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As insurance professionals we have been describing the lack of insurance as the “protection gap” for many years. Despite extensive studies and numerous publications, the gap remains, and the risk of natural disasters is ever so increasing. The statistics highlighting the economic losses far exceeding insured losses keep confirming this. What if we could make insurance more accessible, affordable and relevant, making our processes - from underwriting to claims - more efficient and effective by using modern technology? Here are my hypotheses, risks and recommendations of how this may work.
#1 Insurers believing in transparency of risk data and acting as a network opens a new world. A buyer and seller of insurance need mutual transparency. Solvency, service reputation or capital adequacy on the one side and a comprehensive and authentic risk profile on the other. Sounds like a fair deal. In reality however, the purchase of insurance is often perceived as “confusing, difficult to understand or compare”. Aggregators or comparison tools can help capturing these data but potentially even worsen the concentration risk for the policyholder whose data are now in the hands of a few large data operators, who mostly will just be a conduit, fronting for the actual insurance carriers, not really resolving the peer-to-peer exchange or business transaction. Modern risk data exchange can help resolve this issue and enable insurance to leverage new tools such as IoT, AI and big data analytics will come to full fruition. This will require clear roles for the user (policyholder seeking cover), supplier (carrier providing insurance) and operator of such digital exchange.
#2 An insurance network only survives if well governed and economical for the operator. The notion of a decentralized autonomous authority (DOA) as defined by blockchain or distributed ledger technology, needs adjusted in a highly regulated industry such as insurance. Industry networks often start as consortia with owners being the first users, who therefore need to balance their interest as shareholders – seeking dividends – and customers – seeking low prices.
Such entrepreneurs dilemma can be resolved with strong long-term economics. In insurance for example, the network user will have to reap benefits (e.g. multiple combined ratio points) that far exceed the network usage fee (e.g. only a fraction of a combined ratio point). This is best achieved by initial offerings being in the underwriting area, as they bring contract certainty and a basis to expand functionality along the value chain.
#3 Network operations require neutrality. For an insurance network this implies that the operator only facilitates risk transfer and does not carry risk. The operator should also have processes for permissioning (allowing participants on the network) that do not directly influence the market making. Synergies will arise across the industry which reduce the separate investments required by individual network users. Neutrality therefore goes hand in hand with inter-operability. Networks also need to accept that standardization lowers switching costs which drives a performance and customer service-oriented environment, where customers stay for quality and service, rather than forced by a lock-in.
So if an insurance network for risk transfer could succeed if it were transparent, economical and neutral, what risks would remain for it to still go wrong? Here are a few to consider.
Risk # 1 – market transparency and consumer convenience may lead to less accuracy and not serving consumer interests. Presenting insurance choices in an over-simplified way for the sake of comparability and convenience, may not truly serve the consumer interests.The best mitigation strategy is to actively involve contract wording specialists in this challenge and move towards self-executing contracts”. Such contracts are already a reality for certain standard contract types with simple and well understood provisions, little international variation, no intermediation and short execution periods.
Risk # 2 – network participants may find it difficult to agree the role, scope and expectations of a network provider. A network provider is facing a difficult dilemma: the expectation is to create synergy and add value, yet without misusing a central position as data aggregator or running into a conflict of interest (e.g. pushing only those platform activities that maximize the network’s own profit). A strong governance body is essential for a network has an important role to define this position and ambition. It may require a gradual evolution, involving effective customer feedback processes that drive the desired functionality and priorities for the platform.
Risk # 3 – more transparent data sharing may lead to less privacy protection. Once aggregated data are in central hands, they may be misused and lead to discrimination, intrusiveness and cyber breaches. Here distributed ledger technology should bring a unique advantage since the data is shared without allowing the network provider to access it.
Risk # 4 – if the winner takes it all, a provider may obtain a dangerous dominant position. A more likely and favorable scenario will rather have several winners, made possible when a few industry-wide standards emerge, allowing multi-homing for users and application providers. In insurance, the role for industry associations or regulators will become even more important to set workable industry standards and principles to be applied for taxonomies, non- discriminatory trade, data privacy, compliance with trade controls and other market conduct rules.
In conclusion. Where does this leave the insurance industry in trying to close the protection gap? I would advise every insurance company or stakeholder who wants to make a difference in the digital space, a few guiding principles:
Regain trust – whatever you do, make sure that it increases the trust of the policy holder in your business promise. High (claim) fraud rates point towards a trust issue in our industry. Smart use of data and behavioral economics can now help insurers to prove their policy holder that transparent data exchange is not misused to push back on claims but rather to truly extract tangible analytics that prevent risks and benefit the policyholder welfare.
Make customer care a core activity – all too often insurers have lost touch with their customer. There is limited touch in sales, as the broker or agent owns this customer relationship and neither in the claims servicing, which is often sub-ordinated to a back-office role, perhaps in some off-shore area. Let’s reverse this and take a lesson from Jeff Bezos.
Think of an insurance contract as a tokenized asset – insurance is about trust and typically that requires long lasting relationships that feed long-lived client retention. Like a doctor, a trusted (life) insurer could be kept for a lifetime. An insured asset is an embedded value of future cash flows and these are increasingly very data driven. The future is one where owners of such an asset will want control over their data set and make informed and flexible choices about who gets to price for it. The future is a world of efficient, safe and accurate data exchange to enable such pricing.
Paul Meeusen, CEO B3i, www.b3i.tech, paul.meeusen
Category: Climate/natural disasters: Climate change, Disaster risk, Earthquakes, Floods/storms