Can the insurance industry continue to innovate?

Innovation in the 21st century is characterized by speed. Today, the speed of change is increasing, as many have noted, but the shortened time to adopt new disruptive innovations is so important. (Credit: IRStone/Adobe Stock)

The insurance industry has a proud heritage of supporting innovation and helping society navigate periods of change. However, today’s complex global supply chains and digitization are proving more difficult to manage as risk experts.

One significant shift we need to make is to operate in a world where economic value is increasingly held in intangible assets such as IP, data and digital assets, rather than traditional insurable physical assets such as property or machinery. Intangible risks are also now among the biggest drivers of volatility for businesses, from reputational damage to cyberattacks and business-disrupting events such as pandemics.

Advances in technology create a constant stream of emerging risks, while complex global business relationships and supply chains make some traditional insurance risks difficult to predict and quantify. Even more transformative change is on the horizon: clean energy, artificial intelligence and the sharing economy have the potential to bring about radical change.

Traditional insurer business models will need to keep up with this pace of change. Without new thinking, we risk becoming less and less relevant to the economy and society.

Time is running out

The key success factor of the insurance industry is its distinctive perspective over time. We take a long-term view of exposures and capital management: Insurers are adept at refining historical data to find patterns and are comfortable dealing with tail risks. Who else really contemplates once-in-400-year events?

This recipe worked well in the past—change was slow, even when driven by innovation that was itself disruptive. This timeline allowed insurers to be there for the public during the explosion of international trade in the 18th century, industrialization and modern finance in the 19th century, and the internal combustion engine and electronic communications in the 1920sth century.

Innovation in the 21stSt century is characterized by speed. Today, the speed of change is increasing, as many have noted, but the shortened time to adopt new disruptive innovations is so important. Facebook launched in 2004 and now has almost three billion users. In 2007, Apple introduced the iPhone. Today, there are over 4 billion smartphone users, which is just over half of the world’s population. Last year there were over 16.5 million electric cars on the road, recording a three-fold increase in just three years. Several car manufacturers aim to be 100% electric by 2030.

Compete to stay relevant

Entrepreneurs, scientists and those who fund new ventures deal with the risks associated with innovation. It is the insurance industry that offers a disciplined approach to help society deal with the risks and volatility associated with widespread adoption. Digitization, for example, brings with it potentially huge systemic risks from dependence on critical communications infrastructure.

Ensuring the adoption of innovation, namely managing the volatility that comes from using new ideas, is the problem that insurers have to deal with. We may not all realize it yet, but the industry is racing to solve this problem. Technology companies have access to a wealth of valuable risk data and are not constrained by a legacy business model. Insurers also face competition from their own customers, who will increasingly be able to use data and technology to self-insure, and potentially share or trade their risks with others.

The industry has a serious choice. We can stick to our knitting and avoid (or rule out) risks that we don’t understand and that aren’t easily measurable. Or we increase our investment to find better ways to evaluate and assess risk. Adhering to historical time-based an approach to understanding risk is a fair recipe for becoming irrelevant.

A blank sheet of paper

The solution to the innovation problem can be found, not surprisingly, in data. Historically, industry has relied on descriptive information to assess risks, such as location or type. But technology is enabling greater access to behavioral data, from individuals’ shopping habits to businesses’ cybersecurity posture. Behaviors reveal information about risk and exposure to which descriptive information is blind.

If it starts again, will the insurer rely solely on descriptive data or make better use of behavioral data? Would an insurer ask a driver how old they are or their gender? Or would they like to know how well they drive or where they drive and how often? Behavioral data have always been able to complement descriptive data. In today’s environment, behavioral data has become a necessity.

Keeping pace to stay relevant

Lead photo by Paul Mang of Guidewire.  (Credit: Guidewire) Paul Mang of Guidewire. (Credit: Guidewire)

Insurers are beginning to recognize the potential value of unconventional data as a surrogate for risk. But we collectively need to accelerate this development by investing in new ways to capture behavioral data and the flexible tools needed to derive the right risk insights.

It is time for the insurance industry to reclaim its rightful role as an important player in the broader innovation ecosystem—indeed, the key player that enables society to benefit from the widespread adoption of new ideas and to address the challenges arising from new sources of volatility .

Paul Mang is Chief Innovation Officer at Conductor wire, a provider of predictive analytics, risk insights and business intelligence solutions for the insurance industry. He is the former Global Chief Analytics Officer at Aon plc.

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