The Business of Risk Part Three: The Future of Insurance
Imagine the following scenario:
You start your day by ordering a self-driving cab to your office. As you enter the self-driving vehicle, you log into an all-purpose insurance app to purchase a 30-minute self-driving vehicle insurance policy. AI calculates the premium on this policy based on the route your self-driving vehicle takes: the riskier the route, the more the policy will cost. You can choose which route you would prefer to take based on your finances and risk appetite; after contemplating for a bit, you decide to take the quicker but riskier route.
While you have the all-purpose insurance app open, you also check how much it will cost to renew your daily life insurance policy which is calculated based on health data captured on your smart watch. Regret kicks in – “I should have gone to the gym this morning”. But you didn’t, and now your life insurance policy costs more than it did yesterday. Your heart rate, BMI, and other health metrics are recorded on your all-purpose insurance app. If you decide to have a cheeky cigarette at lunch, be prepared to pay for it tomorrow.
About halfway through your journey, a message pops up on your all-purpose insurance app: “WARNING! DANGEROUS DRIVING DETECTED IN THE AREA!”. Probably nothing – you think – the same message appeared last week, and all was well. Then suddenly, crash! The self-driving vehicle is hit in the rear by another self-driving vehicle. Bing! Your all-purpose insurance app immediately notifies you that a claim has been submitted to your car insurance carrier – the carrier has access to video footage from both self-driving vehicles and can easily ascertain that your vehicle was not at fault. The claim is paid out within minutes.
This might sound like something out of a science fiction film. It isn’t.
Artificial intelligence, machine learning, blockchain, and big data analytics are revolutionising the insurance industry, automating many of the tasks which once required a human touch. While there is currently no “all-purpose insurance app” in existence, many of the products described above are already being offering by insurance carriers.
The term “Insurtech” has been coined to describe the innovative technologies being used to improve the traditional insurance industry. One study has found that Insurtech is increasing premium volume by helping to attract and retain clients. Insurtech is impacting every branch of the insurance industry, from distribution, to underwriting, to claims.
The distribution of insurance policies is occurring much quicker and easier with less interaction between carriers and customers. Several insurance carriers now have apps where customers can purchase personalised products at the touch of a button. The car insurance company Cuvva offers “short-term car insurance” policies lasting for as little as 1 hour which can be purchased directly from the Cuvva app. This points to a broader trend within the insurance industry: the transition away from a “purchase and annual review” model to a “usage-based insurance (UBI)” model where products are tailored to the behaviour of individual customers.
The process of underwriting is becoming more refined as carriers have access to a greater amount of data. This allows underwriters to identify risks in a more sophisticated way and provide customers with instant quote and real-time pricing. The expansion of data which carriers have access to has been facilitated by Internet of Things (IoT) devices – these are physical objections equipped with sensors and software that enable them to interact with little human intervention by collecting and exchanging data via a network. The most popular example is smart watches. The insurance company Vitality rewards customers for exercising by giving them “up to 2 months of premium as cashback” if they exercise regularly and record their workouts on a smart watch.
The handling of claims is becoming more automated and cost-effective for carriers. Claims can now be paid out automatically without the need for human oversight through the use of smart contracts – self-executing programs enabled by blockchain technology that automate the actions required in an agreement or contract. Smart contracts are being used in the insurance industry to create a sense of mutual trust between carriers and customers, as all data is transparently displayed and any contractual deviation results in restitution to the harmed party. Allianz are using smart contracts in many European subsidiaries to streamline international motor insurance claims, reducing the time and cost spent on administration and helping to settle claims faster.
Insurtech bringing several benefits to both carriers and customers; however, it is also posing new challenges which should not be overlooked.
A big challenge for carriers will be around the management of data, given that a large proportion of the data held by carriers are “personal data”. This poses two distinct risks for insurance carriers, particularly those relying on vast sums of data like Cuvva and Vitality. The first risk is regulatory. Insurance carriers which collect and analyse personal data must ensure they are compliant with complex data protection regulations such as the GDPR – this is further complicated by the fact that data protection regulation often vary between countries. The second is cyber-security risks. The personal data held by insurance carriers is a prime target for hackers who can sell it on for a profit. Insurance carriers must have sufficient protections in place to safeguard against cyber-security breaches and could face serious regulatory sanctions for failing to do so.
A big challenge for customers will be around personal autonomy, given that Insurtech is allowing carriers to nudge customers to put in place stronger risk mitigations. As Insurtech reduces administrative costs for claims professionals, claims organisations will place a greater emphasis on risk monitoring and prevention, sending customers real-time alerts with automatic interventions for inspection and repair. This includes things like suggesting alternative driving routes which are less risky. A nudge like this might be acceptable, but it starts to look coercive if customers are offered a ‘choice’ between an unaffordable risky route and affordable less risky route which takes significantly longer. Furthermore, suppose Vitality changed their terms and conditions – “only those who do at least 30 minutes of cardio are eligible for premium cashbacks”. Again, this starts to look like an unacceptable interference with personal autonomy.