Time for an industry response to technology challenge—but make sure it’s driven by risk managers

It was surely no coincidence that, just as our deputy editor Nicholas Pratt was talking to Mr Tunstall about this big topic in Hong Kong, I was hosting a debate in London with UK risk management association Airmic about the huge potential impact of technology on the future shape of the risk management and transfer industry. The need for the insurance industry to invest in state-of-the-art technology for individual life and non-life customers and SMEs is obvious. The days when we popped down the high street to visit the local broker to arrange our personal motor, household and life insurance have long been numbered.hideFirst the telephone and then the internet offered a much quicker and easier way to seek out solutions, compare prices and terms and then hit the ‘buy’ button. An interview earlier this month in Paris with Philippe Rocard, the recently appointed head of AXA Corporate Solutions in Morocco and Sub Saharan Africa, further confirmed the significance and speed of the transformation underway. AXA has just bought an 8% stake in a company that owns African Internet Group (AIG), the Amazon of the Nigerian and other African markets. This is a smart move by AXA as mobile technology is way ahead in Africa compared with more mature markets such as Europe, because the continent simply does not have the fixed infrastructure needed to provide terrestrial services. Africans are avid users of mobile systems to buy all sorts of things and AXA’s exclusive deal to provide insurance to AIG’s customers looks like a good investment. The same forces are of course at work in Asia, and the big insurers need to invest heavily and smartly to make sure they are partnering with the right distribution channels to build their businesses and take advantage of rising levels of penetration in Asia, as in Africa. The larger commercial and corporate insurance space, however, is an entirely different kettle of fish and, as Mr Tunstall pointed out, insurers clearly have not really worked out how to use new technology to do business more effectively in this valuable sector. But they need to do so and fast, before someone else does. As agreed during the debate I hosted in London, the focus is not so much on distribution in the larger commercial and corporate space but more about accuracy and speed of risk identification; analysis (not least accumulation) and pricing; and, perhaps more importantly, service. Smart software systems using complex algorithms have been used for some time now to analyse and price catastrophe risk. The Bermuda catastrophe reinsurance market was incredibly successful because companies like Renaissance Re were able to rapidly build multi-billion-dollar portfolios from small offices populated by small numbers of experts backed up by sophisticated modelling and pricing engines. The capital markets are doing exactly the same thing now, as they pour billions of dollars of capital into the catastrophe market via ILS structures. This is made possible and works at the wholesale reinsurance end of the market because somebody else at the primary level has actually had the time, resource and effort needed to discuss and analyse the underlying risks, how those risks are managed and thus work out a reasonable price. As risk and insurance managers the world over will attest, this takes effort, time and expertise at the primary level. If anything, they want more bespoke and tailored solutions that meet real risk management and transfer needs rather than quick and easy standard contracts spewed out by software models. So the way in which the larger commercial insurance market needs to apply the new technologies is actually less on the distribution and pricing side and more on the service side. Yes, new models that accurately work out supply chain dependency risk and accumulations and the like will be increasingly useful for risk managers, brokers and insurers as they carry out their risk analysis. Yes, there may be more efficient methods of syndicating more commoditised commercial risks based on new technologies than we have currently. But what the risk and insurance manager really wants to see, is investment by their brokers and insurers on improvements in the way the process is managed to deliver greater certainty, less bureaucracy and more transparency, particularly in fields such as compliance and claims. For this to happen, the insurers and brokers need to listen to their customers and deliver what they need and want. Customers need to be more realistic about what information and data they are willing and able to share to help make this happen. Another important area is the development of innovative solutions to challenging emerging risks, in which there is arguably room for more industry-wide solutions based on greater sharing of data. The cyber market is a great example of this. To an extent, insurers are underwriting blind in this rapidly evolving market, because of the paucity of historical and forward-looking data. The introduction of mandatory reporting requirements by a rising number of national and international governments and regulatory bodies will help to build that data and will also raise awareness of the need to take this risk seriously, especially among listed companies. But in the interim period, the lack of data and data-sharing is seriously holding this market back and effectively forcing insurers to come up with restricted new products to add to existing ones, rather than expanding existing ones to include the emerging risk in a neater and more cost-effective manner. As discussed during the Airmic debate in London, perhaps the short-term solution is for industry representative bodies to take a lead and bring the various parts of the market together to pool data, experience and knowledge to come up with more consistent industry-wide solutions that meet customer demands. And surely it is up to associations and federations such as Airmic in the UK and Parima in Asia to drive this process and make sure it is designed to meet the needs of the customers, not the insurers and brokers.

Time for an industry response to technology challenge—but make sure it’s driven by risk managers

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