The end of Underwriting or the Beginning of a New Hybrid Approach?
Predictive analytic is part of the future of underwriting, according to panellists speaking at the recent Insider Tech Live event. Will that replace a lot of underwriting questions and proposal forms? Without doubt. There will, of course, continue to be a place for underwriters with their own unique skill sets and experience.
In the future, however, it seems that the winners in the new insurance landscape will need to marry insurance expertise with technology knowhow to survive and thrive. Bodies like the Chartered Insurance Institute will have an important role to play in this environment. We need more digital skills, knowledge of new technologies. One panellist argued that ultimately, we want to be in a position where all of us do understand what tech can do, what we can do with it, what is available and decide which is the right tool for our needs, while disregarding the smoke and mirrors.
There was much talk of software engineers, being asked to obtain CII certification, which is certainly a route that DOCOsoft already adopts. A blend of insurance expertise and technology is the recipe for success. Collectively we need to do the same in the opposite direction. We need to make sure that everybody who works in insurance has a grounding in technology.
CII training, data science and AI insurance should all go hand in hand and hopefully, one day, this will be something that will be accessible for everyone.
InsurTech changing the landscape of Reinsurance
Insider Tech attendees learnt that InsurTechs today are enjoying significant growth, in fact much higher growth rates than you would find in the incumbent or traditional carriers – usually double digit but sometimes even triple digit.
However, anybody who has been in the insurance industry knows that when you see significant growth that usually causes concern because such growth is usually associated with poor performance, or more aggressive pricing achieved in the hope of increasing a market share. If you look at historical track records of some of the InsurTech players out there, through public or other statutory filings, it appears that the loss ratios on insure tech companies do indeed run higher. On a key ratio of measurement, which is combined ratio, InsurTech companies tend to run higher, according to one panel which focused on the changing landscape of reinsurance.
It now runs higher for a number of reasons, and obviously the insurer tech companies are working on bringing those down, but some of it relates to the fact that because you’re growing rapidly, you do have a heavier portion of your book that would be classified as new business. This new business usually brings with it a new business penalty from the loss ratio side.
On the expense side, a lot of these companies really have significant investments on building a brand, working on distribution, building a following, and then also a lot of tech investment that is built for a larger book business. To start, however, there are some really large upfront tech investments being made, so the expense ratio can be very high.
On the positive side though, reinsurers are interested in the business model of insurer Techs, most obviously in the technology. They like the innovation, they like the fact that start-ups can be nimble, accessing big data and really focused on customer experience. Of course, reinsurers are focused too on customer experience, but their very size makes them cumbersome and decision making can take time to gain consent which is a real handicap in today’s fast-moving environment.
In terms of partnerships with the reinsurer, there is the perceived value of buying into the potential and the future. It is anticipated that combined ratios will come back to lower levels. An insurer or reinsurer has to be profitable to remain viable, and there is a period of time during which they are effectively running at a loss before they can see a path to profitability, so there has to be a balance.
For now, we remain in growth mode zone, but reinsurers are not going to sign up to lose money for ever.
Using data to Understand Emerging Risks
One final area of interest to come out of the Insider Tech conference was the idea that insurers need to get closer to the original risk, to better understand emerging risks. One of the things that’s exciting for reinsurers about the startups is the quality of their data and how much they know about their book. One panellist who talks to reinsurers all the time says that a lot of work is being done to cleanse data.
The difficulty is that the underlying data has so many errors with missing information, or a lack of consistent sources being formatted in ways that are easily digestible. Tools are being built to help traditional carriers to solve that challenge reinsurers are getting really excited for a future world where the core client data is profoundly better. The amount of underwriting blindness that reinsurers sometimes have with big clients is shocking.
The ability for a firm to understand tranches of their portfolio and cohorts of their client base is something that the reinsurers can really sink their teeth into. The objective is to evaluate risk at a much more granular level rather than relying on a ‘mystery box’ for pricing. From the ground up, there is so much more granularity of data input, which must be the future for the industry.