Technology has streamlined countless processes in our daily lives, and insurance is no stranger to this transformation. Technology can make insurance simpler and more personal for consumers, and can enable actuaries to better analyze unstructured data, make good decisions, create new products, and find channels to enhance profitability, provided they can tame the flood of information pouring in from across the digital ecosystem.
Insurance customers are increasingly adopting digital technologies through smartphone applications and other connected devices, resetting the standards of digital engagement. According to a 2020 survey by Mobiquity, 88 percent of baby boomers and 90 percent of younger generations say digital technology helped them during COVID-19, and they expect to continue using technology to reduce their daily touchpoints after the pandemic has passed.
In response, insurers are leveraging technology to understand and analyze a growing volume of unstructured data and create more business value and simplified, personalized digital interactions with policyholders. At the same time, insurers are looking to technology to help them compete with technology giants and nimble insurtechs.
Insurers have a great opportunity to reach new customers and retain their existing customers by expanding digital and self-service capabilities. For instance, usage-based insurance and parametric insurance offer cheaper premiums and pre-determined payouts based on trigger events, respectively. They incorporate technologies like the Internet of Things (IoT) and analytics to provide tailored solutions. But first, actuaries must harness the wave of unstructured, real-time data that is the result of increased digital activity and evolve beyond the statistical data and models traditionally used to determine event probability and forecast risk and liabilities.
COVID-19 Accelerates Usage-Based Insurance Popularity
The pandemic has not only affected connected technology but has also influenced consumers’ insurance preferences. Price-sensitive customers are looking for more than just premium discounts. The J.D. Power 2020 U.S. Auto Insurance Study found 39 percent of auto insurance policyholders were not satisfied with reduced premiums or premium-refund initiatives. And since customers are not driving as many miles because of the remote or hybrid workplace model, they want an auto insurance coverage to fit their specific driving habits.
Usage-based Insurance (UBI) addresses these concerns. While not a new concept, this model is appealing to customers. The program uses telematics devices like smart sensors to track real-time vehicle data. As opposed to traditional auto insurance coverage, usage-based insurance lets auto insurers closely align premiums with each customer’s driving behavior and actual miles driven. For example, Progressive, a pioneer in telematics-driven insurance programs, currently offers Snapshot ProView®, a voluntary usage-based insurance and fleet management program for small business owners. Customers who purchase the program can save at least five percent on their commercial auto policy in its initial term. In addition, customers get digital access to the Fleet Dashboard, which offers insights on real-time vehicle location details, geofencing notifications and trip tracking.
This pay-by-mile insurance model rewards customers with a myriad of benefits such as accurate premium pricing based on current usage and driving behavior, mileage- and driving-behavior-linked discounts, and personalized services like proactive safety alerts and suggestions. This model rewards insurers through reduced claim fraud and expenses, bridged coverage gaps for all kinds of drivers, and enhanced customer trust and transparency through digital policy access. The industry has also witnessed an evolution in usage-based insurance programs, including pay-how-you-drive (PHYD) programs which provide flexible coverage that links premiums to driving patterns, as well as manage-how-you-drive (MHYD) programs, which monitor different driving patterns by sending real-time alerts and suggestions and matching premiums to post-trip analyses.
Europe and the U.K. have also witnessed an uptake in telematic insurance inquiries. Although European customers are demanding alternative auto insurance solutions for their post-lockdown driving needs, they have a lower propensity for sharing personal vehicle data than U.S. consumers. According to the 2020 Otonomo and SBD survey of the European automotive consumer, 77 percent of consumers in France, Germany, Italy, Spain and the U.K. are interested in services based on connected car data. However, only one-quarter of European consumers are comfortable sharing some or all their data. Willingness to share vehicle data in Italy and Spain is higher than in Germany. Customers only consider sharing data if they were offered a tangible incentive such as cheaper insurance rates or discounted vehicle servicing. To encourage telematics insurance adoption, Telematics solutions providers, car manufacturers and insurers in Europe and the U.K. need to step up with services that bolster trust and transparency among consumers.
Rising Catastrophic Risk Paves the Way for Parametric Insurance
Economic losses from natural disasters amounted to $268 billion in 2020, 10 percent higher than the average yearly economic loss for the twenty-first century. Out of the $268 billion loss, only 36 percent ($97 billion) was insured by insurers and reinsurers, according to the Weather, Climate & Catastrophe Insight: 2020 Annual Report from Aon. Disaster responses and the claim processes were disrupted by pandemic-driven social distancing restrictions.
To navigate these issues, insurers and reinsurers were compelled to adopt digital technologies to meet various customer needs including expediting the claims process. But even after covering all losses in 2020, the insurance industry was still left with a coverage gap of 64 percent. Parametric insurance could bridge this gap and offer immediate financial relief to policyholders, without going through a complex claims settlement process. In the occurrence of an event or a catastrophe, the policyholder gets a fixed amount as per the contract.
Like usage-based insurance, parametric insurance is not a new concept, but it is experiencing increasing adoption as a means of closing the coverage gap caused by climate change and frequent natural disasters. For example, Zurich North America launched a construction weather parametric policy to cover weather-related construction delays, which are not included in conventional builder’s risk insurance policies. However, amidst this surging interest, insurers need to clearly define and word the triggering event and payout mechanism in the policy to ensure transparency.
Unlike conventional insurance coverage, which is based on standard industry norms, limited scope of personalization and complex claims processes, parametric insurance provides personalized risk exposure, speedy payments for immediate financial relief, and wide use of digital technologies to analyze unstructured data and automate settlement. It also provides a simplified paperless claims process based on the event data and reduced claim cost by eliminating the claims adjuster role.
The Impact on Actuaries
Simplifying the claims process, parametric insurance, and, indeed, all customized insurance policies, place more responsibilities on actuaries and underwriters. Data accessibility and accuracy are key to ensuring actuaries receive appropriate data points and analytics to make good decisions and help underwriters prevent underwriting leakage. This, in turn, depends on modern platforms, efficient processes, automated workflows, the latest technologies, smooth integrations, underlying talent and eliminating silos. With the right strategy, insurers can innovate, create new products and find various channels to grow revenue and enhance profitability.
The COVID-19 pandemic and the resulting government-mandated shutdowns bolstered digital activity among all consumers. This has led to an influx of data and changing insurance preferences of policyholders. Now, with the spike in digital activity and prevalence of connected devices, actuaries will have access to real-time data to ascertain risk. Insurance actuaries must pay heed to these changes. As personalized products become mainstream, actuaries should be prepared to understand and interpret the vast amount of unstructured data generated by various sources, including policyholders.
Using a wide range of digital technologies, such as artificial intelligence (AI), machine learning (ML) and natural language processing (NLP), will allow actuaries to process big data in various digital models and algorithms and generate predictive analytics. This will enable richer analysis and dashboards, risk alerts and competitive pricing. In essence, actuaries can capitalize on the volume of incoming data to help insurers create tailored products their customer segments demand. Risk predictors can then drive business opportunities.
Editor’s Note: Bharti Nagraj, a research specialist with ISG, contributed to this article.