Turning the world of insurance on its head, that is. We are just back from the Society of Actuaries’ annual ‘Underwriting Issues and Innovations’ seminar in Chicago, where we go to learn what is happening in what one might call paradoxical North American markets where underwriting sophistication and tradition have very different meanings compared with most other places.
In North America, and in the US especially, underwriting to the nth degree via blood and urine tests for purposes of preferred-life categorisation is still king and advanced underwriting engines are a rarity. But things are changing, and in two ways. One, insurers are beginning to move over to capable engines. Two, there is a trend towards ‘accelerated underwriting’ – using complex algorithms applied to data sources such as credit information (a strong pointer to mortality risk actually), prescription history, driving records and previous rated or decline decisions – which avoids time-consuming and expensive paramedical exams and lab testing. Companies started offering sums insured of US$500,000 for ages up to 50 on the basis of an application form supplemented by the algorithmic process but that ceiling has been raised to $1.5 million. In fact, one company is about to launch offering up to $2.5 million at ages up to 65.
This is revolution indeed. And it is just one indication of how the world is changing though the application of technology – in this case advanced data analytics. And data analytics is just a step removed from artificial intelligence (AI) that will bring major change on a wide scale – in customer segmentation and targeting, risk assessment and claim processing. Add that to how consumers are progressively oriented towards on-line and mobile, and have come to expect simplicity, ease of access and great service, and it becomes clear that old models of distribution, fulfilment, policy servicing and customer relations look largely doomed.
Don’t underestimate the power of technology. Remember the maxim (often attributed to Bill Gates) that we over-estimate the pace of change but under-estimate its impact in the longer term. So the lead time might be a bit longer than some would have you believe – we’re still talking (a few) years and not decades though – but the transformation will be, perhaps, difficult to comprehend right now. Make no mistake, technology out there currently has capability that is pretty much unimaginable to ordinary folk; it’s just a question of when it gets applied (and by whom of course – see later). And technology development hasn’t finished yet.
If you thought that underwriting or claims jobs couldn’t be automated, think again. Insurance companies in Japan are already replacing staff with virtual workers (‘robots’). OK, that may be in medical business but it would be foolish to think that life and disability business is a special case. We have underwriting engines today but AI is capable of far more complex decision-making based on multiple sources of information in the form of data. AI can ‘read’ electronic health records, so underwriting from a physician’s report will no longer be the preserve of a human: the information will be just another data feed into an engine.
The trend to ‘accelerated’ underwriting is the way the world is going. Simple is the way forward – that’s simple to the customer but complex in its execution underneath the surface. Big data will either supplement or replace traditional sources of risk information.
Of course, one shouldn’t over-generalise. There won’t be just one consumer proposition and one model of underwriting – segmentation is key. The ‘middle’ or mass market may require simplicity but there will always be niche segments that want something different, something more tailored to their needs.
If it all sounds apocalyptic, it probably will be.
Is your organisation prepared for this? The big reinsurers are: they’ve been investing in research in all the key areas, recruiting data scientists by the score and partnering with firms – often technology start-ups – that have the new skills. So have some of the big international insurance groups. Which makes one wonder who will be the future winners and losers. To succeed in future you need:
- The ability to interpret it and derive pricing models
- Access to customers (via a brand)
- The ability to understand customers and what they want/need
- The ability to deliver great service (aided by smart systems underpinning streamlined processes)
- Willingness to take risks.
- Have been poor at (or at least not too hot on) understanding customers
- Ditto managing customer relations
- Ditto giving good let alone great service
- Ditto generating data and analysing it
- Are risk-averse
- Haven’t had anything like truly strong brands.
Guys, you need to up your game!
The big reinsurers on the other hand are gaining competence and expertise in all the key areas, and they are collaborating with the new powerful players in the consumer world. They understand what the new environment is going to be like and have equipped – or are equipping – themselves with the capability to operate in it. And a handful have within their group structures carrier firms that can issue the policies. Do they need insurance cedants? If you’re an insurer, is your reinsurer your partner or your competitor? Or even your foe? And if you’re a reinsurer in the second tier or below, have you got your alternative strategy mapped out?
A colleague remarked recently that “a lot of companies are sleepwalking into a buzz-saw.” Make sure your firm isn’t one of them.