Imagine having an expert mentor at your fingertips at all times. Someone who could answer questions, provide advice and move you in the right direction. For customer experience representatives at Allstate, that dream is a reality with Amelia, an AI-powered cognitive agent trained in the language of insurance. It’s just one way the company is using AI to power customer experience and lead the charge in a changing insurance industry.

As customer expectations have changed, Carla Zuniga, senior vice president at Allstate, has worked to modernize how the company interacts with customers. The goal is to make more out of everyday interactions with customers and to move more interactions to automated channels, including chatbots and AI-augmented human roles.

One of the major players in the AI game at Allstate is Amelia, a cognitive agent trained on more than 50 unique insurance topics and regulations across all 50 states. Allstate employees can quickly chat with Amelia to get concise answers about complicated insurance questions from customers. Not only does it allow customers to get the answers they need right away, but it allows employees to be ready to work much sooner by cutting down training time. Instead of having to sort through numerous articles and resources and make customers wait, representatives can now chat with Amelia while the customer is on the phone to get the most accurate information. In an industry where regulations and compliance are incredibly important, Amelia helps make sure every customer’s needs are met and are in compliance. Amelia provides the best of both worlds—the quickness and accuracy of AI mixed with the personal touch of human interaction.

See also: Why AI-Assisted Selling Is the Future  

Amelia handles more than 250,000 conversations each month and is used by more than 75% of Allstate call center employees. Allstate has plans to increase her workload and expand her scope to eventually interact directly with customers. Paired with other AI programs like automation and big data, Amelia has helped Allstate reduce its talk times and increase its first call resolution rates.

Zuniga believes AI will continue to grow and transform over the next five years as the technology becomes more robust. As Amelia and other AI services become more customer-facing, employees will be able to focus more on case management and the human aspects of customer experience.

No matter how the technology grows, personalization is still a key element of insurance companies. It can be easy for customers to just feel like a number when they get a new policy, file a claim or contact their insurance agent. To combat that, Allstate relies on data and creates detailed profiles of each customer. By leveraging this information and using AI to highlight trends and the most important data points, the company can help interactions feel more intimate.

See also: Strategist’s Guide to Artificial Intelligence

As the digital transformation continues and AI changes how insurers interact with customers, innovating and staying ahead of the curve is incredibly important. Modern customers want to feel empowered and engaged, and the best insurance companies must innovate to stay relevant. A major part of that innovation must be centered on AI, just like what is being done at Allstate.

You can find the article originally published here.

Impact Forecasting, the catastrophe model development team of Aon’s Reinsurance Solutions business, reports that many countries saw a worsening in drought-related and wildfire conditions during July, leading to hundreds of deaths and a significant financial impact globally – particularly on the agriculture, forestry, water management and fisheries industries.

Preliminary aggregated estimates of economic losses entirely due to harvest reduction and affected forestry exceeded multiple billions of dollars.

Northern Europe was hit by a long-term rainfall deficit that caused one of the deepest droughts on record, contributing to combined European drought losses in excess of $4 billion. According to various industry estimates, German farmers alone could face economic losses of $2.9 billion.

Other severe drought events affected agriculture in Australia and Central America, and an extensive heatwave killed more than 150 people in Japan and South Korea.

In California, the Carr fire became one of top 10 most destructive wildfires on record after being ignited near Redding, killing six people, destroying roughly 1,600 structures and damaging hundreds more. The total economic cost was anticipated to exceed $1 billion, with insurance losses also expected to approach or top that total.

Another Northern California wildfire, the Mendocino Complex fire, destroyed 143 structures and became the largest fire in the modern record (since 1932) in California.

The deadliest wildfire event on record in Europe since 1900 had a devastating impact in the Mati, Eastern Attica region of Greece, killing at least 92 people. The fire, and others in Attica, destroyed at least 905 structures and damaged a further 740.

Elsewhere in Europe, Sweden battled the most significant wildfire outbreak in its modern history, with damage exceeding $100 million.

See also: How to Fight Growing Risk of Wildfire  

Michal Lorinc, an analyst within Impact Forecasting’s Catastrophe Insight team, said: “The month of July was marked by record-breaking heat, deepening droughts and destructive wildfires in areas all around the globe. Nearly every major continent recorded some type of peril impact that will lead to a major cost to agricultural interests. In Northern Europe alone, the cost to local farming interests is expected to result in a multibillion-dollar loss in harvest output. All eyes are on the looming possibility of an El Nino return by the end of the year, which could exacerbate these types of impacts.”

Further natural disaster events to have occurred elsewhere during July include:

• Historic rainfall in Japan caused significant flash flooding and mudslides, leaving at least 230 people dead or missing. Nearly 50,000 homes were damaged or destroyed, with the General Insurance Association of Japan reporting 48,000 insurance claims being paid, at a preliminary cost of $711 million.
• Notable flooding occurred in Arizona and the U.S. Northeast, Nigeria, Russia’s Far East, India and multiple countries in Southeastern Asia, including Myanmar, Vietnam, Laos, Cambodia and the Philippines. Seasonal flooding in China prompted aggregated economic losses nearing $1 billion.
• Multiple typhoons in the Western Pacific Ocean Basin left notable damage in parts of China, Vietnam and Japan. The costliest was Typhoon Maria, which caused nearly $500 million in economic damage in China. Other storms that tracked across Southeast Asia were Sonh-Tinh, Ampil and Jongdari.
• Several outbreaks of severe weather led to widespread damage across parts of the U.S., Canada, France, Germany, Italy and China during July.
• Major earthquakes caused severe damage and injuries in Iran (July 22) and Indonesia (July 28).

See also: Insurers Grappling With New Risks   To view the full Impact Forecasting July 2018 Global Catastrophe Recap report, please follow this link.

Profitability is getting harder. Agencies, brokers, MGAs and carriers have seen major shifts in all aspects of their businesses over the past two decades – from what customers expect to how their competition operates. Distribution patterns have changed, mergers and acquisitions are increasing and automated insurance options are eating into margins. In addition, the globalization of insurance markets is becoming more evident every day. Sound bleak? Yes and no. The fact is, the insurance distribution industry faces many of the same challenges as other industries such as retail and travel -- markets that have had to completely transform how they do business in the face of new customer expectations and nonstop innovation. The common denominator in meeting the challenge is data. More specifically, the answer is data monetization: the process of not only accessing the rich information inside customer and business data but also converting it into actions and business decisions that drive profits. Customer data is quite literally an additional income source that every agent already has at his or her fingertips. And it can, with the right tools and organizational changes, be used immediately to increase revenues, margins and overall profitability. Indeed, it’s hard to overstate the potential value of the data that already resides inside outdated agency management software. It represents not only billions of potential dollars being left on the table, but, for many brokers, it is also the only path to survival. The technology lockbox Why the insurance industry lags behind others in data monetization is largely a matter of culture and technology. People-oriented and traditionally built on relationships, brokerages have been slower than other industries to adopt and subsequently upgrade their agency management systems. As a result, many agents still use legacy software that houses data but does not then release it in usable form. While growing competition and shrinking commissions are driving insurance agents to lean harder on technology to compete, those agents will also tell you it’s next to impossible to extract useful data from their systems -- let alone glean value from it. Principals can’t see what’s going on with their producers, producers can’t see opportunities for growth and customers aren’t getting the value they expect. The unfortunate fact is, data alone can’t tell you what products to recommend or which clients to up-sell. Legacy software is, in fact, a monumental barrier to extracting and monetizing data. Few agents are trained to tap into this vast income-generating resource. Executive teams have too many complex third-party reporting options from which to choose. And there is no defined go-to-market strategy to take advantage of this data even if it is extracted. See also: Why Data Analytics Are Like Interest   Automating data monetization Insurance professionals need the ability to turn data into revenue through all areas of the business, including sales to new and existing customers, operations, policy management, claims and customer service. Brokers must be able to easily, quickly and confidently understand what data means and is telling them to do. Dashboards and reports must reflect the current state of the business to power better decision making. And brokers must be able to access the system and data any time and from any device (and offer the same experience to their clients). The gold standard for data monetization is end-to-end software that can manage daily operations AND automatically provide insights into where agents/brokers can leverage their current customer base to increase profits and margins. It must turn client purchasing histories and behavioral patterns into revelations and opportunities for the broker to deliver value to the customer. Data monetization in action What does the data monetization process look like in everyday agency practice? Here are some examples:

• Agents know in real time, on every account, where the immediate upsell and cross-sell opportunities. The system recommends these opportunities based on customer industry, size and other factors.
• The system identifies which customers are bleeding agency money and which are profitable, so agents can see precisely how a given renewal would affect the bottom line.
• The system can instantly slice and dice an existing book of business to identify the best leads for a new line of business. It could then assign leads to the right sales person to manage the funnel and provide metrics on conversion rates and other KPIs.
• It would offer real-time analysis of:
  • How different business lines are performing
  • Which customers are profitable, break-even or unprofitable
  • What is the total income a customer brings vs. the number of staff hours and resources the customer requires
  • What is a customer’s claims history relative to policy income
  • Time, resources and effort invested in the insurance portfolio relative to actual revenue

Ready access to these kinds of answers can be used to guide renewal strategy, pricing decisions and management of staff’s time and resources toward the most profitable outcomes. Organization change While adopting the right technology is vital to data monetization, it must also be accompanied by cultural changes:

• Staff must have incentives to follow up and make sure revenue opportunities are closed successfully
• Operating procedures must be updated to clarify new rules and how they are to be followed
• Management must follow up weekly for the first few months of implementation

See also: Is Big Data a Sort of Voodoo Economics?   Turning data into revenue and a reshaped customer experience Insurance is a customer-centric business at its core. However, many agents are not living up to their customers’ expectations when it comes to the experiences they deliver. By adopting a business and technology approach based on data monetization, agents can use real-time customer intelligence to deliver more tailored advice and generate bottom- and top-line value. It’s all there in the data – and it’s time to unlock the box.

A lot of people are talking about the promise of artificial intelligence (AI), and some say it’s too early to evaluate its long-term impact. I disagree. I believe we need to evaluate AI’s value now, because it’s already beginning to fundamentally change the way auto insurers do business. A sweeping statement, perhaps, but there’s a lead-up to this discussion that is creating the perfect storm for P&C insurers. First, insurer performance is challenging, and most every insurer I speak with is racing to identify ways to reduce expenses while continuing to offer desirable products to savvy consumers -- consumers who expect insurance to be delivered and serviced just as seamlessly as their interactions with their favorite online retailer. Next, vehicle complexity is making it extremely difficult to price risk, predict frequency (largely due to advanced driver assistance systems, or ADAS) and understand increasing repair costs, thanks to enhanced electronic content, such as the sensors in newer vehicles. In this environment, AI can play a critical role, helping insurers bring expenses back in line while creating opportunities to deliver a better insurance experience for consumers. And, as vehicles become more connected, streaming more data, the role of AI will only grow. AI Now If you’re still not clear on what exactly AI is, it refers to programs that are capable of learning to make decisions more like humans. AI is at work all around us – when robots control other robots on the manufacturing line, intelligently automating the management and optimization of financial portfolios, detecting cancer using MRIs and machine vision and powering self-driving cars. In fact, AI is becoming so prevalent it’s expected to create $1.2 trillion in business value by the end of this year and $3.9 trillion by 2022. AI in Insurance It's now our industry’s turn to put AI to work. What we’re seeing in other industries is now happening in claims. AI is being injected into key points in the claim process, helping to create value that can be seen (and felt) inside and outside the organization. Meaning, AI done right can yield improvements designed to enhance the experience of all stakeholders. From an internal efficiencies perspective, consider AI’s impact on workflow challenges. As just one example, let’s look at the value of mobility and IoT, telematics in particular, because this is foundational to AI-driven improvements in processes. As you read on, think about all the existing processes and labor currently linked to your own auto claims area, because even the workflow that initiates a claim--in place for a hundred years--is now being changed, thanks to AI. See also: Strategist’s Guide to Artificial Intelligence   The New Claims Workflow There is a new claims workflow taking hold right now, not some point in the future. First, policyholders won't call the insurer when they experience an accident—the insurer will contact him/her. This is because the insurer will apply AI to telematics data, setting an alert tagged to view the rate of change of the vehicle and determine in real time that there has been an accident. Now apply AI-driven conversations via chatbots with customers at scale, in real time, to guide them through the claims process after that accident occurs. In our example, the chatbot asks the claimant for a photograph—an automated, back-end review determines suitability of the photograph, enabling the insurer to determine with high accuracy and in real time whether the vehicle is likely to be a total loss or repairable and advises the policyholder accordingly. Fast, transparent communication. If the damage is repairable, the chatbot asks for additional facts and photos. The insurer detects location and severity of the damage by automatically comparing it against millions of collision variables and applying predictive, model-driven AI. Heat maps are used as visible illustrations of the damage, building credibility with your policyholder. The internal workflow changes further when virtual inspections are powered by AI. Remote appraisers can be given photos, heat maps and even a guided estimating tool, reducing time and effort in the field and yielding higher accuracy and productivity, processing 15 or more estimates per day versus four to five estimates in a pre-AI, field inspection world. Once the estimate is written, information gleaned from the photographs is fused with insights gleaned from CCC’s wealth of estimating experience to determine if the estimate is in line with insurer guidelines. The appraiser views the pictures and, applying AI, builds out the estimate with interactive prompts to improve it. Thanks to AI, the policyholder is given an estimate in significantly less time than is possible today. AI also fuels communication that is more transparent and consistent with consumer expectations. When a vehicle is repairable, the policyholder doesn’t need to wait impatiently for days while the claims and repair process slowly unfolds in ways they don’t know about or understand. Instead, a consumer has access to a host of chatbot and SMS technology, where messages communicate the necessary steps to resolve the claim. Similar to how we book a restaurant reservation, the policyholder can schedule a repair shop appointment; and like an airline that can notify us of flight status, repair status updates have become standard practice for shops. Through the use of AI, services can be dispatched and intelligently routed to the repair shop of choice—or the salvage yard in the case of a total loss, saving time and money on additional tows and storage fees. From the policyholders' perspective, the insurer continues to prove that it has their best interests at heart, building trust and loyalty at a pivotal time in the relationship. In other words, an experience is built around AI, putting it to work to benefit the consumer. And, the same thing is happening for the estimator. On the casualty side, insurers handling first- and third-party claims can leverage AI to help inform investigations and increase loss cost management accuracy. For example, AI can detect the principal direction of force and the delta V to predict the likely physical injuries and outcomes of the vehicle’s occupants. There are early indications that integrating this data for analytics and intelligence purposes can improve claims outcomes, both by qualifying injury causation and revealing whether certain injuries are consistent with the facts of the accident. See also: Why AI-Assisted Selling Is the Future   AI Next What I’ve just described is the tip of the iceberg. We are at the tipping point. Connected cars will drive another wave of claims innovation. According to IHS Markit, worldwide sales of connected cars will reach 72.5 million units in 2023, up from 24 million units in 2015. That means, in just over eight years, almost 69% of passenger vehicles sold will be exchanging data with external sources. What does that mean for us? If I’m looking into my crystal ball, here’s what I see: When there's an accident, the amount of instantaneous information available to us will probably be 10 times what it is today. We won’t need policyholders to take the photographs I mentioned earlier. With telematics data, we will have all of the information that is knowable about an accident event, which makes the AI even faster and more accurate and claims management and related outcomes even that much better. If the car isn't that safe, it will be picked up by a self-driving tow truck and taken to the shop while another self-driving car will come pick up the policyholder. By the way, at the shop, no one's going to have to order any parts; the parts will be ordered within minutes, maybe even seconds after the accident. From an internal and external perspective, there is no downside to embracing AI’s promise: reduced claims costs, increased customer satisfaction and improved business outcomes – today and into the future. The value is there; the time is now.

"Insurance innovation" is often treated as an oxymoron, but it can't be. Innovation in the world writ large doesn't happen unless someone takes on the risk from a new technology or business model, and we all see new technologies and related business models flooding the market. Someone in the world of insurance and risk management has been doing something right.

Yet we still see a lot of puzzlement about how to sort through all the technologies that are suddenly becoming available to insurers as they try to innovate. The insurtech movement has moved through the first phase: We all know it's real. But what to do about the next phase, the get-an-actual-new-product-or-service-or-business-model-into-the-market phase? 

Companies are trying all kinds of things: innovation scouts, hackathons, sprints, "innovation tourism," including memberships at Plug and Play, etc. But there isn't a lot to show yet for all the effort by insurers. 

To see what companies are doing with innovation efforts and to help highlight what is actually working, we undertook a major research effort with our friends at The Institutes and supplemented that with nearly 1,100 hours of interviews with insurance executives working in innovation. Guy Fraker, our chief innovation officer, lays out some initial results in the first part of a three-part series, available here.

Two points stand out to me (though please read the whole piece, because there's a lot more there).

First, companies are tackling innovation in too piecemeal a fashion, mapped to the current structure, and need to coordinate across silos to be effective. Company structure is optimized to address questions that have already been answered, but innovation is about posing and answering new questions. The current structure can actually work against the innovation efforts, which are usually best done by a small, goal-oriented team that pays little attention to silos.

Second, a high percentage of executives said that their IT infrastructure limits their ability to innovate, but that's rarely true. There are, in fact, ways to innovate alongside a modernizing of the IT operation. Limitations can even make an innovation effort more focused and fruitful. 

Guy, having laid out an overview of the research in this first article, will get into more of the how-tos in the coming weeks. The good news is that innovation efforts, organized properly, can actually start smaller than you think -- and, no, you don't have to shell out big bucks for a membership at Plug and Play. And when you've succeeded once, you create momentum so that innovation efforts can build on themselves.

Have a great week. 

Paul Carroll
Editor-in-Chief

If lawyers are to represent insurers, if they are to be counselors in the fullest sense of the word, if they are to anticipate and answer questions of the highest importance, they must understand how technology continues to transform the insurance industry as a whole. They must not simply be aware of a few codicils and a minority of codes. They must be conversant with, so they can call and examine witnesses who are fluent in, the technology that influences everything from actuarial science to sales. I write these words as someone who has a law degree. Thus, I know how rigid legal curricula are versus how dynamic technology is. One predates computers, smartphones and tablets, save the ceremonial kind outside a courthouse, while the other has an increasingly short lifespan—its debut is also its death, because the one law not on the books is the law every lawyer should learn. I refer to Moore’s law. From careful observation of an emerging trend, Gordon Moore extrapolated that computing would dramatically increase in power, and decrease in relative cost, at an exponential pace. See also: 2 Steps to Transform Claims, Legal Group   According to Wayne R. Cohen, a professor at George Washington University School of Law and a partner at Cohen & Cohen, Moore’s law is crucial to how lawyers and insurers work together. He says: "More laws are not the solution to Moore’s law. What we need instead are competent lawyers who can advise insurers and be advocates for the rights of the insured, but within the changing technological landscape." I agree with Cohen’s point for several reasons. First is the health of the insurance industry. Insurers cannot succeed without lawyers to advise them, unless they want to issue policies that will compound their liabilities and weaken their ability to survive. Second, we cannot forfeit 2.7% of gross domestic product (GDP), or $507.7 billion, because a majority of lawyers cannot write the language necessary for insurers to underwrite the policies that consumers want to buy and that employers need to purchase. To repeat: We cannot have the innumerate or the technologically illiterate endorse what they do not know and cannot read, as if they were to register their approval by drawing an uppercase X on the signature line of a document, in lieu of confessing their own shortcomings. Third, unless insurers raise the technoloy issue with law schools or until the American Bar Association (ABA) raises the bar of competency, so to speak, new lawyers will find it difficult to get work and pay down their student loans. See also: 3 Major Areas of Opportunity   Let insurers be agents of change. Let them be agents that not only sell policies but help set public policy. Let them reach a verdict—let them issue a ruling as binding as any legal precedent—that is too decisive to reverse and too clear to reject. Lawyers who join this movement will inspire their colleagues to follow suit. They will be at the vanguard of law, technology and insurance. Their actions will ensure the safety of all we seek to insure.

Bourgoin v. Twin Rivers Paper Co. (SJC Maine, June 14, 2018) Maine has just joined the list of states that preclude worker’s compensation coverage for the cost of medical marijuana used to treat a workplace injury. Bourgoin sustained a workplace injury that caused him to suffer chronic back pain and total disability. After receiving a certification to use medical marijuana, he obtained an order from the Worker’s Compensation Board directing Twin Rivers, his former employer, to pay for the cost of the marijuana. He found that marijuana was more effective and had fewer side effects than the opioid drugs he had been prescribed. Twin Rivers appealed, arguing that the federal Controlled Substances Act (“CSA”) prevented an employer from paying for marijuana even when it is legal under state law. The Maine Supreme Court acknowledged that the CSA expressly disclaimed “field preemption” but held that there was an inevitable conflict between state law that ordered an employer to pay for marijuana and the CSA, which criminalizes marijuana. The court concluded that, if Twin Rivers subsidized the cost of marijuana as a worker’s compensation benefit, it would inevitably be aiding and abetting a federal crime, which is itself criminal activity. The court emphasized that “the magnitude of the risk of criminal prosecution is immaterial in this case. Prosecuted or not, Twin Rivers would be forced to commit a federal crime if it complied with the directive of the Worker’s Compensation Board.” Two justices dissented. This article was written with Meghan Shiner.

Change is a funny thing. The people who say they embrace it sound smart, for sure. But saying you embrace something and actually embracing it can be different things. The fact is, for many insurance agents and companies, the old model works. They benefit from customers’ fears and lack of knowledge. In a perverse way, if a customer is fearful or lacks sufficient knowledge, the customer becomes dependent on someone else. That dependency is satisfied by someone from the traditional insurance industry. So if you’re a traditional insurance agent or company, why change? Name another industry where the courage to not change outpaces the courage to change. There’s probably one out there, but I can’t think of it. Fortunately for the customer, things are starting to change. Making Customer the King The traditional insurance model was built in a time when today’s technology didn’t exist. That’s to be expected, but the insurance industry fell further behind by failing to make the first technological leaps that most forward-thinking companies, including other financial services companies, made in response to our digital age that began years ago. I won’t talk about all those leaps, because they’re well-documented. Let’s just skip ahead to the part where the customer expects to be fully in charge. As insurance companies updated their technology, they bolted new technology on top of their old systems, failing to meet customer expectations. In the process, companies focused inward, instead of focusing on the user interface and customer experience. See also: Industry 4.0: What It Means for Insurance   Some startups, with awesome technology acumen but little to no insurance background, have appeared over the last few years, accelerating change in the industry. Shiny new websites are beginning to make it easy for customers to get coverage in seconds, lending the same familiar and seamless online experience to insurance that customers experience when they purchase other products from their desktop, laptop or mobile device. That’s a great step for the industry. Unfortunately, it’s not quite enough. Something Old and Something New While building an online experience where the customer gains knowledge and confidence to adopt a new insurance purchase experience is great, customers are also going to need confidence that, if something goes wrong, the coverage they bought will really protect them. That takes more than a user-friendly website. It takes real insurance knowledge and experience. Most, if not all, new technology providers that have built a great user interface must pass the customer on to a traditional insurance company once it’s time to provide real customer service or pay a claim. That type of handoff interrupts the customer experience and simply won’t work. See also: The Industry Needs an Intervention   The companies that will succeed at bringing real change to the insurance industry will need a blend of sophisticated technology and insurance expertise. Combining the innovative thinking of an insurtech with the experience and knowledge of the traditional insurance industry under one roof is rare today. But it’s this type of unique hybrid model that will become the new standard for companies that will lead the insurance industry for years to come.

Blockchain is a revolutionary technology that is likely to have a far-reaching impact on business – on a par with the transformative effect of the internet. Not surprisingly, the huge potential promised by blockchain has prompted a flurry of research activity across different sectors as diverse organizations race to develop applications. In this article, we’ll explore the many benefits that blockchain could bring to the insurance industry and the different challenges that will need to be overcome.

Overview

Blockchain has strong potential in the short and long term in several different areas, particularly where it links with emerging technologies such as the Internet of Things (IoT) and artificial intelligence (AI). But its potential for delivering new applications also depends on the development of blockchain technology itself. In the medium and short term, there are three categories where blockchain can be applied:

• Data storage and exchange: Numerous data and files can be stored using blockchain. The technology provides for more secure, traceable records compared with current storage means.
• Peer-to-peer electronic payment: Bitcoin (and other blockchain-based cash systems) is a cryptographic proof-based electronic payment system (instead of a trust-based one). This feature is highly efficient while ensuring transparent and traceable electronic transfer.
• Smart contracts: Smart contracts are digital protocols whereby various parameters are set up in advance. When pre-set parameters are satisfied, smart contracts can execute various tasks without human intervention, greatly increasing efficiency.

Data storage and peer-to-peer electronic transfer are feasible blockchain applications for the short term. At this stage, the technical advantages of blockchain are mainly reflected in data exchange efficiencies, as well as larger-scale data acquisition.

See also: The Opportunities in Blockchain

Smart contracts via blockchain will play a more important role in the medium to long term. By that time, blockchain-based technology will have a far-reaching impact on the business model of insurance companies, industrial management models and institutional regulation. Of course, there will be challenges to overcome, and further technological innovation will be needed as blockchain’s own deficiencies or risks emerge during its evolution. But just like internet technology decades ago, blockchain promises to be a transformative technology.

Scenarios for blockchain applications in insurance

Macro level

Proponents of blockchain technology believe it has the power to break the data acquisition barrier and revolutionize data sharing and data exchange in the industry. Small and medium-sized carriers could use blockchain-based technology to obtain higher-quality and more comprehensive data, giving them access to new opportunities and growth through more accurate pricing and product design in specific niche markets. At the same time, blockchain-based insurance and reinsurance exchange platforms – that could include many parties – would also upgrade industry processes.

For example, Zhong An Technology is currently working closely with reinsurers in Shanghai to try to establish a blockchain reinsurance exchange platform.

Scenario 1 – Mutual insurance Blockchain is a peer-to-peer mechanism, via the DAO (decentralized autonomic organization) as a virtual decision-making center, and premiums paid by each and every insured are stored in the DAO. Each and every insured participant has the right to vote and therefore decide on final claim settlement when a claim is triggered. Blockchain makes the process transparent and highly efficient with secure premium collection, management and claim payment thanks to its decentralization. In China, Trust Mutual Life has built a platform based on blockchain and biological identification technology. In August 2017, Trust Mutual Life launched a blockchain-based mutual life insurance product called a “Courtesy Help Account,” where every member can follow the fund. Plus, the platform reduces operational costs more than a traditional life insurance company of a similar size.

Scenario 2 – Microinsurance (short-term insurance products for certain specific scenarios) An example of short-term insurance could be for car sharing or providers of booking and renting accommodation via the internet. Such products are mainly pre-purchased by the service provider and then purchased by end users. However, blockchain makes it possible for end users to purchase insurance coverage at any time based on their actual usage, inception and expiring time/date. In this way, records would be much more accurate and therefore avoid potential disputes.

Scenario 3 – Automatic financial settlement The technical characteristics of blockchain have inherent advantages in financial settlement. Combined with smart contracts, blockchain can be applied efficiently and securely throughout the entire process of insurance underwriting, premium collection, indemnity payment and even reinsurance.

Micro level

Blockchain has the potential to change the pattern of product design, pricing and claim services.

Parametric insurance (e.g. for agricultural insurance, delay-in-flight insurance, etc.): Parametric insurance requires real-time data interface and exchange among different parties. Although it is an efficient form of risk transfer, it still has room for further cost improvement. Taking parametric agricultural insurance and flight delay insurance as examples, a lot of human intervention is still required for claim settlement and payment. With blockchain, the efficiency of data exchange can be significantly improved. Smart contracts can also further reduce human intervention in terms of claim settlement, indemnity payment, etc., which will significantly reduce the insurance companies’ operating costs. In addition, operating efficiency is increased, boosting customer satisfaction.

Some Chinese insurers are already working on blockchain-based agricultural insurance. In March 2018, for example, PICC launched a blockchain-based livestock insurance platform. Currently, the project is limited to cows. Each cow is identified and registered in the blockchain-based platform during its whole life cycle. All necessary information is uploaded and stored in real time in the platform. Claims are triggered and settled automatically via blockchain. The platform also serves as an efficient and reliable food safety tracing system.

Auto insurance, homeowners insurance:  Blockchain has wider application scenarios in the field of auto insurance and homeowners insurance when combined with the IoT. There are applications from a single vehicle perspective as well as portfolios as a whole. From a standalone vehicle perspective, the complete history of each vehicle is stored in blocks. This feature allows insurers to have access to accurate information on each and every vehicle, plus maintenance, accidents, vehicle parts conditions, history and the owner’s driving habits. Such data facilitates more accurate pricing based on dedicated information for each and every single vehicle.

From the insured’s point of view, the combination of blockchain and IoT effectively simplifies the claims service process and claim settlement efficiency. From the perspective of the overall vehicle, blockchain and IoT can drastically lower big data acquisition barriers, especially for small  and medium-sized carriers. This will have a positive impact on pricing accuracy and new product development in auto insurance.

Taking usage-based insurance (UBI) for autos as an example, it’s technically possible to record and share the exact time and route of an insured vehicle, meaning that UBI policies could be priced much more accurately. Of course, insurers will have to consider how to respond in situations where built-in sensors in the insured vehicle break or a connection fails. Furthermore, insurance companies also have to decide whether an umbrella policy is needed on top of the UBI policy, to control their exposure when such situations occur.

Cargo insurance: Real-time information sharing of goods, cargo ships, vehicles, etc. is made possible with blockchain and the IoT. This will not only improve claims service efficiency but also help to reduce moral hazards. In this regard, Maersk, EY Guardtime and XL Catlin recently launched a blockchain-based marine insurance platform cooperation project. Its aim is to facilitate data and information exchange, reduce operating costs among all stakeholders and improve the credibility and transparency of shared information.

International program placement and premium/claims management: Blockchain-based technology allows insurance companies, brokers and corporate risk managers to improve the efficiency of international program settlement and daily management, at the same time reducing data errors from different countries and regions and avoiding currency exchange losses.

Coping with claim frauds: Blockchain is already being applied to verify the validity of claims and the amount of adjustment. In Canada, the Quebec auto insurance regulator (Québec Auto Insurance) has implemented a blockchain-based information exchange platform. Driver information, vehicle registration information, the vehicle’s technical inspection result, auto insurance and claims information, etc. are all shared through the platform. The platform not only reduces insurance companies’ operating costs but also effectively helps to reduce fraud. All insurance companies that have access to the platform receive a real-time notice when a vehicle is reported to be stolen. Insurance companies have full access to every vehicle’s technical information, which promotes more accurate pricing for individual policyholders.

Claims settlement: Using a smart contract, the insured will automatically receive indemnity when conditions in the policy are met: Human intervention will not be needed to adjust the settlement. In the future, some insurance products will effectively be smart contracts whereby coverages, terms and conditions are actually the parameters of the smart contract. When the parameters are met, policies are triggered automatically by the smart contract and a record stored in the blockchain. Business models like this will not only build higher trust in the insurance company but will also greatly increase its operational efficiency, reducing costs; it will also help to reduce moral hazard.

Internal management systems: Internal management systems could be automated through use of blockchain and smart contracts, helping to improve management efficiency and reduce labor costs as well as the efficiency of compliance audit.

See also: How Insurance and Blockchain Fit

Challenges and problems Decentralization strengthens information sharing and reduces the monopoly advantages that information asymmetry provides. Under such circumstances, insurance companies have to pay more attention to pricing, product development, claims services and even reputation risk. All this adds up to new challenges for the company management. At the same time, every aspect of the insurance industry must be more focused on ensuring the accuracy of original information at the initial stage of its business. Knowing how to respond to false declarations from insureds will be crucial.

From a more macro perspective, “localized blocks” of data will be inevitable in the early phase of development in line with the pace of technical development and regulatory constraints. In theory, it is impossible to hack blockchain, but data protection will be an issue for localized blocks. Therefore, higher cyber security protection will be required to protect these localized blocks. The interaction of blockchain with other technologies could mean that existing intermediary roles are replaced by new technologies in different sectors. If the insurance industry wants to ensure the continuous development of the intermediary, it should address the possible disruptive risks to existing distribution business models posed by blockchain.

The necessary investment (both tangible and intangible costs) associated with adopting blockchain technology is a big consideration for many companies at this stage. Insurance companies and reinsurance companies operate numerous systems, and the decision to integrate blockchain-based technology/platform shouldn’t be taken lightly. At the current stage of blockchain evolution, this could be one of the biggest obstacles facing insurers.

Overall, blockchain is an inspiring prospect, and there is every reason to believe that this technological breakthrough will bring positive effects to individual insurers everywhere. But at the same time, we need to understand the mutual challenges that lie ahead and work together to promote our industry’s development in what promises to be an exciting new era.

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In a previous article, I addressed the potential for the Internet of Things (IoT) to help P&C insurers reduce non-catastrophic losses in the homeowners insurance sector. Internet-connected products, such as advanced home security systems, water sensors and smoke alarms, are beginning to demonstrate the potential for reduced losses primarily through early notification of emergencies both to consumers as well as directly to emergency responders. But the potential insurer benefit from IoT does not stop at loss reduction; in fact this may be just the beginning. In this article I will address, at a high-level, how IoT can potentially facilitate and improve the claims management process adding even greater value for those insurers that embrace the technology in their operations. Overview Claims management has always been a challenging part of insurance operations. In additional to the time and expense incurred by the insurer processing and managing claims, the claims process tends to be particularly unfriendly to customers. Even if unintended, bureaucratic processes and slow response times can give consumers the impression that insurers are intentionally delaying, or worse, looking to avoid pay-outs. IoT has potential to automate data collection and communication processes while proving a “record of truth” for events leading to a claim – resulting in lower costs to the insurer and a better customer experience. Let’s look at a few specific ways IoT may make a difference in managing your claims process. First Notice of Loss (FNOL) Relying on a consumer to initiate a claim introduces a level of risk and uncertainty for the insurer while simultaneously lessens the quality of the overall customer experience. After a loss, especially a major one, the last thing a consumer wants to do is to pick up a phone and talk to a claims rep. Yes, arguably a courteous and compassionate rep may give a consumer some level of “piece-of-mind.” But candidly customers facing a loss are anxious their insurer is going to be difficult or uncooperative. I would argue that there are better ways to give the customer piece of mind then requiring them to initiate a communication with a call center. IoT devices can initiate the FNOL process on behalf of the customer and can do so, arguably, in a more compassionate and helpful way. Device alarms can notify the insurer of a potential loss long before the consumer contacts your claims department. The device triggering the notification has a time/date stamp which is of course associated to a customer address and policy number – basically, all the data needed to begin a claim is already available without the customer being inconvenienced. With this data in-hand, insurers might consider a first point of human contact being an outreach message of care and concern. Even if validation or confirmation is required to formally begin the FNOL process this proactive approach would be a unique experience for the customer whose original thought is “oh no, am I covered?” This proactive outreach may also have potential in dealing with a growing problem of “Assignment of Benefit” the home owners space is starting to see. Engaging a customer a time of loss better positions insurers to guide the customer through more structured remediation processes from the start. An insurer’s first communication might include service provider recommendations based on the loss data from the IoT devices. This process may result in helping ensure that customers are aligned with trusted vendors versus hoping for the best that the situation is resolved properly, in addition to raising the customer service bar. See also: Insurance and the Internet of Things   Claims support and fraud investigation Back to point one, at the time of loss, the last thing a customer wants to do is speak to an insurance company. An insured may be rattled and not paying attention to details that may later become critical to proper assessment of a claim, or worse, a fraud prevention situation. But IoT devices are computers and their data is never subjective nor emotional – it is a record-of-truth. It also doesn’t make a difference if a customer is home or away during an incident, the IoT devices responds the same way registering whatever data it is set to convey. IoT devices may also be labeled by users with indicators of location and use data – “motion sensor in bedroom”, “leak detector under hot water tank”, “smoke alarm in basement.” The naming of the devices with this level of specificity is a normal customer behavior and one that could enhanced when IoT kits are purposed built to not only help avoid loss but also to facilitate the claims process. These devices also may be recording “normal state” to provide a record of a situation prior to a loss. Claims processing also doesn’t need to be limited to a single IoT data point. A Smart Home is likely to contain an ecosystem of sensors, many of which have data that can be leveraged in a claim review. For instance, say a connected smoke alarm trips, if the insurer has access to other sensors in the house (e.g. thermostat) a second device data set could confirm the incident with stronger certainty. Obviously these are never-before-available data points that can both help expedite claims processing and potentially lower fraud risk. Remediation monitoring and confirmation While the role of a claims adjuster isn’t going anywhere for some time, IoT devices have the potential to provide an early indication of the severity of a claim: what sensors were triggered, their location in the home, response time before a user disarms or acknowledges, etc. For example, a whole-home water sensor may be able to indicate that 200 gallons were dispersed and 5 water sensors in the home may have triggered, indicating a potential moderate to large loss. And while the confirmation of damage scope may still need to come from the customer or adjuster, there is an early indication on the potential loss – and the urgency of remediation. A bit more futuristic, but IoT devices may also play a role in monitoring the remediation process. Devices may confirm the work process or the completion of work. Humidity or air quality sensors may confirm that a premise is “back to normal state.” Video imagery from IoT devices may record before, during and after imagery to confirm work done to a standard. Sensors may even reset or re-calibrate when all parties have finally agreed “work complete.” This process may even be triggered by the Insurers system of record in claims processing. Once the sensor is seen as an enabling tool for remediation, I believe the customer will see it as an incredibly supportive piece of technology provided by their partner, their insurer. Considerations Of course, with all these technologies, there are important considerations on behalf of both the insurer as well as the customer. Customer awareness and privacy – Concerns around “big brother” and privacy are very real – but the risk can be well managed over the long run. However, consumers must feel the risk/reward ratio is balanced. The best way to do achieve this is through transparency. Let your customer know you’re your objective is to create a better product – and better yet, show them by sharing the benefit in return for your access to their sensor data. Engage the customer and ask them for their preferences when it comes to things like communications or emergency outreach. Consumers are very savvy and tomorrow’s technology requires a level of transparency yet to be seen by the market. Encourage your customers to be part of the journey. False positives – Computers don’t exaggerate or lie, but sensors can be accidentally triggered. Early on there will be misses and false positives and some will be costly, but that is typical in all early technology cycles. Overall benefit to all insureds will be seen quickly if the process is allowed to mature. As consumers begin to realize the value of Smart Home goes beyond simply lights and doorbells into true home safety (and insurance benefits) engagement will grow and understanding the best course of action with the data sets that available will become clear to everyone involved. If need an example illustration, just look at telematics and auto insurance. See also: Smart Home = Smart Insurer!   Costs – IoT device volumes are still relatively low and functionality is still limited. As the insurance industry commits to a vision, deployments will become more widespread driving down price and raising the quality bar. This is highly consistent with any early technology deployment. If insurers engage, companies will double down efforts to meet the industry’s specific needs. And, no doubt, new business models will emerge to support the economics. Conclusion The IoT market is maturing quickly, and one of the biggest beneficiaries may be the insurance industry. Looking at the variety of ways IoT can benefit your organizations (loss prevention, claims management, customer engagement, etc.) is key to building an effective business case in this early stage. Getting involved with the IoT ecosystem now will both better prepare your organization for the market evolution as well as help ensure that your needs are well represented as the technology matures. With the above benefits in mind, I hope you agree that claims management may prove to be one of the pillars of the long-term IoT business case.