After more than 20 years in the insurance industry, working on three continents in various product lines and capacities, I have seen many changes occur alongside a notable constant: Insurance consumers want to pay less, and insurance company returns don’t satisfy shareholders.
Therein lies the rub. The conventional way to increase returns has been for insurers to increase premiums (based on what is presumed to be a fixed risk level), but that approach is contrary to the client’s desire. Yes, insurers also look to improve operational efficiency and claims handling, but those efforts are yielding diminishing returns.
Why not take a different tack and really focus our efforts on reducing the cost of risk? We’d then diminish the tension between insurers and their clients. Client premiums would drop, and insurers’ profitability would rise.
Like many, I believe that insurance is on the cusp of dramatic change. Insurers that thrive will put risk reduction at the forefront of their value proposition. That risk reduction will translate into lower premiums for diminished risk. Clients, and society at large, will be the ultimate winners.
The increasing availability and variety of data, more sophisticated tools to extract insights from that data and technology to cost-effectively support risk reduction will fuel this evolution. Insurers will need to rebalance their resource deployment away from the evaluation of risk for the purpose of assuming liability (underwriting) to the evaluation of risk for the purpose of reducing risk (risk consulting). Clients will come to expect insurers to provide advice on actions they can realistically employ AND the savings they will be guaranteed if they take those actions.
Whether change displaces current insurers or they evolve remains to be seen. Some insurance executives see a future of insurance that delivers a different value proposition to clients. We see a value proposition that primarily focuses on reducing the cost of risk. Insurers will increasingly supplement expertise with data, analysis and technology focused on reducing the cost of risk. They see a future where the industry unlocks the insights in insurers’ own data, integrates external sources as they become available and closes information gaps that exist. They see a future where clients are empowered with clear, objective risk measures that allow them to control their risk level … and their premiums.
In this future, insurers become tech companies where the insurance policy covers the limited remaining risks and in essence serves as a warranty of the risk services provided.
My discussions leave me optimistic that there are like-minded executives who see a different value proposition for insurers. But most I have spoken with draw the conclusion that neither their company nor any they know has the critical mass of support necessary to drive change.
To adapt and stay viable, insurance companies need to think about how evolutions in technology and data science can benefit clients and reshape business models. My goal is to encourage that debate.
I’ll be introducing a topic and perspective every other week that will focus generally on evolutions in the industry and the power of technology to transform the way risk is quantified, along with associated pitfalls. Each piece will conclude with a polling question and, depending on the volume of response, these results will be published.
Coming topics will include:
New Data and New Tools: When we think of data, most think of text and numbers that has been organized. By expanding our thinking, we can add satellite imagery, sensor-derived data, the Internet of Things (IoT), traffic cameras, customer service phone call recordings, pictures and many other potentially valuable sources. Imagine being able to analyze traffic light cameras to understand real-time risk at intersections. Imagine crowdsourcing the analysis of satellite and aircraft imagery to identify properties affected by natural disasters. Imagine being able to review a snapshot of a damaged automobile and adjust many claims without human intervention. Research, and in some case practical applications, exist in these and many other areas. We need to identify the information we need to know to understand risk and then either find the data that will help us or create our own. How do we ensure that the insurance industry is at the forefront of collecting, generating, integrating and analyzing all forms of data to drive deeper insights?
Data, Data Everywhere but Not a Drop for (Clients) to Drink: Every insurance company collects and generates a tremendous amount of data. Some of that data is structured; a much larger volume is memorialized in pdf files, pictures and customer service call recordings. While potentially useful for clients, the data is rarely made available at all and even more rarely in a format that provides insights. Insurers are investing in using that information to drive better claims outcomes, better risk segmentation and better internal processes. Clients expect to benefit from insurers’ resources but generally don’t get the insight they need to effect change. What would it mean if we insurers transformed our business model so that data-driven insights and risk mitigation strategies replace risk transfer as the core of value proposition?
Risk Mitigation Strategies and New Technologies: Imagine being able to identify the moment a risky behavior is occurring and having the ability to automatically intervene or alert the appropriate person. In some realms, that possibility already exists. Applications exist to alert drivers to their own risky behavior. Active technology exists to automatically apply the brakes to prevent collisions. Yet even where appropriate data exists, insurers are hesitant to make definitive recommendations based on specific technologies. Insurers are unique in that they price risk and ensure the realization of financial benefits from investments in risk reduction. Should we as an industry more actively become creators or advocates of risk technology? Can we have enough faith in our recommendations to integrate benefits immediately in prices? Does the traditional insurance policy become a form of warranty that our risk advisory services are effective?
Transparent Risk Indices: We are about to enter an information age where it is possible to quantify risk objectively in real-time. Creating risk indices, making them transparent and using them as the basis for establishing price would give clients confidence in the objectivity of the process and confidence that if they invest in changing those indices they will immediately get the benefit. The indices will also give non-insurance risk capital providers the opportunity to deploy capital against and trade risks that previously lacked the transparency. What can we learn from other financial services that have developed transparent risk indices that allowed capital to be deployed against those risks from a wider variety of sources?