Time insurers stepped up technological game

The potential benefits for the risk and insurance industry of a greater exploitation of new technology were on full display at the Asia CEO Insurance Summit held in Hong Kong in February. The insurance industry is not known for its adoption of bleeding edge technology but given the pace of technological development, it is probably about time it started. The event was subtitled: ‘Insuring a Smart World: The Next Uber’. Given that in 2015 the online taxi firm lost more than $1bn and faced more than 50 lawsuits from disgruntled drivers, rival taxi firms and unhappy customers in the US alone, it is perhaps not the best example for insurers to follow. But the extent to which Uber has disrupted the traditional business model for taxi firms is beyond doubt. Similar developments are now happening in the insurance world, with the rise of peer-to-peer insurance ventures such as Friendsurance in Germany that acts as a broker for household, personal liability and legal expenses insurance.hideSmall claims normally paid by policyholders as part of their deductibles can instead be shared by groups of friends. Part of their premiums are set aside to cover these small claims and anything left over at the end of the year is shared between the group. Elsewhere, there are usage-based insurance products such as US-based MetroMile, which provides motor insurance on a mileage basis in a bid to cater for low-mileage drivers. In January 2015, it entered into a partnership with Uber to insure its drivers that do not require commercial insurance. Users pay a base rate and an additional fixed rate per mile. Mileage is measured using on-board diagnostics that also collect data about the trips taken and the ‘health’ of the car. Diagnostic technology and the so-called Internet of Things, the term used to describe the growing number of devices and appliances connected to the internet, have the potential to profoundly affect the insurance industry and the products it provides, according to insurance chiefs. Data, data everywhere The technology is creating massive amounts of data, all of which can and should be used by insurers. “We cannot ignore the Internet of Things,” said Rudi Spaan, president and chief executive officer (CEO), AIG Hong Kong, speaking at the conference. “Ninety percent of the world’s data was created in the past two years because there are so many applications that can capture data,” he added. Such a data-rich environment will have a profound effect on the insurance industry, said Mr Spaan. Policies will be more dynamic because of the information available. For example, an electronic car linked to an iWatch could create motor policies based on how much the driver presses the accelerator. Wearable technology such as the iWatch could also radically change health and life insurance by providing constant data on the wellbeing of insureds, which can then be used by underwriters. But the trade-off for insurers is that they will have to manage the erosion of certain lines because of the new technology, said Geoff Riddell, adviser, APMEA, Zurich Insurance. “Personal lines insurance will disappear when you have driverless cars that are summoned through applications like Uber,” said Mr Riddell. Meanwhile, the emergence of smart homes where sensors detect potential risks such as an overflowing bath, all possessions are fitted with tracking devices and where a stolen television would be inoperable outside of its home-based network, could drastically affect the property market. Insurers will also have to meet the challenge of a growing peer-to-peer insurance market and the rise of mutual insurance. But on the positive side, data will also be a catalyst for the insurance industry to improve its image and rid itself of some of the common customer complaints such as exclusions, said Mr Riddell. “We are seeing the most dramatic changes the industry has ever faced but it is important that we remember the first principles of insurance. Developments like peer-to-peer insurance do not change the fundamental nature of insurance, which is to provide capital through risk pooling so that everyone in that pool feels they are being fairly treated,” he explained. Mental change Exploiting the potential of technology in the corporate risk space will also involve a change of mentality for some insurers and the adoption of Silicon Valley-inspired thinking. “We are at a point where we have to test some things and be prepared to fail but fail fast and fail small,” said Keith Thomas, CEO, Global Corporate Asia Pacific, Zurich Insurance. “In the corporate risk space we are doing a lot with Big Data and that is coming from customers asking for their data to be used for benchmarking. We can also use that data to analyse clients’ different needs and spending patterns,” he said. But in the future, with technology being used to reduce risk and losses, the challenge for insurers will be how they get paid for the claims that are not made rather the ones that are, said Mr Thomas. Examples could include partnerships with industrial manufacturers to provide sensors on building tools, to prevent costly delays on construction projects. But all of this innovation can only be achieved if the regulators are able to keep pace with the developments, said Mr Spaan, particularly smaller insurers that may need to balance the potential benefit of Big Data with the cost of data protection rules. “Regulators have to keep up with technology. Those that do not will fall behind,” he said. Mr Spaan cited the example of the Singapore regulator and its move from a rules-based to a risk-based regulatory structure. “It became more business-friendly and this led more insurers to base their Asian businesses in Singapore, such as Lloyd’s, which relocated from Hong Kong,” he added. The onus on regulators was noted by Hong Kong’s interim insurance commissioner John Leung, a keynote speaker at the conference. Mr Leung cited the great potential for the wider use of technology within Asia’s insurance industry. A younger generation of customers is increasingly familiar with new technology and is demanding personalised financial services but, so far, Asian insurers have been slow to adapt. In part, this is because of the complex processes involved, from underwriting to risk capital allocation. But, said Mr Leung, exploiting data analytics, psychometric testing and digital distribution will be crucial if insurers are to remain relevant and provide value to their clients. “It is likely to be more of an evolution rather than a revolution but no one should underestimate the long-term cumulative impact that technology will have on the insurance market,” said the regulator. Regulatory implications Mr Leung also warned insurers that the development of technology will have regulatory implications. “It is true that some fintech is disruptive and it raises questions about how regulation should be applied. We need to update our rules to keep pace with technology and to allow for innovation but also to address concerns about, for example, changes in distribution,” he said. Mr Leung referenced a recent report from the European Insurance and Occupational Pensions Authority, the European Union’s insurance watchdog, which warned that a number of online insurance products are being sold without sufficient advice. “As regulators we have to balance innovation with consumer protection and enabling a level playing field,” he said. This regulatory balance was also brought up at the event by Moung-Mo Lee, general manager, analytics at rating agency A M Best Asia Pacific. “Regulation can push innovation in two different directions depending on the intention,” he commented. For example, if the government wants to increase the penetration of online insurance products, it will encourage innovation. However, if the government wants to protect the share of domestic incumbents, innovation is likely to be stifled. While pressing the need for insurers to spend more on technology, Mr Leung did not excuse his own organisation from the need for greater investment. He added that the Hong Kong Insurance Commission will be increasing its own technology capacity as a way to reduce the cost of compliance, an initiative he dubbed “red tech”. To this end, the Hong Kong government set up a steering committee in 2015 to develop the island as a fintech hub and to provide “an environment conducive to technology innovation”. The steering committee is due to publish a report into its first year. In addition, the Hong Kong government has also launched an enterprise scheme to encourage greater private sector investment in research and development, providing HK$10m grants to startup companies. Meanwhile, the Hong Kong Federation of Insurers, a self-regulated association, has set up a taskforce to work with the Hong Kong government to inspire more technology development. “I expect other Asian countries to adopt the same approach,” said Mr Leung. Some delegates were sceptical of Hong Kong’s fintech ambitions. Mainland China has enjoyed far greater success with technology-led financial services such as Alibaba and TenCent, while other Asian countries such as Singapore have been quicker to adopt new technology. Indeed, Singapore’s regulator – the Monetary Authority of Singapore (MAS) – was held up as a shining example of a tech-literate and innovation-friendly supervisor by several speakers at the event. “The MAS really wants to understand and support innovation,” said Saskia Bosch van Rosenthal, director, insurance risk and regulatory, PwC Hong Kong. The MAS has a chief fintech officer and two labs and spends a lot of time helping startups go through the regulatory approval process. By working closely with new businesses, supervisors can not only foster innovation but also protect consumers, said Ms Bosch van Rosenthal. “It is not possible for all regulators to do this but there should be more discussion and partnership with the industry,” she added. In addition to working with startups, insurance regulators and authorities in Asia also have to come up with a workable policy for the use of data, particularly if there is ever going to be a thriving cross-border market. For example, there are different rules in different Asian markets regarding the use of customer data, with many jurisdictions not allowing data to leave its borders. Not only does this create problems for insurers in terms of data storage, it also creates problems for insurance buyers – for example in areas such as travel insurance, which typically has to be bought in the country of residence rather than the destination. “Regulators are a long way from developing a cross-border market but that is the way the market will eventually go,” said Ms Bosch van Rosenthal. “In the current low interest rate environment, I don’t think this will be a priority for regulators but they will have to prepare for a new world.” What about the corporates? Corporate insurance buyers fear they are being left out of the technology innovations within the insurance industry. Personal lines such as motor, health and life insurance are all incorporating emerging technology such as telematics, wearable tech and the Internet of Things. Similarly, some personal insurance policies are being delivered digitally and on a usage basis. But these developments are not being matched in the corporate insurance market. “It is a huge issue,” said Steve Tunstall, director of Tunstall Associates and secretary general of the Pan-Asia Risk and Insurance Management Association. Mr Tunstall raised the subject at the conference and expanded on the topic in interview with Commercial Risk Asia. Of particular concern to Mr Tunstall was the possibility that, despite all the potential for innovation within the industry, the constant consolidation among insurers would actually result in fewer options and less choice for corporate insurance buyers. “And when they look over the fence into the personal lines market, they see a wealth of opportunities opening up and much greater innovation and choice. They could feel they are being left behind,” he said. It is not that there is a total absence of new services in the corporate space but more that the rate and extent of development is just not great enough, said Mr Tunstall. “We have seen some examples of new, technology-led services. Some underwriters and brokers are using technology to create more joined-up insurance programmes. But the pace of change is nothing like what has been seen in the personal insurance market,” he explained. Fintech developments have tended to focus on consumer-driven markets, be that banking or insurance. For example, the digital distribution of products has tended to focus primarily on the retail market rather than corporates, mainly because of the huge cost savings available. And many of the diagnostics and psychometrics are easily applicable to personal lines like health and motor. However, as many of the conference speakers highlighted, there are also ways that new technology and new data analysis tools and techniques could be applied to the corporate insurance market. “Data analysis can now provide reliable predictions about future events,” said Mr Leung. “This will help underwriters to provide more accurate pricing and will also enable insurers to identify early whether a claim will need senior managers involved or a litigation team,” he added. For the growing number of insurance products that exploit automation and digital distribution, the change of operating model is in part possible because of the commoditised nature of the risk involved and the purchasing behaviour of retail consumers. In contrast, corporate insurance programmes are often more complex and bespoke. But, said Mr Tunstall, there is enough diversity among corporates’ insurance demands to warrant greater use of the same innovations seen in the personal insurance market. “For any large corporate buyer there will always be a role for a good broker with experience that is able to design an insurance programme specific to a company’s needs. But there may be other lines within the same company that have more commoditised requirements. In these cases, speed, transactional efficiency and cost savings are perhaps more critical for the business.” Mr Tunstall identified employee benefits as one corporate line that could be ripe for more technology-led innovation. “There are definitely opportunities within this space for technology to be used to speed up systems and processes and improve the level of transparency,” said Mr Tunstall. “But I just don’t see insurers grasping the nettle.” The personal insurance market is always likely to attract a greater number of new entrants and startups that offer non-traditional services and operating models based on the use of new technology, such as the aforementioned Friendsurance and other new ventures like health insurance startup Oscar and another peer-to-peer insurer, Lemonade. The possibility of large, global retail brands like Facebook and Google entering the insurance market has also been a topic of discussion within the industry. The likelihood that these same brands will enter the corporate insurance market is seldom brought up but, said Mr Tunstall, there is theoretically no reason why the same disruption cannot take place in the corporate insurance space. “Most sophisticated large corporate buyers regularly review their partner relationships. There is nothing cast in stone. But any insurance product from a non-traditional insurer would have to look acceptable to the board and be credible in terms of competitors’ offerings. “At the end of the day, it is still about trust, credibility and having confidence that claims will get paid appropriately,” he concluded.

Time insurers stepped up technological game

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