Insurers today are under more strain than ever before. It is business as usual answering a huge range of consumer, industry and regulatory demands but now there is COVID-19, yet another ball insurers have to keep in the air. Vaccines are a welcome relief but the impact of the pandemic will be felt for some time. In many cases, it has changed the insurance landscape permanently.
However, in the near term, there are immediate issues insurers need to address as a result of COVID-19 and these were crystallised in the latest of the PRA’s regular ‘Dear CRO’ letters. The gist of the November letter, one that many carriers will already recognise, is “are you sure you’re writing coverage that both you and the customer understand?”
Equipped for rapid change
This may seem fundamental in the relationship between carrier and policyholder, but the disconnect has been thrown into sharp relief by the pandemic. As claimants attempted to realise their business interruption or travel insurance claims, carriers pushed back. The unique pandemic situation found itself tested in court. Many carriers found themselves on the wrong side of the debate.
Suddenly, there were a raft of coverages whose insufficiencies were exposed by coronavirus – event cancellation, employers’ liability, even economic impacts and geopolitical stability. This could yet prove to be a transformational game of dominoes.
For carriers, this calls into question primarily how they think about pricing, data and concentration of risk. Some are better placed to deal with this than others. One of the biggest problems, particularly in the London market, is the sheer volume of paper-based information. These may have been emailed as pdfs but the problem remains – ingestion of data, development of insight and strategy at pace have been hampered by a general lack of technological innovation in the industry.
Insurers also face a client base that is increasingly global. There is a need to provide products across multiple jurisdictions and that means there are data streams flowing in and out of organisations from all over the place. There is a pressing need for digital transformation.
Some are indeed better placed than others to perform. There are legacy companies who have invested over the last five years in a more flexible approach to their technology architectures and in new tools that embed machine learning and AI, tools that can ingest that paper-based and pdf data. And, there are companies out there without the heavy weight of legacy that can use modern technologies to approach challenges in a much more agile way. But, increasingly, we are seeing an ecosystem model emerge that binds both experience and innovation.
In 2019, AXA XL partnered with Parsyl Inc to make the most of predictive analytics to get a sophisticated view of risk dynamics in marine cargo shipments, for example. Sensors and data mining help both customer and client monitor product as it moves through the supply chain, minimising loss and helping the insurer to model insurance products precisely fit for purpose.
Innovation doesn’t necessarily have to mean an in-house build. This is about partnering, borrowing or renting technology so that it delivers the service and information your business needs.
Understandably, carriers have been nervous about partnerships, but today more and more third parties are able to satisfy the stringent levels of protection around data and cybersecurity that the insurance sector demands. The opportunity cost of not participating in rapid innovation is arguably much greater than the risk of building that network.
That’s not to say insurers don’t have to perform robust due diligence when onboarding partners, and not every partner is up to scratch – even today.
First and foremost, always look at the size, security and longevity of the company. Even in today’s fail fast culture, for the most part, partners need to be around for the long-term. The second piece is around cyber security. Even some of the biggest and the best companies have had significant cyber issues in the past two years. Insurers have very sensitive corporate or personal information at their disposal and the PRA will be looking very closely at firms, how they test, their risk culture and how colleagues assess risk.
In fact, culture is key. It provides the baseline that says ‘these people’s values and strategic understanding match my own’. It comes down to the individual’s view of risk and reward. Some solutions may look great but the associated risks are just too high. There’s nothing wrong with experimentation in a safe, secure test environment. It lets you improvise what you want to do and make decisions quickly. The mark of a great business is that not everything it has tried will work, but it learned, modified and got there in the end.
From ad-hoc to strategic, tech-driven response
Times are moving fast. The need to keep up with macro changes – economic and pandemic, customer expectations, the relentlessly changing regulation and pressure to innovate can seem overwhelming. For example, the Dear CEO letter that the PRA issued in July 2020 on climate change risk insists that all financial services businesses in the UK should have embedded climate change and wider ESG issues into every aspect of their business.
This means embedding climate change impacts into the detailed consideration and pricing of risks. Lloyd’s is issuing whole new frameworks around pricing models and we’re going to see lots of insurers scratching their heads because, up to now, for many it’s been happening by rule of thumb. Regulation can be beneficial but there is no doubt that much of the insurance industry is on the back foot. It needs to get ahead of the curve.
The carriers demonstrating best practice can keep up because they never elected to do the bare minimum in the first place. Those that will succeed are those that have the appetite for change, transformation and innovation already baked in. This needs to come from the top. Insurers can afford to outsource technology solutions, they can’t outsource culture. There is a question over whether today’s insurers have enough IT and operations skills at board level. There are plenty of actuaries but how organisations cope with change, and how boards satisfy themselves that they’re making the right decisions on technology and data will come down to the people sitting around that table.
But, by far biggest risk to insurers in the current climate is complacency. Think back to that modest Finnish Rubber Company. Through various mergers and evolutions it eventually became Nokia, arguably the biggest and most powerful mobile company in the world – for a time. The music player that debuted at the turn of the millennium was little more than a curiosity – until Apple put a sim in it. It’s a salutary lesson – insurers have to continually challenge themselves to find their weakest point.