Any apprehension about how InsurTech will add value in the insurance value chain is moot in pricing and underwriting. With support from InsurTech start-ups, insurers are going to be front runners or in the pack of an accelerating “technology arms race”.
InsurTech businesses continue to attract investment at near record levels. The Willis Towers Watson Quarterly InsurTech Briefing for Q1 2019 recorded the highest overall number of transactions, the highest number of property and casualty transactions, and the highest volume of Series B and Series C funding rounds since the publication started.
For all that, much of InsurTech still focuses on the art of the possible. But, in pricing and underwriting — the core competencies of an insurance company — it’s a different story.
InsurTech has its roots in pricing and underwriting. Internet price comparison websites (a.k.a. “aggregators”) were arguably the first real InsurTechs in personal lines, creating the possibility for consumers to compare numerous prices for the same or similar cover almost instantaneously. And their effect on some markets has been dramatic.
In the UK, for example, where the aggregator channel is most firmly established, it accounts for more than 75% of new personal motor policy sales. A simple and compelling technology proposition and being among the cheapest prices, regardless of brand, often wins the day. Any weaknesses in pricing or underwriting can be quickly exposed.
Not only that, but they have contributed to redefining the market and consumer expectations. The result has been to fire the starting gun of a “technology arms race” of pricing sophistication in which InsurTech businesses can potentially offer a significant boost.
This sees forward-looking insurers in both personal and commercial lines using a far broader set of data sources, more advanced analytics and more agile processes to set and maintain their pricing and underwriting structures. So what is likely to separate the front runners from those left trailing?
Having driven the requirement for increased pricing sophistication, technology is also providing the means to deliver it.
Data has become both a suit of armor and a powerful weapon, including applications of previously underworked, internal data assets. Equally, front runners are piling into data enrichment from third-party sources, such as customer or claimant identity-verification data to strengthen counter-fraud defences. Many are also moving into the realms of customer behavior analysis, based on customer-facing systems and real-time market data that are now such an endemic part of the wider retail market. These proactive data strategies are defining market front runners, not only from a price competition perspective but also in relation to the quality and relevance of the customer experience.
Behind the scenes, among those setting the pace in the pricing function, there’s more dynamic pricing based on agile and short-cycle decision making, with real-time algorithms increasingly making use of current market data. In the underwriting function, there is greatly increased analytical support for decline rules, underwriting scores and manual intervention, with considerable use of data enrichment and more agile and proactive management of footprint and rules. From the InsurTechs’ perspective, they are going to have to play into these environments, supporting and enhancing or extrapolating these established trends.
Internet of Things
Another area that has attracted a lot of interest, and where InsurTech looks likely to have a substantial role to play in supporting front runners, is the Internet of Things (IoT) and its application to monitored insurance.
The IoT perhaps first manifested materially in the insurance industry in the form of motor telematics policies (usage-based insurance) based on onboard monitoring devices. Monitors are not a new thing, but advancing technologies have reduced costs and enhanced analytics capabilities and connectivity to the point that “monitored risk” insurance has become a thing.
Monitors offer far more granular data on which insurers can make more sophisticated pricing and underwriting decisions. In motor insurance, this veers towards information on acceleration, braking, cornering or speeding behaviors, which are correlated with risk. Elsewhere, in marine insurance, for example, cargo tracking and monitoring are supporting risk authentication in traditional coverages and also opening the way to parametric and blockchain-enabled products.
But it’s important to make a distinction here between monitored risk insurance generally and monitored risk propositions specifically. Monitored risk propositions are far less attractive to lower risk customers for whom the perceived downside of being monitored, and the prospect of ongoing interaction with the insurance industry (which doesn’t figure high on most customer’s lists of favoured pastimes), does not outweigh the magnitude of cost savings.
So, for insurers, front runners recognize that having access to demographic, behavioral and claim risk data isn’t only of benefit in pricing and underwriting but also in more tailored product and proposition development.
Fuelling up on InsurTech
Technology’s foothold in insurance pricing and underwriting is already firmly established. For companies leading from the front and leaving the biggest mark on future market norms, InsurTech innovation is further fuel for the journey.
Andrew Johnston is Global Head of InsurTech at Willis Re. His role encompasses helping to make connections between incumbent insurers and InsurTech businesses with interesting technology.