The London insurance market has historically been able to trade off a scarcity of underwriting capital and deep subject matter knowledge. As is very well documented, capital now is certainly not in short supply, and it looks to stay that way as long as the era of low interest rates continues. This will push the industry in one of two ways:
1) Move to cheaper capital; or
2) Become an industry which is more intuitive in what customers actually need (which is more likely).
Cue the birth of Insurtech — technology will play an ever more significant role in the industry, and not just the product it provides, but more the mindset of tackling innovation in an extremely efficient and often ruthless way. It is no coincidence the insurance industry has looked to the darlings of the tech world, including Amazon, Facebook and Twitter, for inspiration. These tech companies inherently have no physical assets, and as a result have to blaze ahead of competition in signing up new clients and keeping churn to an absolute minimum to keep their share price soaring. Their approach to innovation in keeping the customer at the heart of what they do is breathtaking.
The guiding principles of modern technology comes from Agile software development. This came to fruition in the early 2000s when a bunch of brilliant software engineers who consolidated these practices into a framework under the ‘Agile manifesto’https://www.agilealliance.org/agile101/the-agile-manifesto/. The focus of Agile is to deliver incremental value to the customer through the software developed and delivered. This was a rebellion away from working on large waterfall projects. Waterfall projects typically took a significant amount of time to understanding requirements and then even longer to building. Often by the time the product was released the customers needs had changed, or there had been a misunderstanding of what the requirements were in the first place. At its heart Agile has the ability to deliver software to customers in the shortest time possible in order to learn what is the next best thing to build. This method of de-risking products was framed in the popular book “The Lean Startup” by Eric Rise, where he popularised the minimal viable product (MVP); this brought an understanding of Agile to the mainstream.
But how is this applied to the insurance industry?
If you strip away everything around the distribution of an insurance product: the sales, the retail broker, wholesale broker, and all the commissions, we end up with an underwriting model. In this simplistic view of the insurance industry one product is competing with a series of calculations set by an actuary over another. In fact some products we might think of as straightforward involve hundreds of calculations from dozens of input tables. The insured is relied upon to fill out long 10 page proposal forms year after year to satisfy the data hungry underwriting algorithms.
The insurance industry is a data business through and through. There is a surge in AI technology startups focused on helping the industry reduce its reliance on the clunky way it collects its underwriting data. This will fundamentally improve the industries ability to de-risk new product launches and behave in a more Agile way.
For example — An entrant to the market is looking to set up a home insurance product — the insured will be required to answer between 20 to 30 questions. Presuming this is collected via a digital medium, this creates the first layer of complexity. This detailed question set then has to drive 100’s of calculations from dozens of rating tables. Technology has the ability to do these calculations faster than a person can blink, but as each layer of complexity is created the risk of the project grows exponentially.
Using an MVP underwriting algorithm which looks at the relationship between limit and price with the addition of data enrichment, it is possible to reduce the question set to say 5 questions and handful of calculations and tables. As the product scales it is possible to bring in more complexity into the product and rating engine. It’s easy to make something simple complex, but much more difficult to make something complex simple.
Reducing the question set will enhance the customer experience of a new insurance product, which in turn will increase the chance of its success. Reducing the complexity of the underwriting model will speed up the time to market for the technology product, and this will de-risk the chance of failure. If the product is an early success, more time can be focused on delivering incremental enhancements to the customer journey. As well as exploring new and more cost effective distribution and adapting the coverage to the customers actual needs.
Technologies like AI will allow the insurance industry to become more agile in responding to the clients needs; and free up the capacity of its practitioners to focus on working out what is the next best thing to build that offers the most value to their customers. This will truly put the customer at the centre of the insurance industry.