Tag Archives: risk mitigation

Telematics: No Longer Just For Cars

The use of telematics in car insurance isn’t new. For the past few years, more and more drivers have been signing up to have little black boxes installed in their cars that monitor their driving behavior, as insurance companies offer incentives such as lower premiums and discounted rates for safe drivers.

By allowing insurers to track their driving behaviors – including average speed, braking force and distance driven – drivers are able to negotiate lower premiums and other benefits, which many view as a fairer and less discriminatory way of assessing risk.

From a commercial point of view, if we can promote and encourage safer driving on the road then the number of crashes will come down, and the cost to the insurance industry will reduce accordingly – and those savings will be passed on to the public.

Premiums for 17-year-olds with telematics boxes are half what they were four years ago overall, and statistics suggest accident rates within this age bracket are also coming down. Technology, and technology-enabled propositions, have really reduced claims costs, especially for young drivers.

“Black box insurance” has other benefits, too. Many insurers also offer free anti-theft tracking and roadside assistance through the device, and so far RSA has a 100% return rate on stolen vehicles that have a telematics device fitted.

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Enter the era of the smart home

With the benefits of telematics so clearly proven within the automotive industry, insurers are now turning their focus to the residential realm – in a bid to create “smart homes” that are intuitive and responsive to internal and external risks.

For many homeowners, the ability to control their climate, lighting and entertainment devices is one of the main attractions when it comes to home telematics, whereas insurers are drawn to the security benefits offered.

Luckily, telematics-based home insurance offers both parties the best of both worlds – convenience and risk mitigation, all in one handy tech-savvy package.

Smart home = smarter home insurance?

Just as black boxes in cars reward safe driving behaviors with lower premiums and discounts, smart home owners could reap the benefits of a connected abode. From discounts for locking the door and setting the alarm, to a fairer, up-to-date assessment based on moisture, flooding or carbon monoxide monitoring, home telematics can give consumers more control over their insurance rates and premiums, as well as a more in-depth understanding of their utilities usage, environmental risks and overall home security.

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In fact, smart home technology-based insurance has the potential to improve on existing discounts or lower premiums for features like security systems – simply by ensuring that these features are regularly used.

With people buying smart switches and systems, insurers are looking initially for propositions that help reduce the impact, even eliminate, some claims around water, theft and fire.

What’s next, connected pets?

It may seem like a sci-fi fantasy, but telematics for pets is set to be the next game-changer in the insurance industry, which is no surprise given that around 2.6 million people in the U.K. have pet insurance.

Pets are seen as part of the family, and owners spend a considerable amount on maintaining their furry best friends’ health, well-being and fitness. But how do we keep an extra close eye on our four-legged friends when we don’t speak their language?

Pet telematics: Going beyond the microchipping process

It’s not as disturbing or invasive as it sounds. All it takes for pets to join the telematics generation is a small GPS device – which is clipped to a collar or inserted under the dog’s skin to record its movements and activities throughout the day.

When paired with a smartphone app, this safe, easy technique allows owners and insurers to monitor pets’ body temperatures, hormones and heart rates, with some even going as far as tracking bowel movements – and this data is collated to form a comprehensive picture of a pet’s health and lifestyle.

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Pet insurance is really a well-being product – private medical insurance for cats and dogs, effectively. Pet obesity results in a lot of claims, so if pet telematics can encourage owners to have healthier, more active pets, he’s for it.

What’s in it for consumers? 

The use of telematics in everyday life and activities puts consumers in the driver’s seat when it comes to their insurance policies and premiums. By having access to detailed data on their driving, home security and pet care, ordinary consumers can become more aware of the risks around them, which could spur them to change or improve their behavior.

People want to be healthy and happy, and not have to deal with the aftermath of an insurance event. The common thread across telematics is that technology creates proposition that either prevent or minimize the impact of claim events.

What about privacy concerns?

While many customers may balk at the thought of having their lives monitored, a recent Deloitte survey has shown that more than half of respondents were willing to share private information for a premium discount. This shows that, although privacy concerns remain top of mind for most, a sizable incentive can override that resistance to transform consumers into adopters. See the Deloitte report here.

What’s in it for insurers?

Telematics enables insurers to create products and services that accurately reflect customers’ risk.

Perhaps that explains why telematics has become increasingly popular among consumers and insurers over the past few years. A study by ABI research estimates that global insurance telematics subscriptions could exceed 107 million in 2018, up from 5.5 million at the end of 2013. It also predicts that usage-based insurance will represent more than 100 million telematics policies and generate in excess of €50 billion in premiums globally by 2020.

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Telematics can move insurers from dealing with incidents, to stopping those incidents from being as bad as they could otherwise be. Using technology lets insurers move into that prevention mitigation space.

This article originally appeared on www.rsagroup.com/the-thread.

Reimagining Insurance in 2016

After more than 20 years in the insurance industry, working on three continents in various product lines and capacities, I have seen many changes occur alongside a notable constant: Insurance consumers want to pay less, and insurance company returns don’t satisfy shareholders.

Therein lies the rub. The conventional way to increase returns has been for insurers to increase premiums (based on what is presumed to be a fixed risk level), but that approach is contrary to the client’s desire. Yes, insurers also look to improve operational efficiency and claims handling, but those efforts are yielding diminishing returns.

Why not take a different tack and really focus our efforts on reducing the cost of risk? We’d then diminish the tension between insurers and their clients. Client premiums would drop, and insurers’ profitability would rise.

Like many, I believe that insurance is on the cusp of dramatic change. Insurers that thrive will put risk reduction at the forefront of their value proposition. That risk reduction will translate into lower premiums for diminished risk. Clients, and society at large, will be the ultimate winners.

The increasing availability and variety of data, more sophisticated tools to extract insights from that data and technology to cost-effectively support risk reduction will fuel this evolution. Insurers will need to rebalance their resource deployment away from the evaluation of risk for the purpose of assuming liability (underwriting) to the evaluation of risk for the purpose of reducing risk (risk consulting). Clients will come to expect insurers to provide advice on actions they can realistically employ AND the savings they will be guaranteed if they take those actions.

Whether change displaces current insurers or they evolve remains to be seen. Some insurance executives see a future of insurance that delivers a different value proposition to clients. We see a value proposition that primarily focuses on reducing the cost of risk. Insurers will increasingly supplement expertise with data, analysis and technology focused on reducing the cost of risk. They see a future where the industry unlocks the insights in insurers’ own data, integrates external sources as they become available and closes information gaps that exist. They see a future where clients are empowered with clear, objective risk measures that allow them to control their risk level … and their premiums.

In this future, insurers become tech companies where the insurance policy covers the limited remaining risks and in essence serves as a warranty of the risk services provided.

My discussions leave me optimistic that there are like-minded executives who see a different value proposition for insurers. But most I have spoken with draw the conclusion that neither their company nor any they know has the critical mass of support necessary to drive change.

To adapt and stay viable, insurance companies need to think about how evolutions in technology and data science can benefit clients and reshape business models. My goal is to encourage that debate.

I’ll be introducing a topic and perspective every other week that will focus generally on evolutions in the industry and the power of technology to transform the way risk is quantified, along with associated pitfalls. Each piece will conclude with a polling question and, depending on the volume of response, these results will be published.

Coming topics will include:

New Data and New Tools: When we think of data, most think of text and numbers that has been organized. By expanding our thinking, we can add satellite imagery, sensor-derived data, the Internet of Things (IoT), traffic cameras, customer service phone call recordings, pictures and many other potentially valuable sources. Imagine being able to analyze traffic light cameras to understand real-time risk at intersections. Imagine crowdsourcing the analysis of satellite and aircraft imagery to identify properties affected by natural disasters. Imagine being able to review a snapshot of a damaged automobile and adjust many claims without human intervention. Research, and in some case practical applications, exist in these and many other areas. We need to identify the information we need to know to understand risk and then either find the data that will help us or create our own. How do we ensure that the insurance industry is at the forefront of collecting, generating, integrating and analyzing all forms of data to drive deeper insights?

Data, Data Everywhere but Not a Drop for (Clients) to Drink: Every insurance company collects and generates a tremendous amount of data. Some of that data is structured; a much larger volume is memorialized in pdf files, pictures and customer service call recordings. While potentially useful for clients, the data is rarely made available at all and even more rarely in a format that provides insights. Insurers are investing in using that information to drive better claims outcomes, better risk segmentation and better internal processes. Clients expect to benefit from insurers’ resources but generally don’t get the insight they need to effect change. What would it mean if we insurers transformed our business model so that data-driven insights and risk mitigation strategies replace risk transfer as the core of value proposition?

Risk Mitigation Strategies and New Technologies: Imagine being able to identify the moment a risky behavior is occurring and having the ability to automatically intervene or alert the appropriate person. In some realms, that possibility already exists. Applications exist to alert drivers to their own risky behavior. Active technology exists to automatically apply the brakes to prevent collisions. Yet even where appropriate data exists, insurers are hesitant to make definitive recommendations based on specific technologies. Insurers are unique in that they price risk and ensure the realization of financial benefits from investments in risk reduction. Should we as an industry more actively become creators or advocates of risk technology? Can we have enough faith in our recommendations to integrate benefits immediately in prices? Does the traditional insurance policy become a form of warranty that our risk advisory services are effective?

Transparent Risk Indices: We are about to enter an information age where it is possible to quantify risk objectively in real-time. Creating risk indices, making them transparent and using them as the basis for establishing price would give clients confidence in the objectivity of the process and confidence that if they invest in changing those indices they will immediately get the benefit. The indices will also give non-insurance risk capital providers the opportunity to deploy capital against and trade risks that previously lacked the transparency. What can we learn from other financial services that have developed transparent risk indices that allowed capital to be deployed against those risks from a wider variety of sources?

How Connected Cars Will Change Claims

There is a long road ahead before the full potential of telematics is reached, but, from an international perspective, it is clear that the Italian market has already accumulated the greatest experience in the use of telematics within the auto insurance value chain. One of the key characteristics of the Italian experience is the capacity of certain companies to innovate the way in which they deal with claims-thanks to the data collected from the black box.

The benefits of telematics data for handling claims are significant and can be divided into three main categories: a proactive approach, objective information and loss prevention and mitigation.

First, telematics offers insurance companies the unique opportunity to assume an active role that starts immediately after the incident. Traditionally, the company would wait to hear from the insured person that a crash has occurred.

Based on my experience, one aspect that turns out to be key to setting up the telematics approach is that it provides real-time data about the incident to the people in charge of claims management. Usually, this information only reaches the insurance company’s assistance department. This data is crucial for two subsequent processes:

  1. Provide a great customer experience after the crash. Think of how much information can be gathered directly from telematics data without having to ask the client for it. The whole experience delivered to the customer when interacting with the company is becoming more and more important; recent net promoter score studies show that the economic value of a “promoter client” is more than two times higher than a “detractor.”
  2. Anticipate activation of claims management. For example, the insurer can guide the client toward the preferred auto repair centers right after the accident. This maximizes the capacity to achieve savings within the context of an optimized customer experience that is meant to solve the customer’s issues.

Second, telematics makes it possible to gather a structured set of objective data that can improve the understanding of the dynamics of the claim. The data can also provide an estimate of the damage. This information improves the decision-making capacity of the claims management process. It also assists the claims manager in searching for detailed information (such as additional inspections), which further reduces the time required. The information extracted from telematics data is the main factor that improves the efficiency and effectiveness of the liquidation process. Last but not least, this information is highly valuable from a legal point of view.

These two characteristics combined allow a significant reduction of the time spent in managing the different phases of the claims process-time that has proven to be directly related to the amount the company pays. Separating the knowledge supplied by the telematics (regarding the dynamics of the claims event in the case of minor damage) and combining it with the final claim cost by car brand and model will allow the company to make a liquidation proposal just a few hours after the crash. On the one hand, there is a clear benefit in terms of costs; on the other hand, there is a significant improvement of the driver’s user experience.

Third, loss prevention and mitigation was the first area explored when telematics pilot projects began in Italy, with the focus on recovering stolen vehicles. Big data analysis has enhanced this capacity by allowing the automatic identification (based on data received from the telematics device) of a driving style that differs from that of the car’s owner.

This mitigating capacity no longer concerns only the professionally installed solutions. It has now partially extended to new self-installing solutions: The act of uninstalling the device activates an alert. Similarly, there is the value-added services option that mitigates the risks linked to the driver and his car. For example, weather condition alerts or vehicle maintenance notifications could help influence client behavior and lead to a lower risk rate for the driver.

Resolutions

The 1 Resolution for Insurers in 2015

Less than 10% of people keep their New Year’s resolutions for at least six months, according to research from Cancer Research UK, with half breaking their resolutions within a fortnight, blaming a lack of will power. 20% planned to cut back on alcohol, others to spend less money (34%), cut down on chocolate (21% and go to the gym (22%).

New Year’s resolutions aren’t just for individuals, though. They can also be found in the annual reports of most companies, including insurers, when they set out their strategic objectives for the coming year. Sadly, most insurers say the same thing, even if different language is used: reduce costs, improve efficiency, grow, focus improve service. There’s a more than reasonable chance that they will be saying the same things next year, as well.

Delivering against strategy objectives is as much a matter of leadership as it is of planning. I wonder how many business leaders are also abject failures in keeping their New Year’s resolutions? After all, a leopard doesn’t change its spots.

Maybe the answer is to set up a project team and delegate some responsibilities. I imagine an interesting conversation in the office: “Jim, I’ve decided that your role this year is to give up chocolate for me….”

Maybe it’s about having an incentive? Insurers might say to a policyholder that they will give a 20% discount on premiums if the policyholder gives up booze. Such a discount, coupled with the money saved, could be a compelling argument. And, after all, isn’t that what user-based insurance is fundamentally about?

I wonder: Will future insurance models need to have greater alignment between risk mitigation plans of insurers and personal behavior of the individual? I suspect we are already close to having that capability, as insurers increasingly use analytics to understand their customers and create more compelling offers at renewal. Can’t we extend that thinking?

So here’s a challenge for insurers – not to promise the same old stuff but rather to make a single big resolution for their organization which will be differentiating, ambitious, maybe even bold! Perhaps insurers need to look into the crystal ball and imagine not only themselves, but also the industry in 2030, and start to realize how different the insurance business will be by then. And then, in 2015, do “just one thing” of significance to take them along that journey.

As for me and my resolution? I asked a friend what she thought I needed most, and she suggested a visit to the opera, on the basis that it’s apparently good for the soul. How I see myself, and how she saw me, are apparently different. Isn’t that the same for all of us, and for the insurance industry as a whole?

I’ll tell you when I’ve been to the opera!

How to Apply ERM to Cyber Risks

The advent of new technologies has enabled risk stakeholders to perform enhanced data analytics to gain more insights into the customer, risk assessment, financial risk management and quantification of operational risk.

Companies manage many risks aligned to their risk profile and risk appetite. They do so by risk awareness and risk assessment. The visionaries and early adopters do so dynamically by use of mathematics (stochastically or actuarially) and simulations for the future based on the historical loss data to correlate all the risks of the enterprise into one holistic view. Factors to consider include:

Cyber risk. Operational risk affects every organization on an equal basis and is often quantified as a percentage of gross written premiums. Cyber risks are no different from any other risk in terms of risk management and risk transfer. However, IT departments, even with the best of intentions, can increase  cyber risk by their strategy — and there is no silver bullet to protect the company. Keyless signature infrastructure (KSI) enables companies to plan data breach strategies where systems administrators are no longer involved in the security process. This will bring great comfort to risk managers who see  new technology being introduced that will increase cyber risk.

Risk mitigation. Insurance and reinsurance are not alternatives to enterprise risk management (ERM).  Risk transfer programs should be used to address structural residual risk. From EY’s experience, companies can identify risks and adopt leading practices to ease the process of finding the right cover at the right price — with the correct reinsurance optimization. The insurance industry should insist upon this enterprise level of risk mitigation before it issues cover for large risks and data breaches.

Risk modeling. The exercise in Figure 1 uses a robust industrial risk modeling tool to look at cyber risk.  The red is the tail value at risk (TVAR) and the area that needs to be mitigated by risk transfer mechanisms. Reinsurance, the most obvious mechanism, is not the replacement for leading-practice risk management. The assumption is that data integrity standards have already been adopted here, so we are looking at the residual risk mitigation following that implementation.

Capture

The bottom graph shows the situation prior to reinsurance, where small claims are aggregated and a long tail cuts into the companies’ risk-based capital limits. The top graph shows a leaner risk situation after the application of reinsurance, bringing it back in the comfort zone.

The standard deviation process will depend on how the regulator views cyber risk and solvency. Currently, solvency models are geared on average to a 1-in-200-year event, which may be suitable for earthquake and other peril risks but is likely to be different for cyber risks and to vary by country risk appetite.

Other risk transfer mechanisms. In addition to reinsurance, cyber captives are used to address continuing risk. A point worth noting is the potential to mathematically create a “cyber index” in the same manner that weather and stock market indices appear in the macroeconomic models representing market risk exposure correlation to other enterprise risks. This cyber index could be created from the data patterns of the cyber catastrophe models and other data and then used as a threshold to trigger a data breach claims process following notification of a data breach.

Special-purpose vehicles (SPVs). This risk transfer approach is used in conjunction with capital market investors and sponsors, and it is similar to the catastrophe bond investments that protect countries from earthquake risk. It creates a bond shared by government and private industry to pay and share claims by loss bands in the event of a large or black-swan event. While these partnerships are very effective, such bonds often have a 10-year span, and a shorter life-span vehicle will be more suitable to cyber.

Sidecars. For natural catastrophes, these two-year vehicles have been referred to as sidecars, an SPV derivative of a captive where investors invest in a risk via A-rated hedge funds. If the event has not taken place within a given time frame, investors receive their money back with interest. This makes cyber risk part of an uncorrelated portfolio investment for chief investment officers. They can also base investment on the severity level of the attack, so investments are not lost on all events.

It will take time for this SPV approach to evolve over reinsurance and captives, but with good data quality, proper event models, ratings and adoption of KSI and other standards in the IT space, the capability to use capital markets to risk-transfer cyber risks will emerge. Data integrity standards would increase investor confidence in such SPVs.

For the full report on which this article is based, click here.