Despite being an extremely challenging year, 2020 saw the entire insurance industry push technological innovation to new heights. Here we look at five major tech trends reshaping insurance at its core – and ask how today’s insurers can play the lead role in driving these.
1) Cloud architectures as a strategic advantage
Cloud has long been earmarked as a cost-saving technology, but it is far more than this. It fundamentally supports entirely new ways of doing things. Market leaders have already recognised this, and our prediction is that cloud is about to get a lot more strategic.
Why is this? When combined with open architectures, cloud enables limitless integration with different data sources and partners, paving the way for massive-scale analytics and artificial intelligence (AI): from pricing and customer analytics to AI-powered interventions that reduce the risk of things going wrong in the first place.
So, insurers can’t approach cloud as just one tech question among many but must instead see it as the whole foundation of their data-driven future.
The ongoing big-data turn shouldn’t obscure cloud’s longer-established virtues as a source of flexible, on-demand capacity, especially in the context of Covid-19. As lockdowns unfolded last spring, insurers faced customer query volumes many times greater than normal, overwhelming human customer-service teams. Moving some of this function to the cloud – through chatbots, call-centre automation and rules-based claims processing – will equip insurers to ride out such spikes in future.
2) From the law of large numbers to personal pricing, thanks to big data
Our ability to analyse ever-larger datasets lets us optimise all kinds of things, from a building’s energy consumption and the shape of aeroplane wings to 5G networks and the pricing of insurance.
Despite being – arguably – the world’s first data industry, insurance has long relied on relatively sparse data for its pricing and reserving decisions, lumping customers into broad tranches and relying on the law of large numbers to balance the books.
Nowadays though, data-savvy insurers are segmenting their customer book to deliver personalised prices – quantifying and rewarding lower risks.
This trend is most pronounced in lines where data has been most lacking, such as catastrophe insurance. Historically, actuaries modelled catastrophe losses using data that could be decades old (these events are not, after all, everyday occurrences).
However, via APIs, they can now tap rich, real-time sources like atmospheric, seismic and satellite data. As one example, large-scale analysis of satellite imagery is yielding granular insights into wildfires – and how much damage they do – based on myriad factors, from dry terrain to poor forest management.
3) From indemnity to prevention: IoT and digital twins
The annual fall in sensor costs isn’t just good news for gadget lovers, it’s big for insurers too. Low-cost sensors, combined with low-cost data transmission, storage and analysis, are creating a veritable firehose of data for actuaries to feed into their models.
However, what’s really exciting about the rapidly expanding Internet of Things (IoT) is the potential to move beyond understanding long-term trends to monitoring people, things and events in real-time via digital models – or ‘digital twins’ as we call them. This gives insurers a whole new mission, not just indemnifying risk events but also actively preventing them.
This future is already among us, just unevenly distributed. In motor, insurers can identify risky aspects of customer driving (such as speeding) via telematics and incentivise improvements – acting as a kind of ‘driving coach’.
Covid-19 will likely boost adoption here, as consumers look for savings to reflect their reduced driving. In the case of pay-as-you-drive products, a sensor detects when a customer is driving and charges them only for those periods.
Opportunities for insurance IoT abound, largely untapped, in commercial lines, given the large pre-existing sensor footprint in facilities and machinery. However, competition from captives, along with insufficient standardisation of information protocols and systems, continues to drag on the sector.
4) Democratisation of insurance through AI and robotics
Insurance used to have high barriers to entry. You needed actuarial expertise seasoned with decades of historical data, significant capital, an eye for regulatory compliance and, perhaps most importantly, a network of pre-existing customer and broker relationships.
This has all changed though. The combination of cloud and AI has allowed huge, formerly manual, swathes of the insurance value chain to be rendered as ‘virtual functions’ – which can be rented on demand.
This means that outside players – with existing customers or, equally, a smart solution for a specific customer problem – can enter the insurance market in a matter of months, not decades.
The threat may not be obvious, with many insurtechs opting for MGA status and collaboration with incumbents. However, as telecoms has taught us, margins are higher for app companies than for utility providers – so (re)insurers can’t afford to be pushed into a backend role.
The solution for incumbents is simple: they can design, build and scale their own modular insurance products via the same AI and robotics as their challengers, using the scale of their tech architecture, reputation and customer relationships to their advantage.
5) The future is multiparty: ecosystem integration and APIs
To reap the rewards of open architectures and big data – with opportunities in everything from pricing to risk prevention – insurers must plug into an ecosystem of third parties.
Third-party integration is also central to efficient claims settlement, especially for ‘parametric’ products – that is, products that rely on a verified event to pay out. For example, access to flight APIs allows parametric travel insurers to refund, and even rebook, customer flights immediately upon cancellation; and commercial insurers can pay out to small businesses as soon as closure is mandated.
Managing these counterparties – the nature of their involvement and the events that trigger it – brings huge orchestration challenges. ‘Multiparty systems’ can be a boon or bane, depending on how well they’re managed.
Distributed ledger technologies like blockchain have the potential to efficiently undergird multiparty systems, although current deployments in insurance are limited.
These five tech trends should give insurers plenty to think about – and to play with – for the rest of 2021. But it always pays to have an eye to what comes next. As we move deeper into the decade, prepare to see insurers wrap their arms around ESG analytics, small-ticket insurance and quantum computing.
