AI and Commercial Insurance — The Future is Here?
A superb infographic was released this week from the clever people at intelligentinsurer.com - Here’s an extract:
Having surveyed over 300 commercial insurers it seems clear the industry has reached a tipping point — at least in respect of how they reply to surveys. The overwhelming majority of respondents now firmly believe the wind of technological change (in the form of AI) is coming to one of the quieter backwaters of the insurance sector, commercial.
Who is still in denial?
As a company that tries to be an agent of change in this sector in Asia for SME insurance (an Insurtech, in the jargon), one of the standout lessons I’ve learned in the last three years building Inzsure.com is that this sector is slow to adopt new ideas. I’m still not quite sure where the headwinds come from but will try and develop some themes in this article.
At first glance, and as shown in this survey, it doesn’t seem to be the markets themselves that don't understand the need for change. Whilst it’s true that many insurers are still using antiquated technology throughout the region there has been a move to change. There are still several global players who continue to use AS400 as part of their core underwriting technology — for internal closed systems there hasn’t been a big impetus to move — until now. (Here is an example of an AS400 screen for any Millenials on here who have no idea what I’m referring to: )
But the introduction of AI moves the goalposts forever. The secret sauce of underwriting experience is no longer a finished product — irrespective of the product line. Those companies that ignore the fact that not only the goalposts but the entire playing field has shifted, will find themselves increasingly uncompetitive. Coupled with this will be unprecedented commoditization (read transparency?) for many lines in an industry that has arguably long thrived on having ignorant or, at least, poorly informed clients.
This message of change seems to have penetrated the boards of most big insurers. The response has been mixed. Some boards seem to believe that if they can throw enough money at some eager young startups, they will be able to take that innovation ‘fairy dust’ and sprinkle it back over Head Office to infect the mothership with creativity and change.
In reality, though, most big insurer cultures have been successfully fighting off change infections for a long time — in some cases hundreds of years.
But it doesn’t seem to be all lip service. Many companies are feeling the effect of the winds of change on their bottom lines and seem to be genuinely moving the needle in internal conversations. It’s clear from the results of this survey, that rightly or wrongly, most of the industry is now drinking the AI ‘Kool-Aid’.
As always with the buyers of complex financial products, customers tend to be a mixed bag of the well informed and active risk managers and, at the other end of the spectrum, busy people who just don’t have time to deal with this stuff in its current, arguably over-complex form. Most customers don’t care about ‘products’, they care about their needs. Traditionally the insurance industry has cared less about customer needs and more about what can be effectively marketed. To some extent, it has also been argued that the industry is resistant to change in customer needs as it can rely on regulators to not only assist in driving the sales funnel but also to move at a slow and measured pace too.
The insurance industry already risks becoming increasingly irrelevant in boardrooms across the globe. In Asia, where penetration rates have historically been low anyway, the industry is experiencing good growth. It would be truly disappointing if the benefits of appropriate insurance are undermined by a failure to modernise quickly enough to keep pace with changing customer demands.
In the future, commercial customers will begin to understand that leading providers will be able to offer bespoke solutions to their needs using AI delivered solutions. The traditional approach of forcing square product pegs into round client holes will perhaps die off completely.
In many cases, customers are already embracing the impact of AI and other aspects of digital transformation in their own core businesses. They understand that they will need to adapt or die. There will be little patience with service providers that attempt to hold back the tide of change.
Regulation is ultimately about ensuring the safety of the customer. As customers needs evolve and change the regulatory process tends to be the backstop against which the laggards rather than the leaders in each sector are measured. Depending on where a company is buying insurance in the world the regulatory framework in place varies considerably. Generally, though, the frameworks have been a force for stability in each country rather than a method for the facilitation of change. But this is also changing.
There are numerous cases of regulatory bodies that are now positively encouraging change and improvement in the insurance sector, sometimes taking on this additional mandate for the first time. In several countries, the drive to introduce technology into the insurance process, including AI, is being directly facilitated and accelerated by the actions of the regulator. This is only likely to continue to accelerate as customer demand evolves.
So finally we turn to the intermediaries. Historically their role has been to educate customers and take them on a journey of selection through the opportunities available to secure the correct choice. In the personal insurance space, this sector has already seen very significant disruption in many jurisdictions with the rise of online aggregation. This has been undoubtedly a mixed blessing. Whilst the customer has plenty of transparency and choice these days — some Google meta-searches easily turn up over twenty thousand results. As a decision maker, buying a policy, this is not very useful. The personal lines customer often just sorts the result by price and will perhaps more often than not, end up with a solution that is less than ideal.
Change has been slower to make an impact in the commercial insurance sector. Many producers grew up and learnt their trade in an era where personal relationships were everything and it seems as though many continue to turn a blind eye to the potential benefits of introducing technology to the process. There will likely be a role for a human intermediary in this space for a very long time to come. Many clients have highly complex needs and mapping these to a messy and product focussed insurance sector has been a challenging task requiring bespoke tailoring of one sort or another for a hundred years or more.
However, as we see the survey, the insurance markets themselves will be increasingly using AI and similar techniques to bring a more customer focussed approach to their solutions. It seems likely that this will erode many of the services currently provided by human intermediaries, particularly for those products that can be underwritten with structured but limited data points.
Whilst the human touch will always be irreplaceable in some relationships, perhaps we are on the verge of seeing embedded customer focussed products coupled with AI-driven chatbots taking away much of the traditional intermediary rice bowl.
Customers and regulators are ready. If this survey is truly representative then so are the insurers. There seems to be only one impediment to transparency and true corporate governance in commercial insurance? The intermediary.
The demise of the insurance industry intermediary has of course been predicted many times before. Not least in the ‘big bang’ launch of technology and automation in the London markets in the late 1990s. However, to paraphrase Mark Twain, the reports of imminent demise have been greatly exaggerated. Until today the commercial insurance ecosystem has continued mostly unchanged. Will the development of AI be any different? That remains to be seen.