Digital Vision: Digital Insurance

Smarter Insurance

Matching risk with capital in insurance

At a Glance

Digitisation, federated data and unbundling could shape the future of the insurance industry, writes Steve Evans. The Editor-in-Chief of Reinsurance News and Artemis makes the case for the ways in which technology can efficiently match risk with capital across the insurance value chain.

4 Minute Read

Steve Evans

Owner and Editor-in-Chief, Reinsurance News and Artemis

The insurance industry has acquired a reputation for sluggishness.

In my experience, however, the appetite to embrace change among insurers and reinsurers is strong. Especially when there is the very real prospect of improving the offering to customers, the products, the way businesses operate, and the efficiency of capital.

Despite a number of obstacles, there are three areas in particular where I believe technology can help individual insurers and reinsurers achieve these goals and support wider industry change.

Digitization and automation of insurance

Digitisation within insurance businesses is hardly a new concept. Yet there are a number of reasons why big-money, internal initiatives have not lived up to expectations:

Priorities are not aligned across the business

Initiatives do not match market direction

Lots of money means lots of stakeholders

Players must relinquish traditional roles

Technology is breaking down some of these barriers already. It is also enabling new players to insert themselves in the value chain and provide customers with faster, more convenient products or services. Still, this is just the tip of the iceberg.

Technology that is already available can make existing market participants much more competitive beyond layering a great customer experience over an existing product. For example:

Running algorithms across the underwriting portfolio to hedge risk automatically

Using real-time analytics to identify how the portfolio changes with every new risk

Monitoring risk tolerances, portfolio diversification and pricing at scale

Digitisation and automation can deliver the kind of operational efficiencies that can then be reflected in product pricing, making an insurer more attractive to customers. Data insights can also make the use of capital much more effective by showing where the best returns lie, whether in risk or in investments. In essence, technology can optimise both ends of the business.

Data federation not data standardisation

Technology has the potential to transform the way the whole industry operates.

Take the placement of risk capital. A major insurer might have £500 million worth of reinsurance every year. That £500 million might then be placed across 40-60 different counterparties.

Each of these counterparties might buy in at different levels of risk and return. These steps are typically manual and rely on brokers who go out and poll the market for pricing – all of which adds time and cost to the process.

A more efficient way of matching risk with capital would be through an auction process that reduces the steps and automates the process. Reinsurers could simply express their interest and the software would do the rest.

If everyone understood how it worked and had access then reinsurance capital payments could be concluded in milliseconds.

To achieve this kind of market efficiency we have to answer the question of how to centralise the information. Data standardisation is one approach, but forcing everyone to invest in standardising data systems simply does not work and is unlikely to result in agreement on one industry standard.

Data federation enables centralization without standardization. Individual market players do not need to reconfigure everything and acquire the same internal data systems as everyone else. They just need to be able to make the information accessible externally in a format that is recognized by the federated platform. The software is available. The platforms are available. It just needs a groundswell of industry commitment.

Unbundling the insurance value chain

Technology might have an even bigger impact if market participants focused more on value for customers, value from capital and value to shareholders.

Today’s technologies can already perform underwriting, claims and capital management tasks faster and more effectively. Inevitably, this will lead to the unbundling of the industry. While this might seem like a fundamental challenge to large insurers and the traditional brokers, it also represents an opportunity for forward-thinking market participants to differentiate through the way they add value.

Insurers may decide to focus on the customer part of the value chain by becoming pure players in underwriting, without having to worry about capital or even claims. Reinsurers that have more funds from third party investors than from shareholders may decide to focus on writing risk for others. Brokers may relinquish placing risk with capital providers and focus on a more high-value consultative role.

Making the insurance value chain future fit

Those market participants that can see the value of technology and embrace market change will be the ones that can offer a more competitive service than their counterparts. However, smoothing the pipeline to efficiently match risk with capital is less about individual companies spending tens of millions on new technologies. It is much more about focusing on value and improving the way the insurance value chain actually works.

Digital Insurance – Further Insights

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Carol Houle, Global Head of Financial Services and Insurance, Atos