at least 10 new households per day. Plugging unlicensed, cheap labor into the top of the funnel also allowed us to continue to fill our pipeline with new prospects while freeing up agents’ days to follow up on unclosed quotes.  

After weeks and months of consistency, training and oversight, we were writing $5,000 to $20,000 or more a day. We had handled the first important piece of the equation: We’d created a systematized process to create predictable results. We had certainty that if we added X leads into the tele-funnel, it would result in Y sales. 

There have been ups and downs, but the word du jour is persistent-consistency. 

In the next article, I’ll take you into the metrics that need to be looked at, and the necessary baselines that need to be hit to ensure that your tele-funnel machine is functioning properly.

Imagine you were suddenly refused insurance coverage, or your premium increased 50% just because of your skin color. Imagine you were charged more just because of your gender. It can happen, because of biased algorithms.

While technology improves our lives in so many ways, can we entirely rely on it for insurance policy?

Algorithmic Bias

Algorithms will most likely have flaws. Algorithms are made by humans, after all. And they learn only from the data we feed them. So, we have to struggle to avoid algorithmic bias -- an unfair outcome based on factors such as race, gender and religious views.

It is highly unethical (and even illegal) to make decisions based on these factors in real life. So why allow algorithms to do so? 

Algorithmic Bias and Insurance Problems

In 2019, a bias problem surfaced in healthcare. An algorithm gave more attention and better treatment to white patients when there were black patients with the same illness. This is because the algorithm was using insurance data and predictions about which patients are more expensive to treat. If algorithms use biased data, we can expect the results to be biased.

It doesn't mean we need to stop using AI -- but, rather, that we must make an effort to improve it.

How Does Algorithmic Bias Affect People?

Millions of people of color were already affected by algorithmic bias. This bias mostly occurred in algorithms used by healthcare facilities. Algorithmic bias has also influenced social media.   

It is essential to keep working on this problem. In the U.S. alone, algorithms manage care for about 200 million people. It is difficult to work on this issue because health data is private and thus hard to access. But it's simply unacceptable that Black people had to be sicker than white people to get more serious help and would be charged more for the same treatment. 

How to Stop This AI Bias?

We have to find factors beyond insurance costs to use in calculating someone's medical fees. It's also imperative to continually test the model and to offer those affected a way of providing feedback. By acknowledging feedback every once in a while, we ensure that the model is working as it should. 

See also: How to Evaluate AI Solutions

We have to use data that reflects a broader population and not just one group of people -- if there is more data collected on white people, other races may be discriminated against.

One approach is "synthetic data," which is artificially generated and which a lot of data scientists believe is far less biased. There are three main types: data that has been fully generated, data that has partially been generated and data that was corrected from real data. Using synthetic data makes it much easier to analyze the given problem and come to a solution.  

Here is a comparison: 

If the database isn't big enough, the AI should be able to input more data into it and make it more diverse. And if the database does contain a large number of inputs, synthetic data can make it diverse and make sure that no one was excluded or mistreated. 

The good news is that generating data is less expensive. Real-life data requires a lot more work, such as collecting or measuring data, while synthetic data can rely on machine learning. Besides saving a lot of money, synthetic data also saves a lot of time. Collecting data can be a really long process.

For example, let's say we are operating with a facial recognition algorithm. If we show the algorithm more examples of white people than any other race, then the algorithm will work best with Caucasian samples. So we should make sure that enough data has been produced that all races are equally represented.

Synthetic data does have its limitations. There isn't a mechanism to verify if the data is accurate.

AI is obviously having a significant role in the insurance sector. By the end of 2021, hospitals will invest $6.6 billion in AI. But it's still essential to have human involvement to make sure the algorithmic bias doesn't have the last say. People are the ones that can focus on making algorithms work better and overcoming bias.

See also: How AI Can Vanquish Bias

Explainable AI

Because we can't entirely rely on synthetic data, a better solution may be something called "explainable AI." It is one of the most exciting topics in the world of machine learning right now.

Usually, when we have a certain algorithm doing something for us, we can't really see what's going on in the work with the data. So can we trust the process fully?

Wouldn't it be better if we understood what the model is doing? This is where explainable AI comes in. Not only do we get a prediction of what the outcome will be, but we also get an explanation of that prediction. With problems such as algorithmic bias, there is a need for transparency so we can see why we're getting a specific outcome. 

Suppose a company makes a model that decides which applications warrant an in-person interview. That model is trained to make decisions based on prior experiences. If, in the past, many women got rejected for the in-person interview, the model will most likely reject women in the future just because of that information.

Explainable AI could help. If a person could check the reasons for some of these decisions, the person might spot and fix the bias. 

Final words

We need to remember that humans make these algorithms and that, unfortunately, our society is still battling issues such as racism. So, we humans must put a lot of effort into making these algorithms unbiased.

The good news is that algorithms and data are easier to change than people.

Six years ago to the day, as I write this, I was a keynote speaker at a TINtech London Market conference with a brief to talk about e-trading and technology that asked: What are the new technologies that will affect people and process and stimulate innovation? Why is now the time to invest? What are the challenges to overcome? 

I start with this because it resonates strongly with what the InsTech London “E-trading platforms challenges, opportunities, and imperative” paper now sets out to address, several years later.  

Delve deeper, however, as this paper does, and you see that, while progress has not been made as swiftly in our sector as it has in others, the encouraging reality is that a lot has, in fact, changed and even more seems to be about to change in what the paper describes as a “truly digital world that many of the consumers and businesses we serve are already inhabiting.”

The paper is, of course, a must read. For those with less time, you can head straight to the conclusions. Those who prefer edification with their morning coffee and sit back and listen to the excellent podcast with Robin Merttens and Mark Geoghegan. As a poor fourth, here is my brief summary of highlights:

• The environment is more fertile today than ever before. “COVID-19 has acted as an accelerant of digital adoption and provided momentum for the adoption of e-trading, a belated burning platform,” and is smashing some long-held paradigms, not least about shoe leather and queues. “There is more recognition of the imperative for change; greater desire from within to deliver it.”
• There needs to be an intermediate stage between digitizing what the market has today (slips, quotes) to help drive adoption, and then evolve to become a truly digital ecosystem. The intermediate phase will be the foundation to push on from. The digital evangelists in our market are crucial, but it is naïve for us all to think we can step straight into a full-on digital ecosystem. Electronic case files (ECF) eliminated the claims paper but did not fundamentally change the process. ECF opened the servicing bandwidth -- previously, the speed of client service was directly attributable to the length of a claims broker’s arms! ECF gave the opportunity to make a significant change from old state, but it was an example of digitizing an existing process and not reimagining it in a digital landscape. Perhaps a case of “digital lipstick on a legacy pig,” to quote Robin.
• Straight-through processing is still something of a dream, and much data remains sub-optimal. The data standards are too narrow, and more open-source standards must come to the fore. Connectivity is a big issue. Application programming interface (API) adoption will gather momentum once the building blocks are in place. There is “much work to be done to achieve the levels of system-to-system connectivity we need. The industry is well short of where it needs to be on defining data and process standards and on pooling the required knowledge and resources to define them.”
• The stage is set for more innovative digital solutions to emerge. It is about being brave, and “the market cannot be a closed club if it is to succeed with connectivity.”
• The big brokers’ influence is key – “the king makers.” The fear of disintermediation is nowadays overblown, but, with a traditional model of "customers to the left and markets to the right," there is still a fundamental barrier. That is unsustainable and cannot be a continuing strategy, which is something more and more brokers now recognize. It is in and around data, analytics and insight where they can add real value far beyond the transaction. Algorithms will take over. They must, not least because customers like them. “If we fail this time round the most likely cause will be that the brokers sought to protect the status quo for a decade longer.”  
• If the big brokers decide to push on, it will happen, and Lloyd’s has a huge role to play, too. Blueprint Two sets up an environment where “private enterprise can be the way forward for the market to adopt, and across multiple platforms.”
• Consensus is a better way forward (the carrot) rather than imposition (the stick), but at some point compulsion must come. “A long-term free-for-all is unsustainable, and there will, as with any space race, be winners and losers over the medium term.”
• The customer’s voice in ‘the future of insurance’ is not loud enough. The market needs to be bringing the customer inside the tent constantly. If we just concentrate on making life easier for brokers and underwriters, customers will build the solutions that suit their needs independently of us. A great example is Insurwave, the genesis for which was the growing frustration from AP Moller Maersk about the inefficient handling of its huge cargo account. The endgame of a genuine ecosystem involves all market participants, which must include customers. “Our customers are increasingly strident in demanding it.”
• Traction has always been missing, but credible leadership is now starting to show up.
• RIP, analog! “The influence of the analog era workforce is waning, and, as a result, the cultural barriers to adoption are declining.”
• My personal plea: Allow the innovators and the technology specialists to now lead us forward. In doing this, we must not forget the other key members of the cast. In the past, we were hindered by a fundamental lack of actual brokers and underwriters being involved. Those that trade, brokers that broke and underwriters that underwrite. Gather the requirements at a trading floor level with active engagement from that community feeding directly into the innovators and technology partners. This is not to build consensus, but rather to be sure to surface the key issues and pain points that communities need technology to solve for. Imagine organizing a music festival without any reference to the bands headlining and their needs. Or designing a restaurant without involving the chef.  

See also: 4 Post-COVID-19 Trends for Insurers

In conclusion: We are in the risk business, yet we have been risk-averse. Let us take some risks now or, as Henry Ford would have it, we will forever just create faster horses. Or in our world, perhaps we will just end up with smarter slips. “Now we need to harness this collective will to get it done and take great care that we don’t jeopardize this historic level of enthusiasm,” and “we can’t build our future in an isolated echo chamber. It is a prerequisite that we understand what is going on in other industries and align our technology, products, and services with their requirements and interests.” Now really is the right time, and, to borrow from Macbeth, “if it were done, when ’tis done, then ’twere well it were done quickly.”

Traditional, end-to-end business models are breaking down in every industry, including insurance. In the digital era, it is increasingly difficult for any single firm to deliver the seamless experience that customers expect. More insurers are leveraging digital ecosystems to reinvent their products and services, providing better risk management, reduced claim cost and new sources of revenue.

However, rooted in legacy systems and siloed business structures, most insurers even lack the foundations to successfully execute insurance ecosystems. Insurance organizations will likely struggle in moving from traditional insurance offerings to tailored, ecosystem-driven customer experiences.

Nonetheless, insurers should have a plan for incorporating ecosystems into their business models. It’s time for all insurers to become insurtechs.

As opposed to the traditional business model, where insurers create and distribute end-to-end products and services, an ecosystem model is characterized by unified/digital platforms that incorporate third-party products and services and collaborate with segment-focused distribution partners. Carriers must either bundle value from others with their products (e.g., providing IoT-based real-time risk mitigation services) or provide value to a bundle that someone else is creating (e.g., insuring the performance delivered by an IoT service provider).

Based on research from the IoT Insurance Observatory — a think tank focused on North America and Europe with almost 60 members, including many of the largest insurance and reinsurance groups and prestigious tech players like ValueMomentum — the adoption of IoT requires a robust set of capabilities, as represented in the following figure. 

See also: The New IoT Wave: Small Commercial

Any insurance IoT program is a multi-year journey that requires overcoming functional silos, coordinating the different stakeholders and developing a collective intelligence. Insurers can achieve four kinds of goals:

1. Improving core insurance activities (assessing, managing and transferring risks) by using IoT products and services for continuous underwriting, claims management and risk reduction. This goal was investigated in depth in our previous article, “Chloe and Insurance: A Love Affair.” 
2. Providing positive externalities to society, a topic more and more relevant due to the current focus on ESG investments (environment, social and governance);
3. Generating knowledge about policyholders and their risks. This knowledge has allowed carriers to insure current risks in a different way, enable up- and cross-selling actions and insure new risks;
4. Improving customer experience by interacting with them more intimately and frequently, moving beyond the traditional risk transfer. Many players are selling additional services for a monthly fee; others have found new ways to sell insurance coverages thanks to IoT.

Partnerships are a key differentiator. Some insurers have recently announced bold initiatives to use an ecosystem to expand their reach. One such insurer is Nationwide, which recently disclosed its partnership portal, where it exposes its services and protection products – including auto usage-based insurance (UBI) and connected homeowner insurance – to partners. 

With more than half of insurers delivering on their core systems modernization projects in recent years, it’s time insurers leverage data coming from their core systems to grow their business. By integrating IoT devices data to the core system data and leveraging this data fusion, insurers will have the opportunity to build a more holistic view and understanding of their customers and their risks. Insurers will be able to build a sort of digital twin of the customer, then tailor their services and offerings and improve the customer experience. Insurers will also overcome business lines silos, enabling upselling and cross-selling. 

Many senior insurance executives acknowledge that the world will be more and more connected, but, even with ecosystems as a topic on the agenda, IoT has not been exploited in business processes in a meaningful way. To lead an IoT-based business transformation, a clear vision and a structured and well-communicated plan are necessary. 

Technology is one of the key enablers of this transformation. However, insurers will have to carefully investigate, determine, prioritize and experiment with a range of IoT business use cases to develop an IoT-based business model. Many insurers are exploring a range of scenarios beyond connected cars, including connected homes, health and lives, infrastructure, factories and transportation. A comprehensive approach to help insurers build out the required capabilities for IoT is below. This insurtech approach takes insurers from business model definition to vendor partner strategy, to platform implementation and finally to IoT insights across the insurance value chain.

A main challenge for insurers is building the technology architecture to aggregate, normalize and analyze data to make it available for the IoT platform. A big question for many is: How do I get started? An effective way to develop your architecture is by leveraging frameworks.

The framework below breaks down the broad portfolio of technology components, services and capabilities. The components are arranged in three layers – Edge, Fog and Cloud computing – addressing where data should be stored and processed for speed, cost and effectiveness, depending on the type of data and purpose of the data. 

The collection of managed and platform services shown in the framework, across Edge and Cloud computing layers, connects, monitors and controls IoT assets and the processes that generate data for insights and analytics. These services work together across multiple layers that include the IoT ecosystem — such as sensors, devices and industrial sensors — and connect to the computing infrastructure at Edge, Fog or Cloud, persistently or intermittently. 

Data collected by the IoT ecosystem is then processed and analyzed at the Cloud layer, along with enterprise data sets such as on customers, policies, claims and billing. All of this data forms the inputs to the digital twin, which can then be turned into actionable outcomes using the latest computing techniques. 

For insurers that are currently investing in IoT, and for many more that are considering doing so, this framework can help guide your approach and provide a strong architectural foundation.

See also: Global Trend Map No. 7: Internet of Things

As new waves of technology or sudden social shifts bring disruptions or opportunities to the industry — similar to telematics or digitalization — insurers must capture opportunities rapidly. Insurers that can reinvent themselves by leveraging data, including from the IoT, and form ecosystems will win.  

After all, the digital economy is a “made for me” economy, and the digital twins allow insurers to tailor insurance experiences. Customers will reward organizations that understand their needs and provide them personalized value. 

There are already examples of successful insurers – in different business lines and different geographies – that have effectively integrated IoT. Their stories mastering usage of IoT is an achievable target without investing hundreds of millions of dollars, but instead by leveraging the right partnerships.

Drought spells disaster for farmers across the developing world. Most lack insurance because conventional crop insurance is too expensive (where it is available at all). No rain means no income, no food and not enough resources to replant next year. With many countries from sub-Saharan Africa to Southeast Asia already facing an abnormal recurrence of climate risks, natural disasters around the world caused $232 billion of economic losses last year. Only a small fraction of this was covered by insurance.

Many developing economies depend on improving the productivity and resilience of sectors, including agriculture and tourism, that are vulnerable to climate hazards such as cyclones, heat waves, droughts and flooding. With economic losses from catastrophes growing faster than insured losses, adapting individuals and economies to climate-related impacts has become a major societal priority, outranking other risks like aging populations, terror attacks and social unrest. New insurance products designed to create disaster-risk-financing mechanisms, where no other risk-transfer tool is available, are increasingly being seen as part of the solution in closing this protection gap.

Many of these products are parametric, as opposed to indemnity, otherwise referred to as traditional, insurance. Increasingly recognized as a valuable form of transfer for climate and other natural disaster risks, parametric insurance contracts are based on objective and transparent indices, such as cyclone wind speed, earthquake shaking intensity or amount of rainfall, and payments start to be made as soon as the index reaches a preset threshold. As no costly visits are required to assess the losses, payouts can be made quickly to hard-to-reach insureds in remote locations. Crucially, protection against unpredictable but potentially devastating risks -- previously unthinkable with traditional insurance -- is now possible.

Rapid relief 

For the insured, ease of use, speed, certainty of amount of payout (without dispute) and the resulting ability to plan ahead ensure more rapid relief when disaster strikes, which in turn increases financial resilience. 

For the insurer, parametric insurance allows for a more scientific pricing of products that respond to specific isolated parameters, rather than the physical losses that might result from any number of a wide range of occurrences. Together with lower claims management costs, this scientific approach makes lines of business commercially viable that were not previously.

Contrast this with a complex insurance claim on a traditional policy, which may take a long time to adjust and be paid, due to the need to develop claim details and financial components as well as address issues like valuation and other conditions.

A hard sell

This does not solve the issue of how to persuade people in Africa, who are generally somewhat insurance-averse, to buy insurance. This form of risk management requires a certain level of prosperity, as it means spending money on something you hope you will never need. 

However, this challenge can be surmounted. African governments and policymakers understand the cost-benefit analysis, combined with the experience from developed countries showing that insurance can play a cost-effective role in a country’s efforts to increase disaster resilience. 

The African Risk Capacity (ARC), launched by the African Union in 2013, demonstrates what is possible. Set up as a mutual (known as ARC Ltd.), and designed to provide rapid payouts to covered nation state members, initially for droughts but planned to include floods, tropical cyclones and epidemics, the insurance pool started with four countries and now has a dozen or so policyholders and 34 member states. ARC has become highly efficient in pooling risks and their transfer at very low marginal cost to the global reinsurance markets and now protects tens of millions of people. 

This is a remarkable achievement when you consider that until recently the concept of selling droughts in Africa to the global reinsurance market would have been unthinkable.

Insuring the ‘uninsurable’ 

Parametric insurance solutions have mostly been used in the reinsurance space around catastrophe risks, but the boundaries defining what is "uninsurable" are being increasingly pushed to new limits. A policy covering hurricane-related damages to coral reefs was purchased in 2018 to cover a part of the vast Mesoamerican Reef along Mexico’s Yucatán Peninsula. Once verified, the agreed policy would be paid within one week. Such a rapid disbursement of funds is crucial as much of the initial reef repair following a severe storm needs to be done very quickly to avoid further damage and set up a successful recovery.

See also: Increasing Regulation on Climate Change

Not just for developing countries

These same innovative parametric applications being adopted in emerging economies also have significant potential in developed markets. In contrast to emerging economies, where the problem is more likely due to cover being unavailable, businesses in developed countries are increasingly seeking protection against losses for which traditional insurance is not best-suited. 

Emerging climate risks are a key driver behind this growing demand for more innovative insurance products in both the public and private sectors. The impact from a crop loss following a major weather event or supply chain delays is smaller in developed markets, but still significant. The Bank of England, for example, downgraded its expected first quarter GDP growth from 0.4% to 0.3%, following the impact on businesses from the "Beast from the East" – the cold weather snap that hit the U.K. in the winter of 2018.

Whether it’s reducing the protection gap, financing resilient infrastructure or improving risk management and return optimization across the financial sector, insurance technology and innovation has a decisive role to play in responding to climate risk and smoothing the world’s transition. While protection gaps remain an issue as greater costs are borne by the uninsured, these gaps are closing slowly. Innovative risk transfer structures and new products based on parametric triggers have a key role to play and will continue to help increase resilience of households and companies to growing climate risks.

A trio of COVID-19-related risks heads up the Allianz Risk Barometer 2021, reflecting potential disruption and loss scenarios that companies are facing in the wake of the pandemic. Business interruption (with 41% of respondents citing it as a risk) and pandemic outbreak (at 40%) are this year’s top business risks, with cyber incidents (40%) ranking a close third. The 10th annual survey on global business risks from Allianz Global Corporate & Specialty (AGCS) incorporates the views of 2,769 experts in 92 countries and territories, including CEOs, risk managers, brokers and insurance experts. 

The COVID-19 crisis continues to represent an immediate threat to both individual safety and businesses, reflecting why pandemic outbreak has rocketed 15 positions up to #2 in the rankings at the expense of other risks. Prior to 2021, it had never finished higher than #16, a clearly underestimated risk. However, in 2021, it’s the #1 risk in 16 countries and among the three biggest risks across all continents and in 35 out of the 38 countries that qualify for a top 10 risks analysis. Japan, South Korea and Ghana are the only exceptions. 

Market developments (#4, at 19%) also climbs, reflecting the risk of rising insolvency rates following the pandemic. According to Euler Hermes, the bulk of insolvencies will come in 2021. The trade credit insurer’s global insolvency index is expected to hit a record for bankruptcies, up 35% by the end of 2021, with top increases expected in the U.S., Brazil, China and core European countries. 

Further, COVID-19 will likely spark a period of innovation and market disruption, accelerating the adoption of technology, hastening the demise of incumbents and traditional sectors and giving rise to new competitors. Other risers include macroeconomic developments (#8, at 13%) and political risks and violence (#10, with 11%), which are, in large part, a consequence of the coronavirus outbreak, too. Fallers in this year’s survey include changes in legislation and regulation (#5, with 19%), natural catastrophes (#6, with 17%), fire/explosion (#7, with 16%) and climate change (#9, with 13%), all clearly superseded by pandemic concerns.

Pandemic drives disruption — now and in the future

Prior to the COVID-19 outbreak, business interruption (BI) had already finished at the top of the Allianz Risk Barometer seven times, and it returns to the top spot after being replaced by cyber incidents in 2020. The pandemic shows that extreme, global-scale BI events are not just theoretical but a real possibility, causing loss of revenue and disruption to production, operations and supply chains. 59% of respondents highlight the pandemic as the main cause of BI in 2021, followed by cyber incidents (46%) and natural catastrophes and fire and explosion (around 30% each).

In response to heightened BI vulnerabilities, many companies are aiming to build more resilient operations and to de-risk their supply chains. According to Allianz Risk Barometer respondents, improving business continuity management is the main action companies are taking (62%), followed by developing alternative or multiple suppliers (45%), investing in digital supply chains (32%) and improving supplier selection and auditing (31%). According to AGCS experts, many companies found their plans were quickly overwhelmed by the pace of the pandemic. Business continuity planning needs to become more holistic, cross-functional and dynamic; monitor and measure emerging or extreme loss scenarios; and be constantly updated and tested and embedded into an organization’s strategy. 

Cyber perils intensify

Cyber incidents may have slipped to #3 but remain a key peril, with more respondents citing it than in 2020 and still ranking as a top three risk in many countries, including Brazil, France, Germany, India, Italy, Japan, South Africa, Spain, the U.K. and the U.S. The acceleration toward greater digitalization and remote working driven by the pandemic is also intensifying IT vulnerabilities. At the peak of the first wave of lockdowns, in April, the FBI reported a 300% increase in incidents alone, while cybercrime is now estimated to cost the global economy over $1 trillion, up 50% from two years ago. Already high in frequency, ransomware incidents are becoming more damaging, increasingly targeting large companies with sophisticated attacks and hefty extortion demands, as highlighted in the recent AGCS cyber risk trends report. 

See also: 3-Step Framework to Manage COVID Risk

Risers and fallers 

Macroeconomic developments is up to #8, and political risks and violence (#10) returns to the top 10 for the first time since 2018, reflecting the fact that civil unrest, protests and riots now challenge terrorism as the main exposure for companies. The number, scale and duration of many recent events, including Black Lives Matter protests, anti-lockdown demonstrations and unrest around the U.S. presidential election, have been exceptional. As the socioeconomic fallout from COVID-19 mounts, further political and social unrest is likely, with many countries expected to experience an increase in activity in 2021 and beyond, particularly in Europe and the Americas.

Changes in legislation and regulation drops from #3 to #5 year-on-year. Natural catastrophes falls to #6 from #4, reflecting the fact that, although aggregated losses from multiple smaller events such as wildfires or tornadoes still led to widespread devastation and considerable insured losses in 2020, it was also the third consecutive year without a single large event, such as Hurricane Harvey in 2017. Climate change also falls to #9. However, the need to combat climate change remains as high as ever, given that 2020 was the hottest year ever recorded. 

To learn more about this year’s findings, please visit Allianz Risk Barometer 2021.

Let’s Watch Our Language Paul Carroll, Editor-in-Chief of ITL During a podcast I recorded last week with Capgemini’s global insurance lead, Seth Rachlin, we went on at some length about a pet peeve of mine: the insurance industry’s archaic and often downright unfriendly language. While I’ve hit this topic before (most notably here), I haven’t exactly seen much change in the past several years, so I’ll keep harping on the problem. I realize that not everyone focuses on language as much as I do — coming from a family with half a century as copy editors at the Wall Street Journal will shape your perspective — but I believe that insurance’s insular language limits our ability to entertain outside perspectives. As the saying goes, “We shape our tools, and then our tools shape us.”... continue reading > SIX THINGS The Next Wave of Insurtech by Colleen Wells With automated claims processing, the turnaround time for settlement will be measured in minutes rather than days or weeks. Read More Insurance 2030: Implications for Today by Mark Breading How employees will be recruited, trained and retained will be quite different – and organizations need to start on that journey today. Read More Rise of ‘Product-ism,’ Fall of ‘Project-ism’ by Marty Ellingsworth Firms struggle because they view AI initiatives as small projects rather than a product requiring continuing maintenance and investment. Read More How AI Can Transform Insurance Correspondence sponsored by Messagepoint If you think insurers have issues with their mishmash of legacy technology platforms, take a look at the rat’s nest of letters, emails and other documents that languish in an array of systems and formats.  Learn how organizations can overcome the challenge of transforming communications by combining AI-powered approaches and best practices. Watch Now 2020 Catastrophes; Preview for 2021 by Andrew Siffert If this spring La Nina holds together, the central plains could get back to seeing severe weather that was lacking last year. Read More Life Insurance Is Ripe for Change in 2021 by Bill Unrue Under the incoming administration, the focus on consumer protection regulation will rise for financial services, including insurance. Read More Increasing Regulation on Climate Change by Jared Wilner and Vikram Sidhu In 2021, climate-change actions by U.S. regulators will create both challenges and opportunities for insurers. Read More MORE FROM ITL The Future of Blockchain Series Episode 3 Usage in Life & Annuities Having explored the possibilities for blockchain in personal lines and commercial lines in P&C, we conclude our webinar series on the technology by taking a look at two use cases in life and annuities that are close to moving into production.  Watch Now February's Topic: Blockchain While the pandemic has greatly accelerated the digitization of the insurance industry — turning years into months — it has also shown us how very far we still have to go. As a rule of thumb, I’ve heard consultants say that 50% of the operating costs need to be driven out of the industry in the next five years. Blockchain has held out this promise for some time now. It’s lost a bit of its shine because it’s been identified as a hot technology of the year for so many years in a row. But it may be coming into its own, with some uses starting to move into production. Take Me There GET INVOLVED Write for Us Our authors are what set Insurance Thought Leadership apart. Get Started Partner with Us We’d love to talk to you about how we can improve your marketing ROI. Learn More SPREAD THE WORD Share Share Tweet SUBSCRIBE TO SIX THINGS

A primary goal of insurtech is to simplify and automate the insurance lifecycle — reducing time-consuming manual tasks, improving the agent experience and addressing potential client risks. One of the best ways is to increase the free flow of information at all points in the distribution channel.

2020 was the catalyst for huge advances in connectivity, largely due to the shift to work-from-home. In 2021, four particular areas will experience accelerated growth:

Real automation of commercial submissions will arrive.

The process of quoting and binding commercial lines has a lot of catching up to do in terms of workflow efficiencies compared with personal lines. Commercial insurance continues to suffer from outdated manual data entry procedures and an abundance of unnecessary paperwork. One-to-one quoting with individual carriers is a labor-intensive process, and high-volume, low-revenue risks typically require the same amount of time and effort as larger, more profitable opportunities. 

But there’s good news on the horizon in 2021. This year, the industry can expect general availability of robust, comprehensive insurtech platforms that truly automate commercial submissions. These platforms speed up the process for both agents and clients by pulling end-insured information directly from the AMS and filling as much as 80% of most submission forms without a single click. In turn, these solutions deliver structured, more error-free data to the carrier for accurate, bindable quoting.

Commercial submission automation also allows agents to generate quotes from multiple carriers in near-real time. Consumers have long appreciated quote comparisons as a way to make more informed decisions. By bringing that capability to the commercial side, customers and agents can collaborate on coverage options and reach purchase decisions far more quickly.

Carriers will facilitate better data exchanges.

Look for carriers to expand their data sharing initiatives in 2021. With a more seamless connection among carrier, agency and insured, service will become more immediate, more personal and more competitive.

As connections go deeper into core business platforms, actionable insights grow. For example, if an end-insured makes a change in a policy (like adding a vehicle or a driver), an alert from the carrier could immediately be pushed to the AMS. This alert would not only offer the agent the opportunity to touch base with the customer, but it also eliminates the need for agents to reach out frequently to the carrier for updates.

Integration of third-party data will accelerate, as well, though the industry is in the early stages in the commercial space. The aim is for third-party data to facilitate collaboration across multiple activities such as identifying class codes and linking those to risk, streamlining the underwriting process and optimizing submission flows. The goal is to improve quoting speed and accuracy for commercial lines through third-party data integrations and, eventually, a single application programming interface (API), similar to what is already in place for personal lines.

See also: How COVID Alters Consumer Demands

Single sign-on will make carrier credentialing easier.

For independent agencies, usernames and passwords for carrier websites can be a major concern. The problem is evident when the number of employees is multiplied by the number of carriers; every username and password must be tracked and accounted for. 

When an employee leaves, credentials must be removed or changed — a time-consuming process that can also pose security risks if credentials are overlooked. Onboarding new employees requires provisioning dozens of credentials — also a time-consuming task. Over a year’s time, hundreds of hours can be wasted agency-wide simply due to carrier sign-ons.

Single sign-on (SSO) technology is beginning to solve the problem. SSO creates a single, secure agent identity that is acceptable to all carriers. Some AMS and rating systems already offer SSO, but, where the solution isn’t available in an existing platform, users can look to the non-profit organization ID Federation for an alternative. Expect to see SSO gain wider adoption in 2021 as it produces fewer username/password resets, reduces hassle for agents and increases operational efficiencies. 

We’ll see an improvement in straight-through processing.

Lastly, this year we expect the independent agency channel for both personal lines and commercial lines to see more functionality on straight-through processing with carrier partners. 

In other words, while we’ve been involved over the years with Rate Call 1 and Rate Call 2 (rating and quoting), some carriers are beginning to provide more functionality in their APIs to allow direct binding in the agency’s quoting applications. The benefit to the agency is a single workflow for rate-quote-bind. Carriers benefit from being seen as easy to do business with while providing a major competitive differentiator in the channel. This capability won’t be pervasive through the industry, but there appears to be more acceptance of the process from the carrier side than in the past. As a result, we hope we’ll see more carriers start to think about how they’re approaching this as a potential competitive advantage in the channel as well as the captive and direct markets.

The result: a better-connected insurance distribution channel.

SSO, automated commercial submissions, carrier data-sharing and better straight-through processing will be the most visible connectivity developments in 2021, but not the only ones. In a business defined by personal relationships, connecting well on a virtual basis will be more than a change — it will be a requirement for long-term success. And in a world where connectivity is constantly widening and deepening across industries, insurance workflows, both commercial and personal, have a major opportunity to benefit from modernization and in turn help carriers and agencies increase profitability and better serve their clients.