Smart devices have become a popular topic in the P&C insurance world. Tools like smart thermostats, smoke detectors and water sensors offer the potential to halt property damage before it starts, protecting insurance customers from injury, property loss or both. Yet these devices come with risks.
Smart devices often represent the most vulnerable point on any given network, exposing customers and insurers alike to potential risks. Insurance companies that understand these risks are better-poised to protect both customers and themselves.
The Rising Trend of Smart Device Use
Smart home devices were a wildly popular gift during the 2018 holiday season. Amazon broke records for sales of its Echo and Alexa devices, Voicebot’s Bret Kinsella says. Sales of smart sensors, security systems, wearable devices and smart toys were also strong.
Currently, the most common smart devices used in private homes are televisions and digital set-top boxes, says Gartner research director Peter Middleton. Initially more popular among businesses, tools like smart electric meters and security cameras are becoming more popular among homeowners.
As more people use smart devices, insuring these devices becomes more important. Even Amazon has announced an interest in offering homeowners insurance to complement its smart devices like Alexa speakers and Ring Alarm systems, says Julie Jacobson at CEPro.
Growing Security Concerns for the Internet of Things
As reports of data theft, hacking and other malfeasance reach the news, concerns about security and privacy in the smart device realm grow. For instance, a distributed denial of service (DDoS) attack in 2016 incapacitated websites for internet users across the East Coast of the U.S. The attack was launched from an army of smart devices conscripted by malware, says Lisa R. Lifshitz, who works in internet law and cybersecurity. In this attack, many of the device’s owners didn’t even know they were involved.
These events have raised concerns about device security among both government regulators and private device owners. Insurers seeking to offer smart devices to customers can play a role, as well.
Laws and Regulations Address Smart Device Security
Most laws and regulations to address smart device security are still in their infancy. Although the U.K. introduced guidelines for improving IoT security in 2018, the guidelines remain voluntary. This means that not all manufacturers will adhere to them, says Rory Cellan-Jones, a technology correspondent for the BBC.
In September 2018, California became the first U.S. state to pass a law addressing smart device security. The bill sets minimum security requirements for smart device manufacturers selling their devices in California. It takes effect Jan. 1, 2020.
Rather than listing specific requirements, the California law sets a standard for determining whether security is reasonable. For instance, the security features must be appropriate to the device’s nature and function. They must also be designed to protect the device and its information from unauthorized access, modification or other forms of tampering, say Jennifer R. Martin and Kyle Kessler at Orrick.
Customer Interest in Security Has Increased
As smart devices become more popular, so do demands for greater security and privacy regulations. A 2018 study by Market Strategies International found that people who use smart devices at home or at work are twice as likely to believe that governments should regulate the devices.
“We believe that these workers have already seen the massive potential of the IoT and recognize that the risks – data security, privacy and environmental – are very real,” explains Erin Leedy, a senior vice president at Market Strategies. With a sense of both the potential and the risks, smart device users become more interested in stronger regulations to protect privacy.
A 2017 study by digital platform security firm Irdeto polled 7,882 smart device users in six different countries worldwide. Researchers found that 90% of those polled believe that smart devices need built-in security. Yet, respondents also said they too had a role to play in keeping themselves secure: 56% said that users and manufacturers share responsibility to prevent their devices from being hacked, security director Mark Hearn says.
Consumers understand that their devices can pose risks, and they’re willing to join the fight to protect their privacy and data security. Insurance companies can help them do so by providing the information they need to make smart decisions with smart devices.
Who Controls Your Customers’ Devices?
When today’s smart home devices were designed, the main goal was to simplify tasks and make life more efficient. Security took a backseat to functionality, Fortinet’s Steve Mulhearn says. To function well, smart home devices must integrate seamlessly with other devices — meaning they’re often the weakest security point on a network.
Hackers have noticed these weaknesses and are taking advantage of them. In August 2018, the Federal Bureau of Investigation issued a public service announcement warning that IoT devices could be hacked, conscripting them into malicious or illegal online activities.
“Everything from routers and NAS devices to DVRs, Raspberry Pis and even smart garage door openers could be at risk,” says Phil Muncaster at Infosecurity Magazine. While some devices are at higher risk than others, no smart device is totally safe from attempts to use it for ills like click fraud, spam emailing and botnet attacks.
Helping Customers Understand and Address Smart Device Risks
Most smart device users want to play a role in preventing privacy and security breaches. Yet, they don’t always know how to participate effectively.
Helpnet Security managing editor Zeljka Zorz recommends that homeowners adopt smart devices only after asking and answering two questions:
Will the device improve the quality of my life/fill a need I have?
Am I satisfied with the level of security and privacy the manufacturer provides users?
Insurers seeking to incorporate smart devices into their business and their customers’ lives can help by providing answers to both questions.
As Steve Touhill explains on the Resonate blog, demonstrating the usefulness of smart devices can help insurers attract new customers. Smart device owners are 42% more likely to change insurance companies in the coming year. They’re also more open to embracing insurers that offer smart device discounts or support.
Insurers can help customers protect themselves by providing information on privacy and security issues. Options include comparisons of security options for various devices, information on changing usernames and passwords, how-to guides for installing regular updates and checklists for spotting signs of cyber tampering.
When presented as best practices for using smart home devices, these steps can help homeowners and insurers address security risks without raising undue alarm.
Property and casualty insurers that encourage smart device use play an important role in influencing how customers use their devices. While this relationship can be beneficial for both insurers and customers, insurers that enter it face further privacy and security complications.
Protecting Customer Privacy
Insurance companies will need to consider how to protect customer privacy while still gathering relevant data from smart home devices.
This is because smart devices offer the potential to provide more data to insurance companies, changing everything from policy recommendations to underwriting accuracy, Mobiquity’s Sydney Fenkell says.
Gathering this data requires insurance companies to be smart about protecting the privacy of customers and the security of the information received.
“It is not a matter of if but when these systems will be compromised, and the consequences could be much more severe than lost Social Security numbers,” says Dimitri Stiliadis, chief technology officer at Aporeto.
Moreover, P&C insurers will also need to protect their internal networks when communication with these devices presents a weak point.
Being Smart About Smart Device Data Use
The use of smart device data was recently brought to light by an announcement from the insurance company John Hancock. It made public the company’s intention to incorporate information from fitness wearables like the Garmin or FitBit into calculations of life insurance premiums.
This raised a number of concerns with customers, says Chris Boyd, a MalwareBytes senior threat researcher who goes by the pseudonym paperghost. Boyd notes that these devices often have weak security, which means that a user’s personal data could be altered — affecting insurance premiums.
Similar concerns arise for users seeking to link smart devices with their auto, homeowners or renters insurance. A hacked or malfunctioning device that reports multiple loss events, or that fails to report events that did happen, could affect customers’ insurance rates. Unless, however, human intervention in the system verified the event.
For insurers, one of the best early principles to adopt may be one of transparency, says Chris Middleton at Internet of Business. When consumers know what information their smart home device collects and transmits, and under what security protocols or safeguards, they are better-equipped to understand and use the device in a way that benefits both their interests and those of their insurer.
The spirit of “insurance,” as we know it today, developed in response to a need to mitigate risks related to international maritime trade: treacherous waters and storms, piracy, war, physical handling of goods at ports, etc. While many of these risks have become obsolete and while new, more modern versions have appeared (think cyber security), the function of insurance companies has remained as old as the idea itself: to compensate for the effect of financial loss after it has been caused. Insurers that wish to remain competitive in the 21st century, however, must supplement their offerings to mitigating the cause before the effect. Workplace injuries and property loss will continue to happen, but the future of insurance is, quite palpably, preventing these events from happening in the first place.
To this end, companies have begun to leverage technology to aid in this process, and a whole new category of devices – dubbed the Internet of Things (IoT) – has emerged. These devices, and the sensors and algorithms they contain, hold the promise of enhancing our eyes and ears to perceive all things at all times. These new sources of data, and the analysis performed on them, hold the key to alerting customers of potential loss BEFORE it occurs. While the traditional insurance definition would say “this is not our responsibility,” the reality is that insurers can be uniquely equipped to use these new technological advancements to significantly reduce their losses and greatly improve the customer experience.
Let’s take a consumer use case – roughly one-third of all household claims relate to water leaks. Several companies such as Water Hero or Gems Sensors make a small connected device that attaches to a home’s main’s pipes and can seamlessly monitor water flow, continuously. If any anomaly is detected, both the customers and insurer can be alerted to take action before a catastrophic event occurs. Some devices can even turn off the main’s supply or make an automatic call to a plumber. While these devices won’t stop every incident, this low-cost technology can reduce the cost of claims to the insurer and provide a better experience for the home owner. This mutual benefit will make prevention a strategic advantage.
In commercial lines, similar examples can be found. Wearable technology and the valuable data it offers about worker safety can lead to a reduction in workers’ compensation claims while offering significant value to employees. For example, Kinetic has developed a wearable device for manual laborers to detect high-risk ergonomic movements and postures that can cause injury, gently alerting workers in real time. Data from the pager-sized device is fed into Kinetic’s software, which can identify ways of revising processes and workflows to reduce or prevent that risk in the first place. Deployments at manufacturing and logistics sites have shown reductions by up to 84% in the number of high-risk postures performed daily by workers. These postures are known leading indicators of musculoskeletal injuries, and customer sites have seen injury reductions of up to 60% for employees that have worn the device for over six months. Similar lessons can be drawn from telematics systems installed in vehicle fleets, which monitor driver activity through cameras and sensors. These systems provide feedback when certain activities or motions are detected, such as exceeding the speed limit or aggressive driving. As drivers start to modify and improve the way they drive, both accidents and the associated claims can often be reduced.
While some effort is needed to navigate, deploy and maintain these IoT devices in a cost-efficient manner, these products can change the nature of the relationship between insurers and customers from merely transactional to partnerships, where both parties are invested in preventing costly incidents. In this booming, digital era, it seems now is the time for insurance to seize the opportunity and light the way into its own future.
The industry used to be a tech laggard. No more. Though there’s still much work to be done, most insurers are now better-positioned to capitalize on their investment in technology.
Here are eight key tech trends that continue to shape the industry:
Greater stress on cybersecurity
An Ernst & Young security survey revealed that 59% of respondents had encountered a significant cybersecurity incident in their organization. Because insurers store so much sensitive personal and business data, they’re a prime target.
Cybersecurity strategy should be focused on proactive measures rather than reactive strategies. Cyber-crooks are relentless and inventive. Security has to be a top priority for insurers of all types and sizes.
2. Filling a gap in employee benefits automation
While group proposals and policy administration are both well-automated, between the two comes group onboarding, which has not been automated.
But solutions are being developed and implemented. Onboarding solutions will be built on automated data capture and importing. Data integrity is crucial. Employee information must be correct and complete when entered.
The solution must also offer robust data security and comply with privacy regulations to securely gather and store employee information. Flexibility is also mandatory because integrating onboarding closely with both proposal and policy systems is essential to efficient workflow.
Cloud computing will continue to be adopted widely by insurers and insurtech providers as it is cost-effective, speedy and flexible. Cloud providers will continue to improve their technology to deliver sophisticated capabilities.
The security risks associated with housing data off-site via a third-party, however, can present challenges. While cloud storage companies are expected to protect data, ultimately insurance IT departments are responsible for their cybersecurity. That requires constant vigilance, hiring skilled people and spending enough money.
4. Internet of things and big data
IoT continues to become more useful. Insurers can use real-time data to meet and enhance business objectives. This can boost efficiency and revenue and promote better customer service.
As the Big Data revolution continues to expand, IoT adoption in the insurance industry is expected to grow. It will enable collection of data in real time, resulting in lower premiums for insureds willing to participate. There will be continuing adoption of connected devices for loss prevention and pricing in property-casualty, life and health insurance.
Analytics can transform big data into actionable insights. As analytics and data science advance, insurers can better extract value from the huge amounts of data that now exist. Insurers can then leverage sophisticated information analytics to gain a competitive edge in the market.
For insurtech providers, there is a huge opportunity in the coming years to develop advanced analytical technologies that can make sense of unstructured data such as real-time video, social posts and live blogging.
6. Artificial intelligence
In 2018, more insurance and insurtech companies found effective ways to integrate AI. In 2019, companies will complement a significant part of their structured data decision-making with AI data analysis and decision-making.
Robotic process automation will begin to gain a wider application facilitating automation of repetitive processes across the entire IT infrastructure. Robotics and AI can offer improved productivity, shortened cycle times and better compliance and accuracy.
Augmented reality is starting to have a presence in insurance. An article by software development company Jasoren identifies several AR use cases, such as warning of risks, explaining insurance plans, estimating damages and increasing brand awareness. Alternate forms of AR such as virtual reality, mixed reality and extended reality are shaping how AR is being used.
The technology behind cryptocurrencies will be adopted for more promising applications. They include “smart” contracts and secure, decentralized data collection, processing and dissemination. While I do not expect to see a full-scale implementation of blockchain technology any time soon, many insurers and insurtech companies are launching projects and initiatives to test its applicability and effectiveness for insurance.
I have been asked a number of times to provide my perspective on the insurance industry in the time of the Industrial Revolution 4.0. In this piece I’ll do so, but first, how did we get to 4.0? What preceded and led to this brave new world of what’s now called “IR4”?
The first industrial revolution occurred in the late 1700s, with most agreeing that the seminal event was the development of the first mechanical loom in England in 1784. More broadly, the period was defined by mechanized production facilities, usually with the help of water and steam power.
The second industrial revolution, in the late 1800s, was defined by the concept of division of labor and by mass production, with the help of electricity. Think of hog slaughtering or early automobile assembly lines.
The third industrial revolution, starting in the late 1960s, was characterized by the introduction of the electronics and IT systems that accelerated the automation of production and business processes. Think of the room-sized computers of the ’60s and ’70s.
The fourth industrial revolution is happening right now. The IR4 concept was pioneered by Professor Klaus Schwab, founder and chairman of the World Economic Forum. The idea is that we are now entering the fourth major industrial era since the initial industrial revolution of the 18th century. This new world is characterized by the fusion of many technologies and the blurring of lines between the physical, digital and biological spheres.
This evolution to what we now call cyber-physical systems, or embedded systems, is leading very rapidly to a world dominated by systems that are controlled or monitored by computer-based algorithms, and integrated with the internet and its users. This kind of connected and communicating world has enabled the development of such things as a smart power grid, remote medical monitoring and autonomous vehicles. This is the “Internet of Things”: technology becoming embedded into all facets of society, and even into our bodies.
As dramatic as this may sound, the fourth industrial revolution is even more transformative than the previous three in other ways, as well. The speed of recent breakthroughs has no historical precedent; it is exponentially faster in adoption than previous industrial revolutions. Additionally, it is disrupting almost every industry in almost every country. This scope and pace is unprecedented.
Like the revolutions that preceded it, the fourth industrial revolution has the potential to raise global income levels and improve the quality of life for populations around the world. At the same time, however, this revolution could yield greater inequality along the way. Access to technology varies widely, so developments like robotics have the potential to displace workers in precisely the parts of the world that need help advancing most.
The reason is that there are three separate but connected kinds of disruption going on simultaneously.
Technological disruption: artificial intelligence, blockchain, telematics, genomics, the Internet of Things.
Economic disruption: imagine: AirBnB is now the #1 hotel company, Uber is the #1 taxi company, big stores and shopping malls are fighting for their lives. Sears, the Amazon of the 20th century, recently declared bankruptcy, and many traditional bricks-and-morter retailers are threatened.
Social disruption: some parts of the world are aging rapidly, with attendant retirement savings and healthcare challenges, while other parts, mostly in the Southern Hemisphere, have more young people than jobs; people want to be able to use things without necessarily owning them; concepts of work are changing; income equality and gender equality are major issues.
While the concept of a Fourth Industrial Revolution is now widely discussed, I would like to describe the Fourth Insurance Revolution as I see it. Like the eras of the four industrial revolutions, there have been three previous periods in insurance industry history that are somewhat similar to the evolution of the industrial world.
The first era, which I call Insurance 1.0, began logically enough in the parts of the world that were the cradles of civilization, the Middle East and Asia.
As far back as the second and third millennia BC, traveling Chinese merchants practiced an early form of risk management by distributing their wares among numerous ships and different trade routes, to minimize losses along the way. In Babylonia, merchants receiving a loan to ship goods paid the lender an additional fee that would cancel the loan if the goods were somehow lost – credit insurance. This form of coverage is even memorialized in the Code of Hammurabi. The Greeks and Romans introduced the origins of life and health insurance when they created guilds called benevolent societies, to pay family members for funeral expenses of deceased members. These are our industry’s beginnings.
Insurance 2.0 as I see it was the introduction of the first actual insurance contracts. These were developed in Genoa, Italy, in the 14th century and related to marine insurance for goods in transit. This was a formalization of the earlier concepts employed in the Insurance 1.0 period.
Our industry matured greatly in the 17th century, into what I deem Insurance 3.0, a major leap forward.
Much of the accelerated formalization of insurance was stimulated by the Great Fire of London in 1666. This enormous conflagration destroyed nearly 70,000 of the city’s 80,000 residences, and gave rise to urgent risk management and insurance planning. Property and fire insurance as we know it was launched by Nicholas Barbon in London in 1681. Around the same time, French mathematicians Blaise Pascal and Henri de Fermat conducted loss probability studies that resulted in the first actuarial tables. Insurance became an empirically based enterprise, and became widely understood to be a prudent expenditure for businesses and families.
With that brief history of the evolution of our industry, let’s now move on to insurance in the 21st century: Insurance 4.0
In my view, most of the change in the industry since Insurance 3.0 up until the present has been incremental. Broader product lines, more distribution channels and, recently, the first elements of digitization. But what’s happening now is fundamentally different. The basic function and processes of insurance are being disrupted at an accelerating pace.
So let me now present some of the issues and implications of change in the industry, what Insurance 4.0 looks like. I’ll start by making some comments on the insurance industry of today.
Of course much of the rapid change taking place now and defining Insurance 4.0 is related to technology. The insurance industry’s raw material is data. Data not only to make underwriting and loss reserving judgments, but increasingly to manage virtually every business process in the insurance value chain. Data is valuable. But how can insurers successfully plan and manage data when, as Science Daily magazine tells us, 90% of all the data in the world has been generated in the last two years?! How do we use this avalanche of data to make sound business decisions? More data does not inevitably lead to better decisions.
One promising set of tools: Artificial intelligence and machine learning, which represent a quantum leap from the predictive modeling insurers have been using over the past decade.
Moving rapidly from applications in high-frequency, low-severity lines like auto and home insurance, AI capabilities are now employed in more complex commercial lines, and already show evidence of having real underwriting and loss reserving value.
Skeptical about whether this can work in complex cases? Let me give you an AI example. A few years ago, a computer beat the world chess champion. Well, some said, that’s fine, but it will be a long time before a computer can beat a top Go player. As many of you know, Go is a complex Asian game played on a 19-by-19 grid, with more possible configurations than the number of atoms in the known universe. Google’s Deep Mind Lab computer input all the Go games ever recorded, over a 1,000-plus year span. After playing 4.9 million games against itself in a three-day period to learn, the computer immediately beat the world’s best Go player in a live game.
What’s more thought-provoking, though, is what happened next. Putting aside the input of historical game results, Google just uploaded the basic rules of the game – no experience data. This new program, AlphaGoZero, became expert simply from learning first principles alone, without any human knowledge or experience input. Does anyone still think sophisticated underwriting or loss reserving is beyond the capability of modern computers? I don’t.
Entrepreneurs have expanded the way technology can influence the insurance value chain to create an ecosystem we call insurtech. Leveraging off fintech’s huge impact on the banking and payments world, insurtech companies, which now number more than 100,000, are innovating in every insurance company department. Investments in them have grown by leaps and bounds. Insurtech attracted about $140 million in funding in 2011, $275 million in 2013, $2.7 billion by 2015 and more than $4 billion last year.
Insurtech products and services address product development, marketing, pricing, claims and distribution, especially reducing policy acquisition costs, and have been much more focused on nonlife insurance (especially personal lines) than life and health insurance to date. Up until now, insurtech ventures have tended not to displace the incumbent insurers, but have been invested in or acquired by them to enhance their existing operations.
Much of the industry’s current expanded use of technology, including insurtech, is focused on customer interface and the customer experience. It has always been said that an industry can’t disrupt itself; that disruption always comes from the outside. Not surprisingly, then, insurance policyholders and potential customers have had their expectations of customer experience elevated by their interaction with other product and service providers. No longer do they measure their satisfaction against other insurance companies. They want the kind of experience they get from Apple, Alibaba, Amazon, Starbucks and the like. They want mobile, 24/7, personalized service. Most insurers today are simply not capable of delivering this. They lack both the innovation mindsets and the IT budgets to deliver a 21st century insurance customer experience, and they will lose share of market to those companies that do.
Another element of change in today’s insurance business is the emergence of public/private partnerships. More sovereign and sub-sovereign governments have come to realize that they are effectively the insurers of last resort when catastrophes strike.
Efforts are accelerating to narrow the protection gap between total economic losses and the portion covered by insurance.
Because the governments often end up paying directly or indirectly for disasters, and their citizens feel their brunt in terms of higher taxes or reduced services, governments now increasingly seek to partner with insurers. This is a positive development for the industry, one that presents both an enormous growth opportunity and a benefit to society.
Recent years have seen the launch of the African Risk Capacity, the Caribbean Catastrophe Risk Insurance Fund and the Pacific Catastrophe Risk Insurance Company. All are regional public/private partnerships, and all are enabled by technology-driven parametric triggers. Others are in the works, facilities designed to address a range of perils including flood pools, terrorism pools and the like, best managed by governments and industry working together.
The “lower interest rates for longer” world we live in presents major challenges for investing the assets that support our policy liabilities. Insurers can no longer simply commit the bulk of their portfolios to investment grade corporate and government debt. Such a strategy just isn’t sufficient to pay claims and provide an adequate return on capital now.
Insurers and the asset managers who serve them have responded by changing their asset mix, to increase allocations to higher-return, not-much-higher-risk securities (let’s hope). More equities. Structured products and bundles of loans. Private equity funds. And recently, infrastructure debt, in both developed and emerging markets.
Portfolio yields are rising, but only time will tell whether these new investment allocations provide an appropriate margin of safety in more turbulent market conditions. It’s really too soon to tell if the industry’s investments have become riskier, or if insurers have simply better understood the true risks of 21st century investing.
A more subtle but truly profound change in Insurance 4.0 is the industry’s focus on talent. I’ve been in the insurance business more than 47 years, and I can say with complete confidence that insurers have never remotely spent as much time, money and thought on developing their future leadership as today. There has always been talk about this, but the action has never before matched the rhetoric.
With approximately 25% of the industry’s top management retiring in the next five years, as Baby Boomers retire in large numbers, the urgency of talent development has finally dawned on CEOs and even boards. Competing for top young talent isn’t easy. The lure of technology firms, entertainment, investment banking and other seemingly more exciting career paths is undeniable. But insurers have to try to attract at least some of the best, because our industry’s role in society is so critical, and the talent gap is large and growing.
For the first time in my career, CEOs bring up their programs for attracting, developing and retaining talent without me asking them first. More and more describe carefully thought-out programs that are so strategically important that they have high visibility with their boards. Believe me, this is a real change. These are the companies that will thrive over the long term.
All of these initiatives, in technology, in the customer experience, in public/private partnerships, in new investment approaches as well as in talent development, exemplify Insurance 4.0. Not just doing what we have always done, hoping to be somewhat better, but developing new tools to address new challenges, new opportunities and new competitors from within and without the industry.
This is because insurers are the financial first responders in this risky world. We rebuild communities and homes after disasters, we provide financial stability when families lose loved ones and we invest to build economies around the world, and in Insurance 4.0 we do it faster and better.
As numerous and daunting as the changes of today are for the insurance industry, there will be more and greater challenges in the industry of tomorrow.
The accelerating pace of change in our world not only demands new products, but presents entirely new forms of risk, as well. I referred earlier to the three generic kinds of disruption we are witnessing. Each of them carries new risk exposure the likes of which our industry has not dealt with before.
Technology disruption, for example, presents a host of new risks related to our connected world. Insurers are struggling to find their place as autonomous vehicles loom large in our future. What does this mean for the motor insurance business, the industry’s largest line of coverage? Will auto manufacturers simply bypass the insurance industry and go directly to the capital markets for their enormous coverage needs? Will commercial drones inspecting property damage claims improve workflow and reduce reliance on human error?
How will blockchain reduce expenses? The InsureWave project developed by EY, Maersk, Willis and GuardTime promises to slash marine insurance expense ratios by approximately 10 points! Other blockchain applications are in the works, and industry consortia like The Institutes’ Risk Block Alliance are finding new processes to save and make money every day now.
Finally, cyber risk represents the world’s first truly global peril, including a cascading potential due to our connectedness. Clearly, there is premium growth potential in cyber, but the early promoters of long-term-care insurance might remind us that revenue growth potential does not necessarily portend long-term profit. Current cyber combined ratios are running around 60%. True loss experience, though, will take years or decades to be fully understood.
Economic disruption also presents new challenges and opportunities for insurers going forward. Who will be the insureds of the future? How does a company insure Uber or AirBnB, let alone the people who use them and the facilities they work with? How does the collapse of traditional industry customers like retailers, coal companies and other industries that dominated the 20th century affect insurers? And by the way, is the industry prepared to cut 25% to 50% of its non-customer-facing jobs over the next decade as a “benefit” of AI and robotics? Some of the internal workforce can become part of the “hybrid system,” the human overlords who write and work alongside the smart systems to make their ultimate decisions, but not many.
Social disruption is also a source of new risks. For nonlife insurers, reputation risk and privacy risk have enormous potential exposures, and little existing loss data to make rates. It’s much too soon to tell if providing coverage for these exposures will be viable or not.
What are the insurance implications of the sharing economy, where more people want the ability to use things without owning them? Usage based insurance is gaining popularity, but also has the potential to significantly reduce premium volume. What about the “gig economy,” where many people hold several part-time jobs and no full-time job (meaning no benefits)?
And how will life and health insurers cope with a rapidly aging developed world? Retirement savings is a looming crisis. And even if we manage to avoid pandemics (consider: If the Spanish Flu of 1918 occurred today, it could kill 400 million people), what are the implications of a hotter and more polluted planet for healthcare? Will wearable devices driving the Internet of Things provide a cornucopia of information to enable better health outcomes?
And what of the big issue: climate change? Both the World Economic Forum and Lloyd’s of London define climate change as a top socio-economic risk to our society. Climate risk is now considered a core strategic issue by governments, businesses, even the military. Certainly for the insurance industry, adaptation and mitigation, the need to make future provisions for inevitable damage, and send pricing signals to insureds of the true cost of risk, is a defining issue of our time.
In a broad way, Insurance 4.0 means the industry is becoming part of an ecosystem of connected and communicating sectors that are symbiotic, not as “B to B,” business to business, or “B to C,” business to consumer, but “E to E”: everything to everybody, where the information exchange benefits all participants, but is not equally understood by all parties. The information flow is asymmetrical. We can all agree that reducing risk in our world is a good thing for society, but, if risk is materially reduced, will the size and relevance of our industry then shrink?
A few words are also in order about the political capital the insurance industry possesses. I have written herein mostly about the risk management side of our business, and indeed it is the very reason we are in business. But even in a time of increasing public/private partnerships seeking to mitigate and remediate natural disasters, politicians and policy makers primarily ascribe our industry’s power and influence to our investment portfolios.
Globally, the industry has over $35 trillion of invested assets. Assets that are invested in companies’ domiciliary countries’ government bond markets and are critical to those countries.
Assets invested in their stock and corporate bond markets, as well. And now, insurers’ role, along with pension funds, as the only true long-term investors, means they are vital to infrastructure funding. Growth projects for the emerging world, and reconstruction financing for the developed world. This is what gets the attention of policymakers. And so this attribute is what we must nurture and promote to enhance our stature. Our most promising avenue to high esteem with policymakers is by securing their understanding of the vital role our investment portfolios play in helping them achieve their goals.
And so, the world of Insurance 4.0 is not just one of new products covering new risks, but a whole new conception of what insurance can be and do. Some say that in the future, all companies will be technology companies. If that is even close to being true, then insurance companies, which run on information, must surely be technology companies to succeed.
But can they all be? No. Some don’t have the innovation mindset to adapt. I know of many insurers that employ only slightly modernized versions of the same processes that have been around for well over 100, and have yet survived. They will continue to try to muddle along until forced. Capital providers to stock insurers are getting impatient about returns, and so merger and acquisition activity is increasing. Few small insurers can afford to become state-of-the-art technology providers, and many will have to seek stronger partners. Most mutual companies, which do not have those demanding investors to answer to, will just carry on, but lose share of market to faster-moving competitors. I believe Insurance 4.0 will feature an accelerating consolidation of the global industry, driven by the technology leaders taking over technology laggards.
I also believe that more and better utilization of data by insurers will lead to better pricing and better loss reserving, reducing the amplitude of underwriting cycles. This, in turn, will result in the industry becoming less of a frequency business and more of a severity provider, a tail-risk provider. The greatest value of the industry to its customers will become having the ability to better forecast and the capacity to provide for extreme weather events and other large losses. Examples would include cyber, environmental and terrorism/civil unrest. This is yet another argument for industry consolidation around fewer, bigger, tech-savvy insurers, and for an even greater role for funding from the capital markets.
Another rapidly emerging concept of Insurance 4.0 is the industry’s role in loss mitigation. I’m shocked to find that many people still think our industry exists solely to pay money to people after bad things happen. In fact, the industry’s role in mitigating and even preventing losses before they occur is the key reason for the rapid rise of public/private partnerships and invitations by governments to help them anticipate and reduce, not just pay for, losses.
As an example, I participated in this year’s G20 meetings in Argentina , where, for the first time ever, a dedicated insurance summit was held. Industry and governments explored opportunities to work together better to reduce losses any way possible. It is becoming widely understood that every dollar spent on loss mitigation and prevention by governments saves five dollars of post-event spending.
This gets to a basic disconnect that the industry must come to grips with: Insurers basically want to sell protection for when losses occur, which they have done for centuries now. Customers, on the other hand, now want to buy loss prevention and mitigation, in the form of broader advisory services.
If real customer-centricity is to be achieved, making this fundamental shift in the business model of how the industry meets customer needs would truly mean we have reached Insurance 4.0!
The insurance industry, started in the 17th century at Lloyd’s of London, has made significant progress since then, but it is only now that it is truly at the cusp of disruption.
The traditional models of business development through intermediaries, pricing through actuarial models and underwriting on the basis of experience and data collected through physical inspection of risk and proposal forms are being challenged, as are the policy contract issuance and claims handling methods.
The digital revolution has led to all types of information and data not only available in public domain, but easy to access and share at lightning speed. People are connected to each other on social media, devices are connected to the internet, homes and cars are becoming smarter through IoT and robotics and AI are increasingly prevalent in our everyday lives.
Almost 150 years back, when the first self-propelled car came out and could drive at only 4mph, a person with a red flag would walk in front of the car to ensure road safety. Fast forward, and we are now looking at cars that can drive themselves.
While insurance was slower to adapt than other industries, there has been a recent boom of insurtechs. This creates meaningful opportunities and one of the most exciting times in the insurance space.
Today’s customer expects information to be available at her fingertips. Information is either a click away on search engines or through voice prompts on your smart phone or smart assistant.
We also face changing risk scenarios and heightened unpredictability. Cyber is at the top of the list – and headlines. Increase in terrorism or “lone wolf events” – at places one would never imagine to be faced with such risks. Changing global weather patterns – the recent floods in Houston, hurricanes in Florida, wildfires and mudslides in California and the extreme winter freezes in the Northeast. And changing geopolitical and socioeconomic environments.
How do we cope with this rapidly changing risk profile and environment? Will traditional insurance be able to provide relevant protection and, more importantly, will it be delivered, serviced and provided in a manner to match customer expectations in today’s digital age?
Insurers are responding to this challenge in two ways:
Digitizing the front-end user experience and user interface but still continuing to follow the traditional model of underwriting, pricing, risk selection and claims.
Disrupting the whole value chain from the front end of the business to the entire back end.
These responses are happening at both startups and established insurers. The winners will be companies that are willing to disrupt the entire value chain from front to back end.
What does that mean?
With the amount of internal and external data sources available today, we can get enough information on prospective customers and the risks they face so as to enable us to personalize their insurance and meet their specific needs.
How will we do it?
By harnessing big data, connected people and devices, smarter homes and cars and so on, and combining this with years of customer and claims data available with insurance companies. Insurers able to use this wealth of internal and external data in a manner to create distinct customer profiles will:
Know the customer
Anticipate the risks they are exposed to
Find the gaps and where they may need insurance
Give consumers a tailored solution to cover these gaps
As an example, and subject to compliance and other protected privacy considerations, let’s assume the IP address or phone number is linked as the unique identifier of a person. As soon as that person calls or logs in with her device, the insurer should be able to pull up all of her available information. Then, without the person answering all kinds of questions and forms, the insurer could automatically offer relevant insurance:
“Welcome, Joan, for your two cars and home in Ohio, here are the coverages and premiums. Please select one.”
As permissible, the same data can be used for underwriting, risk selection and pricing. Today, we as insurers have access to much more data and information on the risks and needs of our customers than ever before — provided we are able to use the data effectively, a big challenge most incumbents face today.
As with underwriting and risk selection, we can use data sources and technology such as sensors, AI and IoT at the time of claims. That includes the possible use of parametric insurance for natural catastrophes, and even smart contracts on a blockchain that self-execute the adjusting and settling of certain types of claims – the objective being to pay claims in a frictionless manner.
Before we get there, we will need to work with regulators on data privacy laws that are fit for purpose for this digital age.
The other very important aspect of the new age insurer is to offer a full suite of “personal risk management services.” What that means is that, using the insights gathered over years of claims data, coupled with the availability of external data and AI, we should be able to:
Predict – help insureds prevent a potential loss before it occurs. I believe people do not buy insurance to make a claim — the real purpose is protection. What better protection is there than someone helping continuously monitor and help prevent bad things from happening?
Assist – if even after efforts of prevention something unfortunate happens, insurers should be able to tap into their claims handling. Some companies have invested in risk management and loss mitigation units to actually assist the insureds through the time of need.
Restore – and finally help the insureds to restore the loss or damage. This is the actual claim settlement, which is what most insurers do as the only activity at the time of claims.
In what I propose, the insurance (restoration or loss indemnification) is only one-third of what a new age insurer should be doing. And all of this needs to be seamless and digital with the use of available and developing technology.
Time has come to disrupt the centuries-old insurance industry from what some would call a “necessary evil” to “a pleasant experience called insurance.”