That the industry needs to do better at harnessing technology if it is ward off competition from so-called disruptive providers is an oft-repeated mantra. But technology – and specifically digitisation – can also help close the protection gap, according to a new report from re/insurance industry think tank the Geneva Association.
In a wide ranging report, the authors explain how modern technologies can help encourage insurance take-up in developing markets but also in mature economies.
In emerging markets, mobile technology is already enabling microinsurance and benefitting customers by cutting transaction costs across the value chain, from marketing to claims settlement, the report’s authors point out. The report cites the success of BIMA, which provides mobile-delivered insurance and health services in emerging markets around the world.
Under-insurance is not just an emerging market issue and digitisation could boost penetration in most mature markets, the report’s authors believe. In the digital age, traditional information asymmetries in insurance will disappear, with both insurers and policyholders benefiting from improved information and data sources at much lower cost, the report says.
Big data enables quantum leaps in risk classification and makes insurance more attractive to ‘good’ risks whose loss probability directly translates into more favourable individual pricing.
“Those risks no longer have to pay a premium that reflects the loss probability of the entire population – which may previously have prompted them not to purchase insurance altogether,” the report says. “By using behavioural indicators as a more meaningful way of assessing riskiness, insurers could safely and responsibly extend coverage to significantly more people, without assuming disproportionate risk, and narrow the insurance protection gap.”
That’s controversial because it up-ends the conventional logic that the premiums of the many pay for the claims of the few.
Enter the insurance bots
It’s always said that insurance is a people business. But for how much longer? The Japanese insurance firm Fukoku Mutual Life Insurance is laying off 34 employees and replacing them with an artificial intelligence (AI) system that can calculate insurance pay outs.
Fukoko reckons it will increase productivity in its claims department by 30% and expects to save around JPY140m (£979,500/$1.2m) a year in salaries after the JPY200m artificial intelligence system is installed.
Maintenance of the robot set-up is expected to cost about JPY15m annually. The system is based on IBM Japan’s Watson, which IBM terms a “cognitive technology that can think like a human”. IBM says it can analyse and interpret all data, including unstructured text, images, audio and video.
Fukoku Mutual will use the AI to gather the information needed for policyholders’ payouts - by “reading” medical certificates, and data on surgeries or hospital stays. According to local newspaper reports, three other Japanese insurance companies are considering adopting AI systems for work like finding the optimal cover plan for customers.
It’s a sign that workers in the insurance industry are not immune to so-called “Industry 4.0” trends that are already evident in the manufacturing industries. Maybe we should be worried that the insurance industry is starting to feed into two of the biggest risks recently identified by the World Economic Forum in its Global Risk report: high structural unemployment or underemployment and profound social instability brought on by technological advances.
Speaking up on silent cyber risk
Cyber risk is everywhere. At the end of last year the Prudential Regulation Authority (PRA) voiced what some people in the insurance market have already expressed concerns over: the PRA is worried that fast growing cyber insurance poses big underwriting risks for the industry. The PRA said it is concerned about underwriting risk aggregations emanating both from affirmative cyber insurance policies, and also from implicit cyber exposure within ‘all risks’ and other liability insurance policies that do not explicitly exclude cyber risk, i.e. ‘silent’ cyber risk.
The potential aggregations resulting from ‘silent’ cyber are a big worry for reinsurers as well, or ought to be, as long as there is no widespread use of cyber exclusions in either property or casualty reinsurance contracts.
The cavalry is on the horizon, however. A company called BitSight has launched a cyber security rating tool it claims will provide objective, data-driven daily ratings of a company’s security performance. In theory it is a big advance on how underwriters currently rate a risk they’ve been presented with, which tends to be questionnaire surveys and maybe, just maybe, conversations with the client’s management.
BitSight says its security ratings platform ‘gathers terabytes of data on security outcomes from sensors deployed across the globe’. Using this Big Data approach it says it can identify indicators of compromise, infected machines, improper configuration, poor security hygiene and potentially harmful user behaviours.
I can’t vouch for BitSight or its security rating claims, but it is encouraging that underwriting risk analysis tools are starting to evolve that are as advanced as the risk in question.