How the insurance industry is embracing innovation to cover unforeseen risks

Safe, trust­ed and well-received poli­cies always appeal to under­writ­ers. After all, why take unnec­es­sary risks on unproven prod­ucts?

And rather than pars­ing com­mer­cial under­writ­ing prospects accord­ing to risk pro­file and insur­a­bil­i­ty, indus­try insid­ers say buc­ca­neer­ing insur­ance firms must cre­ate orig­i­nal prod­ucts first, then test them on an unsus­pect­ing mar­ket.  

Big data is, arguably, the most excit­ing dig­i­tal-era inno­va­tion to affect the world­wide insur­ance indus­try, cre­at­ing or extract­ing new val­ue from insights.

There’s sig­nif­i­cant invest­ment behind the dri­ve to inno­vate, too. Gart­ner thinks glob­al IT spend­ing with­in the insur­ance mar­ket reached $222 bil­lion in 2020.

But despite the tan­ta­lis­ing prospects of tech-dri­ven progress, lega­cy sys­tem com­plex­i­ty com­bined with cor­po­rate iner­tia have con­spired to its slow trac­tion.  

Insuring the uninsurable

Simon McGinn, Allianz UK gen­er­al man­ag­er for com­mer­cial and per­son­al, urges dig­i­tal devel­op­ment as cru­cial to enabling greater agili­ty in key areas, such as the reor­gan­i­sa­tion of assets for spe­cif­ic chan­nels and oppor­tu­ni­ties. 

“The crit­i­cal com­po­nent is in the data space where valu­able his­toric and new data sources can be bet­ter aggre­gat­ed to enable this,” he says. “The enhanced abil­i­ty to inter­ro­gate data in a way that can pro­vide under­stand­ing of risk pools or cus­tomer seg­ments means we are able to meet dif­fer­ing cus­tomer needs with increased flex­i­bil­i­ty and pre­ci­sion.” 

David Broughton, head of insur­able risk at Cen­tri­ca, the inter­na­tion­al ener­gy ser­vices com­pa­ny, thinks unin­sured risks are a crit­i­cal over­sight for the insur­ance indus­try. He chairs a work­ing group on the sub­ject, con­vened by Rus­sell, the risk man­age­ment soft­ware and ser­vices firm.

Broughton claims intan­gi­ble assets have over­tak­en the val­ue of tan­gi­ble assets in the cor­po­rate world, while large cor­po­ra­tions are fac­ing cli­mate change and a vari­ety of oth­er risks to their future.

“At the same time, the insur­ance mar­ket has, on the whole, due to past issues and increased reg­u­la­to­ry pres­sure, reduced their risk appetite for intan­gi­ble assets, and have con­cen­trat­ed more on prop­er­ty and there­fore nat­ur­al per­ils, also per­son­al lines, motor and small and medi­um-sized enter­pris­es,” he says. 

This has left large cor­po­rate clients exposed and feel­ing the insur­ance indus­try is fail­ing to respond to the increas­ing com­plex­i­ty of risk they wish to mit­i­gate, Broughton adds.

Sins of omission

The omis­sion is echoed by David Heath, chair of the Insti­tute and Fac­ul­ty of Actu­ar­ies (IFoA) Pol­i­cy and Pub­lic Affairs Board. IFoA mem­bers have a statu­to­ry role to pro­vide actu­ar­i­al opin­ions for man­ag­ing agents at Lloyd’s of Lon­don, the world’s fore­most insur­ance mar­ket. 

Heath cites instances where the use of advanced tech, for exam­ple wear­able tech­nol­o­gy and genet­ic test­ing, could reduce the risk pool and leave those at the mar­gins with­out ade­quate pro­tec­tion or in some cas­es no pro­tec­tion at all.

Astound­ing­ly, accord­ing to Rus­sell research, only 20 per cent of risk that con­cerns the cor­po­rate C‑suite is cur­rent­ly insured. “Much of the bal­ance is increas­ing­ly intan­gi­ble and asso­ci­at­ed with the extend­ed enter­prise as a result of inter­con­nec­tiv­i­ty and dig­i­tal­i­sa­tion. Siloed insur­ance prod­ucts do not match ways cor­po­rates oper­ate their busi­ness­es,” says Rus­sell Group man­ag­ing direc­tor Suki Basi. 

To address this, risk trans­fer needs to be risk based not per­il based, while the trans­fer of risk frees up the cor­po­rate bal­ance sheet which, in turn, leads to oppor­tu­ni­ty.

Risk and insur­ance man­agers from major cor­po­rates have long been talk­ing about this issue, but have had lit­tle response from the tra­di­tion­al insur­ance mar­ket. “As a result, they [cor­po­rates] are being dri­ven to make increased use of cap­tives, and there­fore the wider rein­sur­ance mar­ket, espe­cial­ly in the use of struc­tured long-term mul­ti-class cov­ers,” says Basi. 

Future-fit focus

Despite this, new prod­ucts and ser­vices are devel­oped and launched every day with­in the insur­ance indus­try by com­pa­nies of all sizes and dis­trib­u­tors, accord­ing to McGinn at Allianz. 

“A lot of what is often con­sid­ered inno­va­tion is in insurtech, and is usu­al­ly dis­tri­b­u­tion inno­va­tion, and often needs the sup­port of estab­lished ‘big-tick­et’ insur­ers who have the data and expe­ri­ence to under­write the risks,” he says. “The actu­al risk being insured is often not new, but exist­ing risk types repack­aged to meet more fine­ly seg­ment­ed cus­tomer needs.” 

While there tends not to be an “iPhone” moment, a game-chang­er, in risk-car­ry­ing prod­ucts, adds McGinn, there is a huge amount of inno­va­tion at indi­vid­ual pol­i­cy­hold­er lev­el for com­mer­cial cus­tomers when it comes to tai­lor­ing of cov­er­age, risk engi­neer­ing and pol­i­cy word­ing devel­op­ment as a result of the huge­ly com­pet­i­tive UK mar­ket. 

“There is a great deal of this, but as it is behind the scenes and cus­tomer spe­cif­ic, it’s just not that sexy,” he says. 

One such nov­el devel­op­ment is Tic­trac, a health and lifestyle track­er that inte­grates data across an app linked to devices such as Garmin, Fit­bit, Apple Health and Stra­va. 

Tic­trac received fund­ing from Avi­va Ven­tures, the insurer’s ven­ture cap­i­tal fund set up in 2015 to make invest­ments in ear­ly-stage, high-growth-poten­tial busi­ness­es, with the aim of bring­ing new oppor­tu­ni­ties, ideas and insight to Avi­va. Tic­trac aims to build cus­tomer engage­ment with Avi­va and reduce pre­ventable health con­di­tions in users.  

Aviva’s chief inno­va­tion offi­cer Ben Luck­ett empha­sis­es up-to-date insights on emerg­ing glob­al trends are crit­i­cal to inform strate­gic dis­cus­sions and deci­sion-mak­ing.

Ulti­mate­ly, to tru­ly stim­u­late dis­rup­tive tech­niques and prod­ucts, the mind­set of adher­ing dogged­ly to pre­dictable core rev­enue streams must be ditched. Time must be freed up for prod­uct inno­va­tors to exper­i­ment with­out fear of fail­ure.

As McGinn attests, the biggest chal­lenge is not ideas, but the abil­i­ty to iden­ti­fy inno­va­tions that are sus­tain­able, pro­vide real val­ue for the cus­tomer and make a rea­son­able return for the risk car­ri­er.