How tech is changing the insurance model 

January 2018    |    9 minute read    |    By David Gambrill

Digital transformation is promising not only to expand the potential for process innovation at property and casualty insurance organizations in Canada, but some predict it may alter the core insurance model as well. Canadian insurance professionals predict that their roles will change to become more like holistic risk advisors in the future.

Changing the model: from underwriting loss to risk prevention

Historically, insurance has been about pooling resources to help underwrite losses due to unforeseen accidents. This principle can be traced back thousands of years ago. Between 1792 and 1750 B.C., in what was presumed to be the first written insurance contract, King Hammurabi carved a law into a Babylonian obelisk monument that a debtor didn't have to pay back his loans if some personal catastrophe made it impossible (disability, death, flooding, etc.).

The concept of underwriting losses became more rationalized over time, perhaps culminating when Lloyd’s of London developed into a specialist marine insurance market in 1688 A.D. London was a major trade and shipping centre at the time, and ‘brokers’ for shipowners would seek wealthy merchants who, in exchange for a premium, would promise to cover losses if the boat sank. These merchants would literally write their names under the name of the ship, hence the term ‘underwriter,’ indicating their agreement to cover the losses in the event of an accident.

We know a lot more about accidents now. Today, insurance modelling has evolved to the point where much more is known about perils such as fire, flood, car collisions, damage to homes, and business losses – how they happen, how often they happen, when they are likely to happen, as well as how to avoid them.

In a world now dominated by the Internet of Things (IoT) and Big Data, the rapid expansion of data collection has put insurers in a position where they can start to prevent accidents from happening. Imagine insurers and brokers sending out text messages warning their insured policyholders in a certain postal code that a hurricane is about to hit their high-net worth homes. Or perhaps a proud new Lexus owner receives an email from an insurer warning about a series of vehicle thefts in a local mall.

“Technology is rapidly providing our industry the opportunity to focus on prevention rather than just reacting to a claim,” says Ilda Dinis, senior vice president of customer experience and innovation at Northbridge Financial Corporation. “The Internet of Things (IoT) is propelling us in that direction. Tools like sensors and monitoring devices can have a significant impact on minimizing damage or even preventing certain kinds of claims. The technology still needs some time to mature and gain reliability, but the potential to transform our traditional model is definitely there.”

Michael George, president and CEO of Trisura Guarantee Company, sees the day coming when commercial insurance brokers will do more than just sell insurance to their clients.

“I see that move from simply selling product to an end consumer, to a more holistic view of providing that commercial customer with advice and guidance from an overall enterprise risk management standpoint,” says George. The focus of the new role would be to help a company prevent risk as well as to insure it, he added. “A broker has to become a trusted advisor for that commercial company, have their best interests at heart, and you are trying to help them manage all aspects of their risk. You become indispensable, you are basically on their board of directors almost.”

Norman Black, insurance industry principal consultant of SAS, a business analytics and data management software provider, sees the role of insurance professionals evolving even further—almost to one of a life coach. By helping clients to live and drive better, insurers are helping them prevent future claims.

For example, Black points to life insurers who have offered policy discounts to policyholders who agree to use ‘wearables’ to demonstrate fitness or join a fitness club to work out. “What excites me about that is not so much that [life insurance] companies are using IoT, because other companies are doing that in motor and homeowner lines,” says Black. “But they have fundamentally reinvented the model. It’s become ‘Let’s prevent illness and death’ rather than pay for it.”

Similar reasoning lies behind telematics, now offered in Canada. Essentially, auto insurers are offering premium discounts to drivers who agree to provide data to insurers about their driving habits—including distance and speed traveled, braking patterns, etc. It’s a form of social re-engineering to create healthier and safer behaviours.

IoT drives the change

Thanks to the Internet of Things (IoT), a term coined in 1999 by entrepreneur Kevin Ashton, co-founder of the Auto-ID Center at MIT, approximately 90 per cent of the world’s data has been created in the past few years, the BBC reports.

IoT refers to “the concept of everyday objects – from industrial machines to wearable devices – using built-in sensors to gather data and take action on that data across a network,” SAS reports. Examples would include a building using sensors to adjust heating and lighting automatically, or production equipment alerting maintenance personnel to an impending failure.

As more devices connect to the Internet, and as the content of social media is further mined for personal information, huge quantities of data are being stored in our computer systems. According to computer giant IBM, as cited by the BBC, 2.5 exabytes — that’s 2.5 billion gigabytes (GB) — of data was generated every day in 2012 alone.

Computer processing time is accelerating, giving insurance and other organizations unparalleled access to information about risks, claims losses, consumer profiles, etc. Data analytics plays a central role in knowledge-based economies such as insurance, allowing industry professionals to detect patterns and make predictions about risk. Once the unexpected becomes better understood, insurance professionals can help prepare clients to avoid a loss in the first place.

Putting IoT data to use in the Canadian p&c industry is happening now, although it is not widespread. At least one broker management system (BMS), Vertafore’s Keal Technology solutions, has the capability to send out storm warning notifications to clients. And technology will soon be available to help brokers with prospecting clients.

“There are some initiatives going on for bringing in IoT information, and being able to use those analytics to help connect to customers in ways that make sense to them,” says Bill Redford, vice president of product development for the Keal Technology solutions.

For example, a solution under development parses through IoT information to produce profiles of a broker’s clients and prospects, allowing the broker a glimpse into how their clients think, work or do things online. This information can be gathered through messages posted on social media, for example. The resultant profile would provide insight into how long the client typically takes to make decisions, as well as how they wish to be contacted.

“So, for example, if we look at the prospects, there might be one type of person who would want information right after they got off the phone,” says Redford. “They would want to have emails or texts coming to them — warning about flood, for example, or giving them more details about a product — and they would want to make a decision very quickly. Whereas, others may not want to be pushed that quickly. They may take 2-3 weeks to make their choices. You will be able to grab that information from the IoT by using advanced analytics. That’s definitely something we are approaching.”

The road to risk prevention

But while the technology may be arriving now, the industry is still a long way from being able to use or adopt it.

“For me, a big issue is the entire network infrastructure,” says Steve Pieroway, vice president of marketing and sales at technology provider Policy Works Inc. “Insurers and brokers work in a variety of different systems, so integrations are key. Having systems that can capture the data that needs to be captured; that can mine the data in a way that’s meaningful; so that other players in the industry can hook into that, and provide more value. I think that’s the biggest challenge.”

As the Canadian p&c tech network is presently structured, insurers are still trying to move away from their legacy systems, or to layer new solutions onto their legacy systems. They are still trying to find seamless data exchange solutions to get their information out to the broker channel, let alone push out their back-end information directly to end customers.

“One of the biggest challenges comes down to data, especially in commercial lines,” Pieroway says. “How clean is the data? How robust is the data? To exchange something, you’ve got to have something to exchange — at its most base level, it’s the underlying data.”

On the broker side, brokers wishing to take advantage of advanced technologies to push the information out to consumers — by using text messages or a chatbot, for example — will need to organize and house their data into one solution before being able to gain insights from IoT data, says Michael Howe, senior vice president of product management at Applied Systems.

“Having a single system where there can be a single source of truth, and you are not really dealing with all of these difficult [data] integrations, that is a hugely valuable place to start,” said Howe. “Simplify the environment, get everything into one system, and then you have a fighting chance to be successful.”

Once the industry overcomes the technical issues around data mining, there comes the issue of how to communicate risk prevention insights to insureds.

“Information being passed is one of the great challenges,” says Redford. “You want to make sure you are getting to the right person in the way that they want, and that you are speaking to them in the manner they wish.”

When CASL [The Canadian Anti-Spam Legislation] first came into force in 2014, the rules around communicating information to consumers “tightened things down a bit,” says Redford. The effect was to restrict communications with consumers, requiring their permission to send information.

“You don’t have free reign to push things,” he says. “If you want to warn [a client] about an upcoming storm or a claim, and they don’t want to be getting that information, then it’s kind of hard to communicate that out. We’re inundated with so many emails and texts and notifications, it’s hard to make sure your insurance needs are being met with all the other noise that’s out there.”

Pieroway agrees CASL can be an issue for communication. However, if you follow the CASL guidelines and have permission from policyholders, communication can be quite meaningful. Therein lies the challenge, though: getting widespread permission. Until that happens, the pending transformation to a risk prevention model may remain a thing of the future

“The underlying idea of insurance is protection from the unforeseen,” Pieroway says. “Unless we get to a point when there is a complete ability to prevent accidents or catastrophes with 100 per cent certainty, I don’t think that part of the business model will change.”