What A.M. Best Says
Charting a Path to Property/Casualty Innovation
Best’s Special Report (Excerpt): Insurers Agree Innovation Is Critical for Future Success (September 24, 2018)
- December 2018
An ongoing focus on innovation is paramount to remaining competitive in an ever changing marketplace. The insurance industry is often thought of as lagging in innovation. In August 2018, A.M. Best surveyed its rated universe, to get a better read of the state of innovation in the industry. The findings in this report are based on the responses we received. The overall insurance industry recognizes that it has jumped on the innovation bandwagon rather late, as virtually no respondent believes the industry has adopted and implemented innovation “extremely well.” However, anecdotal evidence by A.M. Best's analysts suggest that more attention has been given to innovation in recent years, as technology and the methods for conducting business have evolved.
The P/C segment's diversity in terms of size and scale has colored its perceptions of innovation. Companies that have not yet addressed their system/process inefficiencies see innovation as a means to do so. Companies that have been ahead of the curve in addressing the issues associated with outdated legacy systems look to innovation to provide strategic answers for questions regarding emerging risks such as cyber, increasingly devastating natural catastrophes, and shifting demographics. P/C companies go through market cycles in their sub-segments, and competition can be intense and growth hard to come by. Innovation can help companies develop a defendable edge that will enable them to stand out from the crowd.
The Innovation Landscape
Overall, 56% of P/C insurers view innovation as either extremely (17%) or very critical (39%) to the success of their organizations. Less than 14% of respondents believe that the P/C insurance segment has adopted and implemented innovation either well or extremely well, which is consistent with the general view that the insurance industry has lagged other industries, especially banking, in adopting and implementing innovation initiatives. Although the P/C segment has had its own share of challenges in past decades, it has not faced the kind of structural disruption and existential crisis as we have seen in other segments. It emerged relatively unscathed from the financial crisis—thus, the slow pace of change. Moreover, while the insurance industry has been using analytics and data for decades, the digitization of the world is providing the industry with new sources of data, allowing companies to become more data-driven.
Close to one quarter of P/C respondents believe that addressing customer needs is the primary reason that innovation is important to their organization, slightly more than gaining a competitive advantage (20%) and realizing operational efficiencies (19%), all of which were a common theme throughout the industry. (Exhibit 1) Examples of customer-innovation include chatbots, an outgrowth of advancements in artificial intelligence. Chatbots provide convenience and ease of use for consumers but also benefit insurers, by lowering costs with automated customer-facing interactions such as onboarding new clients and processing claims.
The protection gap—the difference between insured losses and economic losses—is increasing across the globe, especially in emerging economies and countries that have not seen much economic progress. Many large insurers are attempting to address this gap through the use of innovative products such as microinsurance and inclusive insurance, which cater to the needs of low-income people. However, the distribution and servicing costs necessary to reach such populations have been prohibitive. Nevertheless, AI and big data may help insurers expand their reach with growing technological globalization and enable commerce through mobile applications.
Innovation can help overcome a number of challenges; P/C insurers believe that the top three challenges include system/process inefficiencies (90%), disruption of business model (61%), and underwriting risk (61%). Consistent with the observation that P/C companies are slow to innovate, companies themselves are starting to realize the drag an arcane IT system/inefficient processes can have on their operations. By not investing in innovation, companies will see their expense ratios gradually rise, take longer to reach customers, and eventually lose their competitive edge. In the age of big data and sophisticated predictive modeling by a few select players, those without underwriting and risk selection capabilities will likely find it increasingly hard to compete. For example, some insurers offer do-it-yourself inspection discounts if customers use a phone app to take pictures and videos of their home in lieu of a visit from a certified home inspector post-purchase. This could eliminate the cost and time of having a certified inspector and is more convenient to the insured, ultimately improving the overall customer experience. Further, AI enabled visual computing techniques can be used to automatically analyze areal images to detect pre-existing damage on properties such as roof damage or to detect liability hazards. Visual computing can also be used in wildfire risk and flood plain analysis.
As technology has evolved drastically in a relatively short period and has become more complicated, it has opened the door for new potential products as new risks are identified. The demand for cyber is growing rapidly in light of cyber attacks such as the NotPetya and WannaCry ransomware attacks, and cyber hackers are exploiting even the slightest vulnerabilities in systems to wreak havoc on unprotected insureds. Progress in this area is hampered by a lack of actuarial data and understanding of the risk. P/C insurers who have technically savvy underwriting teams or strategic partnerships with vendors, reinsurers, etc., are starting to find innovative ways to address demand.
Big data, artificial intelligence, and cloud computing are expected to be the most significant technologies P/C insurers use to facilitate innovative change and improve operations. Companies are investing in these technologies to varying degrees, with 46% investing in big data, 35% investing in artificial intelligence, and 60% investing in cloud computing.
All three may be able to assist companies in overcoming the top three challenges respondents identified in. P/C insurance has always been a data-centric industry, and carriers are always seeking an edge, trying to charge premiums commensurate with the true underlying risk characteristics, with some form of predictive modeling. With the growing amount of data gleaned from telematics devices or social media websites, the possibilities for even deeper data mining are increasing rapidly.
Insurers can use big data to build unique customer profiles, enabling the creation of personalized offers based on individual preferences and behavioral data. More detailed understanding of customers can facilitate cross-selling opportunities, increase retention, and enhance customer experience.
Telematics, which can capture increasingly sophisticated information about driver behavior, can help insurance companies more accurately price policies based on the risk profiles of individual drivers and lead to a better understanding of underlying activities and processes.
Blockchain technology is relatively less mature than IoT or AI, and comes with the most security and performance concerns as well. There have been some recent developments in the title insurance industry with regard to the use of blockchain—for example, OneTitle (a new insurtech based in New York) does not use title agents at all; instead, it uses encryption technology and acknowledges that blockchain could disrupt the title industry and its processes.
This Best's Special Report is available at www.ambest.com.