Over the past two decades Insurers and Reinsurers have made much of their move into the digital age. Many market participants have migrated to electronic messaging platforms to alleviate some of the administrative burden of dealing with contract Cashflows. However, whilst these developments have helped to improve combined ratios for processing traditional contracts, there is ultimately a limit to the efficacy of such solutions. In addition, a reliance on existing messaging tools and processes will limit innovation that is demanded by customers in the new hyper-connected economy.
Within industry verticals and the consumer economy, sensor installations and connections are growing exponentially. The consequent data explosion has led to huge improvements in process insight through the use of Artificial Intelligence and machine learning technologies. Individual and Corporate customers are increasingly relying on up to the second, granular data to make decisions and steer their lives and businesses. With the explosion of Internet of Things ('IoT') devices and the global introduction of '5G' connectivity by 2020 this trend looks set to continue.
The importance of efficiency
The insurance industry has been spending scarce resources on incremental improvements to manage the existing product base, allowing many firms to eke out precious savings. Administrative efficiency is particularly important where there is a burden of legacy transactions and long tail liabilities.
Electronic messaging has allowed many insurance market players to replace paper and email with structured messages that flow back and forth between their companies. These solutions require investment in bilateral connections and contract terms continue to be held and interpreted separately by each participant. With no 'shared source of the truth' the timelines for claim settlement can be lengthy and manual effort is onerous to match structures, confirm calculations and book financials. Earlier attempts at centralised or exchange initiative were not very successful but more recent 'common standards' approaches have reduced administrative cost and improved turnaround times, and for this the industry should be applauded.
However, there is a massive opportunity for a win-win for consumers and the industry if innovative products can be developed without being hamstrung by the baseline costs associated with 20th century technology used for legacy product administration. Lower cost decentralised approaches can help to close the 'protection gap' by enabling very low premium products to meet the needs of customers in the developed world and to help solve challenges in the developing world.
Insurers and Reinsurers must capitalise on recent revolutionary technology advances to permit secure data flows and create trusted common views of contract terms and conditions. Taken together with a step-change in the use of customer data and contract automation it is possible to progress very fast. These contemporary approaches
are somewhat analogous to the move from 160-character peer to peer 'SMS' messages, to shared, instant messaging via WhatsApp/WeChat. Such solutions can significantly ease data exchange amongst multiple parties and promote trust through immutable ledger records. Pre-agreed 'Smart Contract' functionality can take the business model a step further in respect of mutually beneficial contract automation. [More on Smart Contracts in an upcoming post!].
Distributed Ledger Technology in action
The good news is that many industry participants have been learning about these technologies through hands-on test implementations. Examples include: B3i (Blockchain Insurance Industry Initiative); Maersk marine; Allianz Captive solution; Italian commercial insurance;
It would be churlish to ignore the importance of traditional insurance products and the need to efficiently manage the legacy portfolio, but it is an important time for the insurance industry to make a decisive move and ready itself for the demanding, connected world of the 21st century.