Tag Archives: micro-insurance

10 Predictions for Insurtech in 2017

It’s time to reflect on the passing year, mark my predictions from last year and throw some light on what I see 2017 holding in store.

In my post from this time last year, I made a number of predictions, so, now, I wanted to look at how I did. Feel free to jump in and see how close to the mark I was and share your perspectives.

Reviewing 2016 — How did I do?

1. Fintech and insurtech.  In last year’s piece, I said that 2015 was the year of the zone, loft, garage and accelerator and that this would continue in 2016 with more focus. Regarding fintech and insurtech, I was right. We have seen some heavyweight investment (more so in the U.S. and Asia) and no major failures, to my knowledge. Trending up. Points: 1. 

2. Evolution of IoT. In 2015, I wrote, “2016 will be the year we all realize (IoT) is just another data/automated question set.” Evolution here is continuing, but not at the pace I expected. New firms such as Concirrus (and many others) have come up with some great examples of managing and leveraging the ecosystem. Points 2.

3. Digital and data. At the end of last year, I said 2016 would continue to be a big area of growth for both. There’s been progress, yes, and pace and traction ahead of what’s expected. Points 3.

4. M&A will continue but will slow. I think this has slowed this year, with two of the three major regions in the latter half of the year focused on Brexit and the U.S. election. Now, folks are trying to work out where that leaves fintech/insurtech. Points 4.

5. Will the CDO Survive? I said I thought we’d see a move back to the chief customer officer. Well, no sign of my chief customer officers yet! (Although, after writing this, I came across three chief customer officers, so it’s a start). Have you ever asked an insurance company or people inside the company “who owns the customer?” To me, we’re still product-centric rather than customer-centric. Points 4.

6. New business models. I said last year that we’d need to be clear on what the new business model will be — and what it needs to be. This year, there’s been lots of talk in this area, including here at Deloitte in our Turbulence Ahead report. We identified four business models for the future: 1) Individualization of insurance, 2) Off-the-shelf insurance, 3) Insurance as utilities and, finally, 4) Insurance as portfolio. It may take longer for this to materialize, but, without doubt, these models are coming. See my colleague Emma Logan describe these here. Points 5.

7. What we buy and sell. I believed that, last year, we’d move away from a product mindset to become more relevant and convenient. But we’re still in talking mode, although the ideas here are evolving rapidly. Expect an all-risks policy in Q2 2017. Points 5.

8. Cyber is the new digital. There has been an increase in the number of products and players, but there still hasn’t been any personal cyber policy. I expect that to come in 2017 still. Points 6.

9. Partnerships and bundling. In 2015, I thought we’d see a big rise in the partnerships between insurers and third parties. That’s happened. Points: 7.

So I’m marking my 2015 predictions as 7/9 (or 78% ) — a good effort, but I may have been a bit too ambitious.

See also: 4 Marketing Lessons for Insurtechs  

Moving into 2017

Re-reading the above, I still feel all my predictions are valid, be it the end of the CDO, the birth of personal cyber or an all-risks policy. I’ve been involved in enough conversations over the last 12 months to say these are all very real, although some are closer to seeing the light of day than others.

Moving into 2017, here are my top 10 trends to watch:

  1. Speed. Almost all conversations about insurance start with a statement that we’re not moving quickly enough — from transforming and modernizing the legacy estates to quite simply getting products to market quicker. We can no longer wait six months to launch new or updated products. Look at those who managed to capitalize on Pokemon Go insurance cover. In insurance, we’ll move from fast walking to jogging and sprinting. But take caution: This is still a marathon, and there’s still a long way to go. In fact, as Rick Huckstep wrote recently, the sheer speed at which the insurance market has grown in the last 21 months is part of the challenge and attraction.
  2. AI, cognitive learning and machine learning. AI has been long bandied around as a material disruptor. On the back of collecting/orchestrating the data, it’s critical to drive material insight and intelligence from this and allow organizations, brokers and consumers to make subsequent decisions. In 2017, AI will come of age with some impressive examples, including voice. In 2016, we saw Amazon’s Echo and Google Home product launches, as well as some insurers — like Liberty Mutual — giving voice a try. Imagine asking freely, “Am I covered for…?” or, “What’s the status of my claim?” Adding this skill to the mix will likely be table stakes. In addition, AI will augment other solutions to drive value, e.g. robotic process automation, which I wrote about here. All this boils down to getting a better grip on the amazing data we have already while leveraging the vast open data sets available to us.
  3. Line of business focus shift. The insurtech world will make a definitive shift from all the wonderful personal line examples to SME (the next obvious candidate) and to more specialty and complex commercial examples. Will Thorne of the Channel Syndicate wrote a great piece on this in November. While the challenges are harder and more complex, I believe the benefits are greater once we get to them.
  4. Believers. The market has polarized somewhat between those who believe in major innovation and are pushing hard, and those who don’t (or have a different focus and near-term objectives). The range is from those who worry about the next 90 days/half-year results to those who are actively looking to cannibalize their business and investing to find the most efficient way to do this. Here, there’s no right or wrong, with hundreds of organizations strewn across the path. I still believe more will move to the cannibalization route as the first carriers start to unlock material value in 2017, including continued startup acquisition. Oliver Bate (Allianz) had an interesting and positive perspective on this during his company’s investor day in November.
  5. Scale and profitability. Over the last 12 to 18 months, I’ve seen some great startup organizations; internal innovation and disruption teams; VCs; and more. Now is the time to work out how we industrialize and scale these. This is the very same challenge the banking and fintech communities are going through. If you’re an insurance company with 30 million or 80 million global customers, should you be worried about Startup X that has 10,000 or 100,000 customers? If they do manage to scale, can they do so profitability? This reminds me of a recent article about how unprofitable Uber is, but, with millions of engaged customers, they have our attention now. Profitability will become front and center. In fact, Andrew Rear over at Munich Re Digital Partners put together a good post on what the company looks for and why he and the team chose the six they did.
  6. Orchestration. With all of these startups in insurtech, we’ll need to quickly understand what role they play. Are they a platform play, end product play, point disruptor or something else? Regardless, given the volume and velocity of data generation, the importance of both API connectivity and the ability to orchestrate it will increase dramatically. For me, these are table stakes.
  7. External disruptors. In the Turbulence Ahead The Future of General Insurance report released earlier this year, we identified six key external disruptors that are happening regardless of the insurance industry. These are 1) the sharing economy, 2) self-driving cars and ADAS, 3) the Internet of Things, 4) social and big data, 5) machine learning and predictive analytics, and 6) distributed ledger technology. The key for me within insurance is to identify what role we’ll play. I believe we’ll continue to firmly be the partner of choice for many given our societal and necessary position in the global economy.
  8. Micro insurance. Here, I specifically mean the growth of micro policies, covering specific risks for specific times. Whereas we typically annually see 1.1 policies per customer, we’ll see eight to 10 micro policies covering a shorter period (episodic or usage-based insurance) as per our business models described in the Turbulence Report. This will be true for all lines of business. We’ve already seen some great launches in this space — including Trov, which partnered with Munich Re in the U.S., AXA in the U.K. and SunCorp in Australia. There’s been global access through partnering with established players that has created a new way to market to the next generation. While we switch this on manually by swiping left and right (given some of the external disruptors and location based services), this will very much be automatic going forward. Insurers will need to find new ways to orchestrate, partner and find value to bring in clients. It won’t be just one policy, it will be many that they orchestrate to deliver clients everything they need.
  9. Blockchain and DLT. I almost didn’t include blockchain here, but two factors have led me to include this for the first time: 1) the number of requests we’re now seeing in the market for both specific solutions and more education/use cases and 2) the fact that nine of the 18 startups in the FCA’s new Sandbox are blockchain-related. In 2016, we saw lots of PoC examples, trials and the first live insurance product on the blockchain (see: FlightDelay). Some use cases are more developed than others, and some markets are more suitable than others (I’m still looking for good examples in personal lines), so I believe this will evolve in 2017 but that there won’t be scale breakthroughs. However, along with the World Economic Forum, I firmly believe that “The most imminent effects of disruption will be felt in the banking sector; however, the greatest impact of disruption is likely to be felt in the insurance sector.” We still must ask, “why blockchain?” Just because you can use it? It needs to be the right solution for the right business problem. Horizontal use cases such as digital identity or payments offer compelling use cases that can easily be applied within insurance. In many ways, blockchain, for me, feels much more like an infrastructure play in the same way we would do core systems transformation (policy, claims, billing, finance, etc.)
  10. Business as usual — for now! Partly related to No. 4, we still need to run our business. How we do this and how we set up for the future will be another challenge — not just from a technology perspective but from a people and organization design perspective. (How we work, collaborate and more.) What are the transition states from our current models to a new world in 12, 24 or 36 months. Forward-thinking organization are putting plans in place now for their organizations in the years to come. This will become more important as we embed, partner and acquire startups and move toward new ways of engaging and working with customers.

Interestingly, there are now also so many accelerators, garages, hubs, etc. that startups all now have a lot of choices regarding where to incubate and grow. This presents a whole new challenge on the rush to insurance disruption.

See also: Asia Will Be Focus of Insurtech in 2017  

Finally, there are two other observations I wanted to share:

  1. China. While I don’t spend any time in China, it’s hard not to be in awe of what is going on — specifically, the speed and scale at which things are happening. China’s first online insurer, Zhong An, did an interview with Bloomberg regarding what the company is doing with technology (including blockchain) and, more importantly, its scale ($8 billion market cap in two years, 1.6 billion policies sold) — and the only concern from the COO, Wayne Xu, is that the company isn’t moving quickly enough! Step away from this and look further to what’s happening with disruption in general with Alipay and others from the BAT (China’s equivalent of GAFA — Baidu, Alibaba and Tencent) is simply amazing. There’s a good FT article on Tencent, the killer-app factory, and the sheer speed and scale of disruption.
  2. Community. The global insurtech (and fintech) community is an amazing group of people from around the world who have come together across borders and time zones to further challenge and develop the market. Each geography has its own unique features, mature players, startups, labs, accelerators, regulators and, of course, independent challenges. We don’t always see eye to eye, which makes it all that more rewarding because you’re challenged by industry veterans and outside-thinking entrepreneurs. This year’s InsureTech Connect in Las Vegas with more than 1,600 people was truly amazing to see. Things have clearly moved far beyond a small isolated hive of activity with varying levels of maturity to a globally recognized movement. It was great to meet and to see so many carriers, startups, VCs, regulators and partners looking to further the conversation and debate around insurance and insurtech. This community will, no doubt, continue to grow at a fast pace as we look for insurtech successes, and I look forward to seeing how the 2017 discussion, debate and collaboration will continue.

As always, I look forward to your feedback! What I have I missed?

Here’s to an exciting 2017!

A Word With Shefi: Applebaum at ISG

This is part of a series of interviews by Shefi Ben Hutta with insurance practitioners who bring an interesting perspective to their work and to the industry as a whole. Here, she speaks with Stephen Applebaum, managing partner, Insurance Solutions Group, and senior adviser at StoneRidge Advisors, who describes the implications of the “torrents of data that will flow from connected cars, homes, buildings and people.”

To see more of the “A Word With Shefi” series, visit her thought leader profile. To subscribe to her free newsletter, Insurance Entertainment, click here.

Describe what you do in 50 words or less:

I provide consulting and advisory services to participants across the North American auto and property insurance ecosystem, which leverage my experience, industry contacts and understanding of innovation and emerging technologies to drive meaningful, measurable improvement in revenue, market share, process, profitability and user and customer experience.

What led you to your career in insurance?

Serendipity, actually. An early management consulting engagement with a technology-based startup providing insurance claims solutions to P&C carriers led to a full-time operational and management role and ultimately a very exciting and rewarding 30-year career spanning several different companies that continues today.

What emerging technology will change how insurance is sold?

Prescriptive analytics applied to the torrents of data that will flow from connected cars, homes, buildings and people – enabled by mobile devices and embedded sensors – will transform virtually every aspect of how insurance products are developed, priced, packaged and sold, and how risk is managed in general.

A carrier you highly value for its innovative culture?

Among the many top-tier carriers that have invested in and developed innovative cultures, USAA stands out because of its highly focused and fierce dedication to pursuing constant improvement and technological innovation in the pursuit of providing superior service excellence to its “members” in insurance as well as the full range of its financial services.

You recently published an article on “Disruption in the Automotive Ecosystem.” What tip do you have for companies looking beyond their core value to offer innovative solutions in the auto ecosystem?

I suggest that auto insurance carriers focus on leapfrogging current incremental innovation around connected vehicle and data technologies and begin designing and developing the auto insurance products and services of the future. These will likely be very different than anything offered today and will be enabled by enormous amounts of data flowing from not just connected cars but the broader Internet of Things. They may include personalized, utilization-based micro auto insurance coverages, ride-and-car sharing insurance solutions for owners, drivers and passengers, risk management services from behavioral driving modification assistance to location-based and contextual alerts for commercial favorites as well as navigational, traffic, roadside assistance and weather conditions.

You’ve had more than 25 years of consulting experience in the P&C space. What piece of advice have you found to always be relevant regardless of the subject matter?

I regularly ask myself, “What am I doing, and why am I doing it, and is this the best possible use of my time and talents?” It sounds so simplistic, but if you do it honestly you will find it very valuable.

You are a frequent chairman in industry conferences. In fact, you are the chairman of a coming event on IoT in Miami in December. Who should be attending and why?

Anyone who plans to work, invest and succeed anywhere in the insurance ecosystem over the next decade and beyond should attend. This includes insurance C-level executives, heads of innovation, strategy, claims and innovation, underwriting, business development, product development, strategy, design and innovation, heads of IT, technology and digital, IoT technology companies and startups and regulators.

When you are not consulting on insurance or hosting insurance events, you are most likely…?

Reading, watching and listening to anything and everything that relates to my work – which is, in fact, also my hobby.

Insurance at a Tipping Point (Part 2)

This is the second in a series of three articles. The first is here.

With the entire insurance industry at a tipping point, where many of the winners and losers will be determined in the next five to 10 years, it’s important to think through all the key strategic factors that will determine those outcomes. Those factors are what we call STEEP: social, technological, environmental, economic and political.

In this article, we’ll take a look at all five.

Social: The Power of Connections

The shifts in customer expectations present challenges for life insurers, many of which are caught in a product trap in which excessive complexity reduces transparency and increases the need for advisers. This creates higher distribution costs.

A possible solution lies in models that shift the emphasis from life benefits to promoting health, well-being and quality of life. In a foretaste of developments ahead, a large Asian life insurer has shifted its primary mission from insurance to helping people lead healthier lives. This is transforming the way the company engages with its customers. Crucially, it’s also giving a renewed sense of purpose and value to the group’s employees and distributors.

Further developments that could benefit both insurers and customers include knowledge sharing among policyholders. One insurer enables customers to share their health data online to help bring people with similar conditions together and help the company build services for their needs. Similarly, a DNA analysis company provides insights on individual conditions and creates online communities to pool the personal data of consenting contributors to support genetic studies.

A comparable shift in business models can be seen in the development of pay-as-you-drive coverage within the P&C sector. In South Africa, where this model is well advanced, insurers are realizing higher policyholder retention and lower claims costs.

This kind of monitoring is now expanding to home and commercial equipment. These developments are paving the 
way for a move beyond warranty or property insurance to an all-’round
 care, repair and protection service. These offerings move the client engagement from an annual transaction to something that’s embedded in their everyday lives. Agents could play
 an important role in helping to design aggregate protection and servicing.

In banking, we’ve seen rapid growth in peer-to-peer lending; the equivalent in insurance are the affinity groups that are looking to exercise their buying power, pool resources and even self-insure. While most of the schemes cover property, the growth in carpooling could see them play an increasing role within auto insurance.

Technological: Shaping the Organization Around Information Advantage

More than 70% of insurance participants in our 2014 Data and Analytics Survey say that big data or analytics have changed the way they make decisions. But many insurers still lack the vision and organizational integration to make the most of these capabilities. Nearly 40% of the participants in the survey see “limited direct benefit to my kind of role” from this analysis, and more than 30% believe that senior management lacks the necessary skills to make full use of the information.

The latest generation of models is 
able to analyze personal, social and behavioral data to gauge immediate demands, risk preferences, the impact of life changes and longer-term aspirations. If we look at pension planning, these capabilities can be part of an interactive offering for customers that would enable them to better understand and balance the financial trade-offs between how much they want to live off now and their desired standard of living when they retire. In turn, the capabilities could eliminate product boundaries as digital insights, along with possible agent input, provide the basis for customized solutions that draw together mortgages, life coverage, investment management, pensions, equity release, tax and inheritance planning. Once the plan is up and running, there could be automatic adjustments to changes in income, etc.

Reactive to preventative

The increasing use of sensors and connected devices as part of the Internet of Things offers ever more real-time and predictive data, which has the potential to move underwriting from “what has happened” to “what could happen” and hence more effective preemption of risks and losses. This in turn could open up opportunities for insurers to gravitate from reactive claims payer to preventative risk adviser.

As in many other industries, the next frontier for insurers is to move from predictive to prescriptive analytics (see Figure 2). Prescriptive analysis would help insurers to anticipate not only what will happen, but also when and why, so they are in a better position to prevent or mitigate adverse events. Insurers could also use prescriptive analytics to improve the sales conversion ratio in automated insurance underwriting by continually adjusting price and coverage based on predicted take-up and actual deviations from it. Extensions of these techniques can be used to model the interaction between different risks to better understand why adverse events can occur, and hence how to develop more effective safeguards.

figure-2

Environmental: Reshaping Catastrophe Risks and Insured Values

Catastrophe losses have soared since the 1970s. While 2014 had the largest number of events over the course of the past 30 years, losses and fatalities were actually below average. Globally, the use of technology, availability of data and ability to locate and respond to disaster in near real-time is helping to manage losses and save lives, though there are predictions that potential economic losses will be 160% higher in 2030 than they were in 1980.

Shifts in global production and supply are leading to a sharp rise in value at risk (VaR) in under-insured territories; the $12 billion of losses from the Thai floods of 2011 exemplify this. A 2013 report by the UN International Strategy for Disaster Reduction (UNISDR) and PwC concluded that multinationals’ dependencies on unstable international supply chains now pose a systemic risk to “business as usual.”

Environmental measures to mitigate risk

Moves to mitigate catastrophe risks
 and control losses are increasing. Organizations, governments and UN bodies are working more closely to share information on the impact of disaster risk. Examples include R!SE, a joint UN-PwC initiative, which looks at how to embed disaster risk management into corporate strategy and investment decisions.

Governments also are starting to develop plans and policies for addressing climatic instability, though for the most part policy actions remain unpredictable, inconsistent and reactive.

Developments in risk modeling

A new generation of catastrophe models is ushering in a transformational expansion in both geographical 
breadth and underwriting applications. Until recently, cat models primarily concentrated on developed market peak zones (such as Florida windstorm). As the unexpectedly high insurance losses from the 2010 Chilean earthquake and the 2011 Thai floods highlight, this narrow focus has failed to take account of the surge in production and asset values in fast-growth SAAAME markets (South America, Africa, Asia and the Middle East). The new models cover many of these previously non-modeled zones.

The other big difference for insurers is their newfound ability to plug different analytics into a single platform. This offers the advantages of being able to understand where there may be pockets of untapped capacity or, conversely, hazardous concentrations. The result is much more closely targeted risk selection and pricing.

The challenge is how to build these models into the running of the business. Cat modeling has traditionally been the preserve of a small, specialized team. The new capabilities are supposed to be easier to use and hence open to a much wider array of business, IT and analytical teams. It’s important to determine the kind of talent needed
 to make best use of these systems, as well as how they will change the way underwriting decisions are made.

Emerging developments include new monitoring and detection systems, which draw
 on multiple fixed and drone sensors.

Challenges for evaluating and pricing risk

Beyond catastrophe risks are disruptions to asset/insured values resulting from constraints on water, land and other previously under-evaluated risk factors. There are already examples of industrial plants that have had to close because of limited access to water.

Economic: Adapting to a Multipolar World

Struggling to sustain margins

The challenging economic climate has 
held back discretionary spending on life, annuities and pensions, with the impact being compounded by low interest rates and the resulting difficulties in sustaining competitive returns for policyholders. The keys to sustaining margins are likely to be simple, low-cost, digitally distributed products for the mass market and use of the latest risk analytics to help offer guarantees at competitive prices.

The challenges facing P&C insurers center on low investment returns and a softening market. Opportunities to seek out new customers and boost revenues include strategic alliances. Examples could include affinity groups, manufacturers or major retailers. A further possibility is that one of the telecoms or Internet giants will want a tie-up with an insurer to help it move into the market.

More than 30% of insurance CEOs
 now see alliances as an opportunity to strengthen innovation. Examples include the partnership between a leading global reinsurer and software group, which aims to provide more advanced cyber risk protection for corporations.

Surprisingly, only 10% of insurance CEOs are looking to partner with start- ups, even though such alliances could provide valuable access to the new ideas and technologies they need.

SAAAME growth

Growth in SAAAME insurance markets will continue to vary. Slowing growth 
in some major markets, notably Brazil, could hold back expansion. In others, notably India, we are actually seeing a decline in life, annuity and pension take-up as a result of the curbs on commissions for unit-linked insurance plans (ULIP). Further development in capital markets will be necessary to encourage savers to switch their deposits to insurance products.

As the reliance on agency channels adds to costs, there are valuable opportunities to offer cost- effective digital distribution. Successful models of inclusion include an Indian national health insurance program, which is aimed at poorer households and operates through a public/private partnership. More than 30 million households have taken up the smart cards that provide them with access to hospital treatment.

The already strong growth (10% a year) in micro-insurance is also set to increase, drawing on models developed within micro-credit. The challenge for insurers is the need to make products that are sufficiently affordable and comprehensible to consumers who have little or no familiarity with the concept of insurance.

Rather than waiting for a market-wide alignment of data and pricing, some insurers have moved people onto the ground to build up the necessary data sets, often working in partnership with governments, regional and local development authorities and banks and local business groups.

Urbanization

The urban/rural divide may actually be more relevant to growth opportunities ahead than the emerging/developed market divide. In 1800, barely one in 50 people lived in cities. By 2009, urban dwellers had become a majority of the global population for the first time. Now, every week, 1.5 million people are added to the urban population, the bulk of them in SAAAME markets.

Cities are the main engines of the global economy, with 50% of global GDP generated in the world’s 300 largest metropolitan areas. The result is more wealth to protect. Infrastructure development alone will generate an estimated $68 billion in premium income between now and 2030. Urban citizens will be more likely to be exposed to insurance products and have access to them. Urbanization is also likely to increase purchases of life, annuities and pensions’ products, as people migrating into cities have to make individual provision for the future rather than relying on extended family support.

Yet as the size and number of mega-metropolises grow, so does the concentration of risk. Key areas of exposure go beyond property and catastrophe coverage to include the impact of air pollution and poor water quality and sanitation on health.

Tackling under-insurance

A Lloyd’s report comparing the level 
of insurance penetration and natural catastrophe losses in countries around the world found that 17 fast-growth markets had an annualized insurance deficit of $168 billion, creating threats to sustained economic growth and the ability to recover from disasters.

Political: Harmonization, Standardization and Globalization of the Insurance Market

Government in the tent

At a time when all financial services businesses face considerable scrutiny, strengthening the social mandate through closer alignment with government goals could give insurers greater freedom. Insurers also could be in a stronger position to attract quality talent at a time when many of the brightest candidates are looking for more meaning from their chosen careers.

Government and insurers can join forces in the development of effective retirement and healthcare solutions (although there are risks). Further opportunities include a risk partnership approach to managing exposures that neither insurers nor governments have either the depth of data or financial resources to cover on their own, notably cyber, terrorism and catastrophe risks.

Impact of regulation

Insurers have never had to deal with an all-encompassing set of global prudential regulations comparable to the Basel Accords governing banks. But this is what the Financial Stability Board (FSB) and its sponsors in the G20 now want to see as the baseline requirements for not just the global insurers designated as systemically risky, but also a tier of internationally active insurance groups.

The G20’s focus on insurance regulation highlights the heightened politicization of financial services. Governments want to make sure that taxpayers no longer have to bail out failing financial institutions. The result 
is an overhaul of capital requirements 
in many parts of the world and a new basic capital requirement for G-SIIs. The other game-changing development is the emergence of a new breed of cross-state/cross-border regulator, which has been set up to strengthen co-ordination of supervision, crisis management and other key topics. These include the European Insurance and Occupational Pensions Authority (EIOPA) and the Federal Insurance Office (FIO) in the U.S.

Dealing with these developments requires a mechanism capable of looking beyond basic operational compliance at how new regulation will affect the strategy and structure of the organization and using this assessment to develop a clear and coherent company-wide response.

Technology will allow risk to be analyzed in real time, and predictive models would enable supervisors to identify and home in on areas in need
 of intervention. Regulators would also be able to tap into the surge in data and analysis within supervised organizations, creating the foundations for machine-to-machine regulation.

A more unstable world

From the crisis in Ukraine to the rise of ISIS, instability is a fact of life. Pressure on land and water, as well as oil and minerals, is intensifying competition for strategic resources and potentially bringing states into conflict. The ways these disputes are playing out is also impinging on corporations to an ever-greater extent, be this trade sanctions or state-directed cyber-attacks.

Businesses, governments and individuals also need to understand the potential causes of conflict and their ramifications and develop appropriate contingency planning and response. At the very least, insurers should seek to model these threats and bring them into their overall risk evaluations. For some, this will be an important element of their growing role as risk advisers and mitigators. Investment firms are beginning to hire ex-intelligence and military figures as advisers or calling in dedicated political consultancies as part of their strategic planning. More insurers are likely to follow suit.

The final article in this series will look at scenarios that could play out for insurers and will lay out a way to formulate an effective strategy. If you want a copy of the report from which these articles are excerpted, click here.

Microinsurance Has Macro Future

“‘We’ll all be rooned,’ said Hanrahan….”

So goes the famous Australian bush poem by John O’Brien about the plight of farmers going from drought to flood to bush fire – one extreme weather situation after another. And though we are nearly 100 years on since that poem was written, we seem to be no further along in being able to predict weather with any certainty more than a few days into the future. In fact, extreme weather seems to be hitting more frequently and with greater ferocity because of the apparent effects of global climate change. The extended 2013 winter in Europe cost the economy there more than $7 billion – that is just from being cold for a month longer than usual.

Extreme weather events have dominated the headlines, especially where they impinge on highly developed insurance markets such as North America and Europe. But from the perspective of the impact on human lives, the greatest risk lies in Asia and Africa, where a vast majority of people depend upon subsistence farming and there is very little penetration of traditional financial services. A number of governments in the region, in partnership with semi-government, educational institutions and private organizations, have established a range of programs to foster the development of sustainable microfinance and microinsurance services for the most at-risk segments of their communities. In India alone, there are more than 700 million farmers and farm workers who struggle with extreme weather risk every season.

Building sustainable programs, now there’s the trick!

In one program in India that ran from the mid-’80s through to the end of the twentieth century, the cumulative premiums were $80 million, while the cumulative claims were $461 – hardly a sustainable proposition. In another program, a World Bank study showed that the microinsurance proposition was advantageous to farmers only in very extreme situations, so in most cases it was uneconomic for farmers to buy the insurance.

From 2001, the Indian government has ensured the growth of microinsurance through a regulatory framework set up as part of the entry of private insurers into the market. Popular products in the sector are weather index policies, where payouts occur if rainfall is below a trigger level, in a particular area. The premium for these types of policy have proven to be expensive, but, with government subsidies and an education program, awareness and acceptability of this kind of financial service have grown in communities in rural India. Governments in China, Bangladesh, Indonesia and the Philippines are following suit, by introducing their own agricultural insurance programs.

The major problem for insurers writing this kind of business is getting a good handle on the risk, to enable correct pricing. For the most part, insurers have to rely on historical data, which really only establishes a wide range of outcomes; with extreme weather trends continuing, insurers tend to be very conservative in risk pricing.

This is where big data and analytics come in.

In the commodities sector, at least one player has marketed reports that help predict the price of commodity futures. A case in point is the recent U.S. drought. By using National Oceanic and Atmospheric Administration (NOAA) and NASA remote Earth-sensing data, and coupling with advanced climate predictive analytics, the U.S. drought was predicted three months in advance of the U.S. government’s declaring drought. The model enabled the assessment of the weather impact on particular areas of the U.S., as well as the impact on the particular commodity crop grown in that area (corn), and, consequently, a prediction of the price of the commodity at harvest time based on the expected overall yield, with drought factored in.

Currently more than 15 petabytes of public data is produced annually that is global in nature, and the amount of data is set to increase to more 300 petabytes as more satellites come on line over the next few years. The computing power and technology to cope with huge data sets continues to improve each year with big data solutions.

These rich data sources and new technology solutions represent an unparalleled opportunity for governments and communities to turn microinsurance from a subsidized, unprofitable activity, to a sustainable model to spread economic stability and prosperity. By enabling the weather risk to be more accurately modeled, underwriters will be able to price policies on a more accessible basis.

Studies are showing that, where microinsurance is in operation, microfinancing is supported, as farmers can have certainty around being able to meet their loan commitments. These financial services are being used by farmers to improve their farms’ yield by investing in appropriate weather risk mitigation (irrigation, soil moisture conservation, etc) and productivity enhancements (planting automation, genetically modified seeds, fertilizers, improved pest control, etc). This virtuous cycle lifts this sector from depending on subsidies and government programs to being commercially viable and self sustaining. Definitely a win, win, win proposition.

Far from the pessimistic, doom-mongering of Hanrahan, I see a world more in line with Peter Diamandis’s vision as outlined in his book Abundance: The Future Is Better Than You Think.

I don’t know about you, but I for one would love the bragging rights to say my industry is helping to improve the lives of billions on planet Earth, while still making a commercially reasonable profit.

Hey, I wonder if it’s going to rain today?