Can the insurance industry continue to innovate?

The insurance industry has a proud heritage of supporting innovation and helping society manage periods of change. However, today’s complex global supply chains and digitalization is proving harder to manage as risk experts.

One significant change we need to address is operating 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, like property or machinery. Intangible risks are also now among the biggest drivers of volatility for business, from reputational damage to cyberattacks and business interruption events, like the pandemic.

Advances in technology are creating a steady pipeline of emerging risks, while complex global business relationships and supply chains are making some traditional insurable risks difficult to predict and quantify. Even more transformative change is on the horizon: clean energy, artificial intelligence and the sharing economy all have the potential to bring about radical change.

Insurers’ traditional business models will have to keep up with this pace of change. Without a new mindset, we risk becoming less and less relevant to the economy and to society.

Running out of time

The insurance industry’s key success factor has been its distinctive perspective on time. We take the long-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 events that happen once every 400 years?

This recipe worked well in the past — change tended to be slow, even when driven by innovation that itself was disruptive. This timeline allowed insurers to be there for society during the explosion of international trade in the 18^th century, industrialization and modern finance in the 19^th century, and the internal combustion engine and electronic communications in the 20^th century.

Innovation in the 21^st century is characterized by speed. Today, the pace of change is increasing, as many have noted, but it is the shortened time of adoption of new disruptive innovations is as salient. Facebook launched in 2004, and already has almost three billion users. In 2007, Apple unveiled the iPhone. Today, there are over 4 billion smartphone users, that’s just over half of the world’s population. Last year, there were over 16.5 million electric cars on the road, recording triple growth in just three years. Several car manufacturers aim to be 100% electric by 2030.

Race to remain relevant

Entrepreneurs, scientists and those that fund new ventures deal with risks associated with innovation. It’s the insurance industry that brings a disciplined approach to helping society deal with the risks and volatility associated with widespread adoption. Digitalization, for example, brings with it potentially huge systemic risks from reliance on critical communications infrastructure.

Enabling the adoption of innovation, namely managing the volatility that comes from using new ideas, is the problem insurers need to address. We may not all recognize it yet, but the industry is in a race to solve this problem. Technology companies have access to a wealth of valuable data on risk 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, as well as potentially share or trade their risks with others.

The industry has a stark choice. We could stick to our knitting and avoid (or exclude) the risks we don’t understand, and that are not easily quantifiable. Or we increase our investments to find better ways of assessing and evaluating risk. Sticking to the historical time-based approach to understanding risk is a just recipe to fall into irrelevance.

Blank sheet of paper

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

If starting out again, would an insurer rely only on descriptive data, or would it make better use of behavioral data? Would an underwriter ask a motorist how old they are or their gender? Or would they want to know how well they drive, or where they drive and how often? Behavioral data has always been able to complement descriptive data. In today’s environment, behavioral data has become a necessity.

Keeping pace to maintain relevance

Insurers are beginning to recognize the potential value in nontraditional data as a proxy for risk. But we collectively need to accelerate this development by investing in novel ways to capture behavioral data and the agile tools necessary to extract the appropriate risk insights.

It’s time for the insurance industry to regain its rightful role as an important participant in the broader innovation ecosystem — the key player, in fact, that enables society to benefit from widespread adoption of new ideas and to tackle the challenges that stem from new sources of volatility.

Paul Mang is chief innovation officer at Guidewire, a provider of predictive analytics, risk insights and business intelligence solutions for the insurance industry. He is the former Global CEO of analytics at Aon plc.

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