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3 Practical Uses for AI in Risk Management

Every year, financial crime becomes more sophisticated, new malware emerges and fraud losses rise. Top that problem up with continuously evolving regulations and hefty non-compliance penalties, and financial institutions are facing an increasingly complex risk landscape.

To compete in the new environment, banks, insurance companies, asset managers and other industry players need to rethink how they approach financial risk management. That’s where artificial intelligence can lend a helping hand. With advanced analytical capabilities, AI can augment human-led risk management activities to drive better outcomes much faster. It is estimated that through better decision-making and improved risk management, AI could generate more than $250 billion in the banking industry.

Insurance companies, banks and fintech startups alike are starting to integrate AI-driven analytics into their financial risk management software. Here’s a roundup of three practical use cases to give you the idea of AI potential.

Accurate fraud detection

The complexity and visibility into multi-channel fraud prevention is a major challenge for financial institutions. Scammers are getting more sophisticated and quickly find creative ways to steal from banks and their customers. Each year, fraud costs over $5 trillion, a sum more than 80% greater than the U.K.’s entire GDP.

To stay agile and quickly respond to threats, banks are augmenting their fraud detection toolkit with machine learning capabilities. The idea behind ML-driven fraud analytics is that fraudulent transactions have telltale signs that algorithms can uncover much more effectively than rule-based monitoring systems. By processing customer, transactional and even geospatial data, they can even spot patterns that seem unrelated and simply go unnoticed by human data analytics.

As a rule, ML algorithms leverage supervised or unsupervised learning techniques for fraud detection. The difference between these two types is that supervised learning-based algorithms heavily rely on explicit labels, meaning that machines need to be repeatedly trained on what a legitimate versus fraudulent transaction is. Unsupervised learning models, in contrast, do not need prior labeling to recognize abnormal activity, so they can continuously update their datasets and detect even previously unknown fraud and abuses.

Credit risk prediction

In simple terms, credit risk refers to the risk of financial loss when a borrower fails to meet financial commitments. And as these non-performing assets continue to grow, it has become imperative for banks to find better and more robust mechanisms to manage default risks.

Advanced ML-driven analytics can do just that. By analyzing a vast amount of financial and non-financial data, trained machine learning algorithms can model credit risk and predict default with a much higher degree of accuracy than traditional methods.

See also: Claims and Effective Risk Management

There is no shortage in up-and-coming startups that work on AI-powered credit scoring solutions to help the financial industry fight high delinquency rates. One such example is British startup SPIN Analytics, which has developed its RiskRobot to optimize credit decisions. The solution leverages advanced analytics to forecast credit behavior and credit losses of individual customers and entire credit portfolios.

Effective regulatory compliance

Over the years, the number of rules and regulations that banks and financial organizations need to adhere to has multiplied — EMIR, SFTR, MiFID II/MiFIR, MMF, GDPR. With this raft of regulatory bodies, updates are issued every seven minutes. And, with hefty fines and penalties, non-compliance is not an option.

Handling the overwhelming volume of regulatory change is no easy feat. But recent advancements in natural language processing (NLP), an AI subfield, are bringing us closer to effectively solving the compliance puzzle. With the ability to understand the human language, NLP-based solutions can scan and analyze millions of lines in regulatory content, including legal documents, commentary, guidance, legal cases, to spot applicable requirements much faster — that’s what London-based Waymark offers its corporate clients.

Another prominent regtech player is IBM, which offers its cognitive computing platform Watson to drive down regulatory compliance costs. Trained with the help of Promontory, Watson identifies and tags obligations, guides and controls to facilitate regulatory change management.

The bottom line

The financial risk landscape is changing fast. Staying on top of emerging fraud threats, credit risk and rapid regulatory changes requires a superhuman effort.

AI can augment human intelligence with rich analytics and pattern prediction capabilities to drive fraud and credit risk detection with higher accuracy and at a larger scale. In the regtech space, AI-fueled analytics solutions can significantly accelerate compliance procedures while reducing the costs.

AI Investment in Commercial Lines

Artificial intelligence (AI) has been in almost every technology-based headline over the past 24 months. If an incumbent technology provider or a newly emerging insurtech organization wants to grab attention – well, just insert AI in the first few lines of the description. Better yet, insert AI in the product or organization name.

In fact, AI holds exceptional business promise, and there are numerous proven use cases. But AI is a complicated topic.

There are many sub-categories of AI, and one of the first steps in choosing the appropriate technology is to break down AI into consumable bites. SMA finds that there are six primary AI technologies in play within commercial lines organizations: machine learning (ML), computer vision, natural language processing (NLP), user interaction technology, voice technology and robotic process automation (RPA). The big question is – which AI technologies drive the most value for commercial lines?

Not surprisingly, there is a tug-of-war between AI for transformational purposes and AI for tactical purposes. According to commercial lines executives and managers, ML, RPA, computer vision and NLP (in that order) will transform commercial lines the most. Given the general need for transformation across the insurance industry, one could conclude that the previously stated order of technologies would be where the industry is heading in terms of investment. But that is not the case.

The actual investment order is new user interaction tech, machine learning, RPA and NLP, with the remaining technologies following. Does this mean commercial lines insurers have gotten it wrong? The answer to that question is “no,” with possible shadings of “could be.” Much of the framing for this answer lies in the product mix.

For the small business and workers’ comp segments, new user interaction technologies such as chatbots and text messaging have been invaluable in contact centers. This affects underwriting and claims by clearing tasks from work queues, thus freeing up technical expertise for more complex interactions. Billing benefits, as well. Collaboration platforms and real-time videos proved highly valuable during the pandemic’s height and continue to be highly worthwhile.

Machine learning has universal value across product lines. Whether it be ML to improve straight-through processing for less complex lines, such as small business and workers’ comp, or to provide decision support for complicated product lines, ML can contribute in all areas. The great thing about this is that investment in adopting ML skills pays off across the enterprise.

RPA is a technology that not only improves operational efficiency and expense management – important internal goals – but also enhances customer and distributor satisfaction through rapid request fulfillment. Policy service, underwriting and claims all gain value through RPA adoption. Because almost all commercial lines segments have repetitive processes, RPA skills are used universally.

See also: COVID-19 Sparks Revolution in Claims

The “could be” warning comes in terms of computer vision and NLP. Both technologies have significant transformational value in commercial lines, ranging from turning aerial images into information to digitizing paper-based information sources. Prioritizing these technologies sooner rather than later is critical across all product segments.

More than almost any other technology, AI technologies work best in combination — for example, NLP with RPA to increase process penetration. The industry is in its early days when it comes to AI usage, and skill sets are still advancing. The “getting it right” discussion is frequently dependent on product segments. But, over time, value will be universal regardless of product complexity, albeit for different reasons.

For additional information on all six AI technologies and survey results, see SMA’s new research report, AI in P&C Commercial Lines: Insurer Progress, Plans, and Predictions.

A Burning Platform for Transformation

While the industry had digital as a “priority” in nearly every survey the last few years, the events of 2020 have accelerated its importance – creating a tipping point for insurance. Malcolm Gladwell’s bestseller, The Tipping Point, described this phenomenon as a “magic moment when an idea, trend or social behavior crosses a threshold, tips and spreads like wildfire.” We now have a “digital wildfire” expanding rapidly every day, reshaping every aspect of our customers’ lives and businesses.  

The COVID-19 crisis exposed less than desirable customer experiences due to manual, paper-bound processes, non-digital post-service transactions like claims, payments, printing, mail, a rise in online insurance purchases and the need for extra caution due to fraud. Projects are getting reprioritized for this and next year to adapt to this new reality. But companies need to consider prioritizing investments in the digital platforms that will meet their needs today and in the future.  

Digital Insurance Platforms – Digital Wildfire Creates A Burning Platform

We have been writing and talking about digital platforms for a few years, including in our thought leadership report, Insurance Platforms – A Burning Platform for Market Leadership in the Digital Era of Insurance. Through our research over the last five years, we have found a top motivator for digital transformation is the need to meet customer and distribution channel expectations of a much-improved experience. We identified a strong intersection of business and consumer technology trends that are relevant to the insurance industry that require a new insurance platform. The insurance platform lays the groundwork of a new digital insurance business model defined by a focus on customer experience, business innovation and technological leadership, with rich and robust capabilities that will enable speed to value as a digital insurer. 

In the insurance platform report, we define a platform as an architected, networked system that provides access to a broad set of services, data and other capabilities; is continuously and seamlessly upgraded with newer technology, content and functionality; is accessed via APIs that are part of a robust, extensive API catalog; enables personalized customer engagement; is cloud-based, with a designed-to-scale, pay-per-use pricing model; leverages AI and machine learning through embedded capabilities; is flexible to aggregate heterogeneous services from multiple providers (technology, data, insurtech); and enables rapid “test and learn” for new business models and products while supporting current operational business models.

Fundamentally, the insurance platform model replaces the old paradigm of the integrated suite of core insurance systems focused on transactional processing with “one-size fits all” portals over the core. While that approach enhanced the traditional business of insurance of the last few decades, it does not meet the demands and expectations of a new era of insurance because it leaves unchanged the nature of the business model and the products that insurers sell.

Today’s next-generation insurance platform uses cloud-based technology architecture to unite core insurance processing systems — policy, billing, claims — with advanced digital and data/analytics capabilities and third-party services delivered via application programming interfaces (APIs) that will enable the customer-led digital transformation. Furthermore, platforms enable innovative companies to create speed to value, unique customer engagement, a “test and learn” platform for minimal viable products and value-aligned, optimized costs.

See also: Digital Future of Insurance Emerges

Digital Platforms Must Digitize, Optimize and Innovate

On June 24, SMA held a virtual event (now available on video) focused on digital platforms. Manish Shah, Majesco’s president and chief product officer, described the digital transformation journey with three main parts:

  • Digitize — This first step enables organizations to create digital portals for interaction with traditional product and channels, to digitize and automate the existing processes.
  • Optimize — The second step enables organizations to move beyond digital portals to create richer digital experiences beyond core transactions.
  • Innovate — The final step, and goal, enables organizations to launch innovative products and services to transform the business and operating models for sustainable, competitive advantage.

Customer expectations and changing market dynamics are shifting business and operating models and driving digital transformation. We believe that all three steps of digital maturity – Digitize, Optimize, and Innovate – are needed to build sustainable, competitive advantage in the digital age. Many of our customers are at the different steps from building next-generation customer and agent portals, optimizing the business with electronic bill payment, creating a powerful single quote and buy experience for different products across multiple policy systems and leveraging new dynamic sources of data to creating an innovative on-demand product for the market. These are just the tip of opportunities and innovation well underway.

Digital Leaders – From Owner to Orchestrator to Provider

Emerging digital leaders, many of whom align to our Knowing – Doing leader focus from our Strategic Priorities report, are aggressively investing in new business models, products, and processes – including customer engagement and distribution models aligned to a more digital economy and growing demographic.

Customers are looking for ways to make their lives simpler and have a great experience. The next generation of customer experience is bigger and broader, and it requires a digital platform and robust ecosystem that work together under one common platform across different core systems.

Given the nature of ecosystems, insurers can assume multiple roles, from owner of the unifying platform, to orchestrator of the products and services to provider of products and services. What insurers achieve will depend on their ability to create a cohesive digital experience … requiring a digital platform that creates rich customer experiences; innovates business models, products and services; leverages a vast ecosystem of third-party capabilities; capture market opportunities; competes in the digital age; and reinvents the insurance industry. Future success and growth are tied to your answers and your digital transformation. 

See also: New Digital Communications

What is your digital strategy and journey? What role will you play with your customers? Are you investing in a digital platform that will take you across the entire journey or stop at the first step of portals? Do you have a burning platform for today’s digital wildfire?

3 Silver Linings From COVID-19

Despite the challenges posed by COVID-19, insurers can seize opportunities from the unexpected silver linings that have appeared. The sudden, widespread case study in remote working has validated the forecasts and long-held views of insurtechs. Insurance, more than almost any other industry, is positioned to thrive in the virtual world as the need for large processing claims centers and customer service hubs vanishes. 

The pandemic forced openness to a change in mindset, and this flexibility was a prerequisite for the bright spots that ensued. A recent survey found that 76% of employees expect to work more flexibly even after restrictions ease, and 67% feel they are more or equally productive from home. In the post-pandemic world, as insurers rethink their work model, they will be confronted with a crucial choice: whether to keep that openness to change or revert to old ways of thinking.

Here are some of the silver linings we’ve seen in the insurance industry.

Increased access to executives and breaking of silos

Across the industry, executive teams and other teams within organizations are collaborating more closely than ever, meeting more frequently and making quicker decisions. As the pandemic took hold, document-sharing systems and other collaboration tools were rolled out quickly across enterprises, with IT, legal, communications and HR departments working together to a degree not seen before. Policies such as procuring headsets and chairs so that people could have comfortable home office setups were enacted swiftly. Of employees working remotely, 40% say they have received the most employer support in the form of digital tools and software, while 39% cite line manager check-ins with employees. It will be important for insurers to maintain these levels of connectivity and collaboration rather than allowing them to be anomalies of the pandemic.  

Innovation realized faster

A pre-pandemic innovation session was as much about the physical space and gathering of people in one location as it was about innovation itself. Some insurers had even moved to rescind their work-from-home policies and push their people into collaboration spaces. All of that has given way to a more pragmatic approach. Now, though a certain amount of lead time still exists, multiple innovation sessions can occur in a shorter period. This is an imperative, as the ability to continue innovating quickly is key to meeting high and changing customer expectations. Research has found that remote workers not only are more highly engaged, but also more likely than their office colleagues to consider their workplaces innovative.

Better engagement across geographies

Teams are collaborating much more in the virtual environment, which has leveled the playing field across offices — and research backs up the benefits. One study found that employees who work from home averaged an extra productive day a week, had 50% reduced role attrition, took shorter breaks, had fewer sick days and took less time off. Another study found that full-time employees working from home have been “optimistic adapters” – meaning they’ve demonstrated strong psychological capacity based on feeling in control of their future, and have dealt better with being locked down than other workers. And 43% of employees in that same survey said they have enjoyed a better work-life balance.

Still, evidence shows that there are some people for whom these silver linings don’t exist. Executives have cited an increase in employer relations cases during the pandemic, underscoring the idea that those cohorts of the employee population who were isolated in the pre-remote work environment are even more isolated now. As an example, 41% of Gen Z respondents in a recent survey said they are struggling with having limited private space and family. Managers may not be as adept at mitigating difficult situations as they would be if they saw problems unfold in person. Leaders will need to redouble efforts to identify employees who aren’t assimilated into the company’s culture, measure the extent and produce interventions to close those gaps. 

See also: A New Boom for Life Insurance?

The longer we go on in a virtual environment, the greater the tendencies people have to revert to old behaviors or fall back into old roles. But insurers are poised to thrive if they document the positives that have arisen during this time, chronicle how they’ve come about and who has modeled best behaviors and then hard-wire those into their cultural dynamics and operating model. Those that do can turn the accidental silver linings of the pandemic into a purposeful program of meaningful change and better business outcomes.

How to Engage Better on Auto Insurance

Don’t be hesitant to reach out to your policyholders. They want to hear from you — but in the right way. It’s all about creating and implementing the right outreach strategy.

Auto insurance consumers are shopping more than ever before, and that’s not surprising. A competitive environment combined with easy access to online quotes and an informed shopping audience has led to a shopping bonanza, even among loyal policyholders.

Carriers find themselves needing to retain valuable customers but may be nervous that their outreach might not be well-received. Do not fear. Your policyholders want to hear from you, if you use the right outreach strategy.

What’s your outreach strategy?

Does your strategy revolve around the renewal period? Do you simply send policyholders a renewal notice rather than make personal contact? Are you concerned they won’t welcome your outreach outside of renewal?

If you’ve answered yes to any of these questions, you’re not alone. Anecdotally, we know that many carriers are reluctant to reach out to policyholders outside of renewal for fear of putting them off.

However, if you avoid outreach outside of the renewal period, you could be missing an important opportunity to improve customer satisfaction, profitability, retention and upselling/cross selling initiatives. Why? Because believe it or not, your policyholders would like to hear from you more often―and that can affect policyholder loyalty.

See also: 5 Trends Changing Auto Insurance

What consumers are telling us

Our recent auto insurance consumer study, which surveyed over 2,000 U.S. auto insurance consumers who had shopped their insurance in the last year, indicates consumers are not being contacted by their carriers as often as consumers would like―and they’d like that contact to be more personal, not simply a standard renewal notice. After all, who wants to be treated like a number?

Across every age group, 74% or more of our respondents reported they want to personally hear from their carrier during their renewal period. Slightly over half are open to outreach anytime during the policy term. Almost one-third of policyholders would like to be contacted by their carrier both at renewal and during the policy term. Fewer than 14% are content with just a renewal notice.

Here’s the disconnect. Only 46% of respondents reported any personal contact from their carrier during their policy term, including renewal ―even though many are receptive to it, especially during renewal, when the vast majority of policyholders most want to hear from you. In fact, almost half of our respondents who shopped their insurance policy said their carrier’s failure to reach out to them influenced their decision to switch.

Who should reach out to whom?

While our study debunks the common myth that policyholders shy away from carrier contact and reveals that your policyholders do want to hear from you, there are a few caveats. One of them is, “I won’t contact my carrier. My carrier should contact me.” In fact, our research shows that almost half of policyholders are reluctant to contact their current carrier before switching to a new carrier. 18% of those who switched believe it’s the carrier’s responsibility to contact them instead.

But that’s not all. 19% of policyholders who didn’t contact their carrier before switching believed contact wouldn’t have made a difference. In other words, they were sure their carrier wouldn’t respond to their needs. Among those who shop, almost half who switch carriers are influenced to do so because their current carrier never reached out to them.

The message is clear. Connect with your policyholders, because they are waiting to hear from you. By upping your outreach and opening meaningful conversations with your policyholders, you can boost retention and create valuable, long- lasting relationships.

Engage with your policyholders…but on their terms

While it’s great news that policyholders want more engagement with their carriers― engagement that extends well beyond an automatic renewal notice, it’s not a green light for you to inundate them with irrelevant contact or content. Your customers want to engage with you, but they want that engagement to be meaningful and on their terms.

Most policyholders prefer to hear from you through email (90%), but quite a few Baby Boomers would also welcome a phone call (55%). Almost as many millennials are open to contact through a mobile app (43%). If you happen to know when policyholders are actively shopping, it’s good to know that the vast majority of those shoppers are okay with you reaching out within one to five days after they’ve received a competitor’s quote. However, they don’t want to be pestered. One post-quote outreach is enough for most policyholders.  

See also: How to Thrive in Auto Insurance

For carriers that have been reluctant to touch base with policyholders outside of the renewal period (and we suspect there are many), the message is―don’t be. But make sure you understand your target audience’s preferences first, then tailor your outreach to match those preferences.

What do your policyholders want to talk about when you reach out to them? More than you might think.

From increased coverage to bundling options to providing feedback that can help you improve your business, your policyholders are ready and willing to have important conversations with you. These critical conversations can lead to improved customer satisfaction, profitability, retention and successful upselling/cross-selling programs.