The insurance industry has a proud heritage of supporting innovation and helping society manage periods of change. However, today’s complex supply chains and global digitization are proving more difficult to manage as risk experts.
A significant change we need to address is operating in a world where economic value is increasingly held in intangible assets, such as IP, data and digital assets, rather than traditional insurable physical assets such as property or machinery. . Intangible risks are also now among the biggest drivers of instability for business, from reputational damage to cyber-attacks and business disruption events such as pandemics.
Advances in technology are creating a steady pipeline of evolving risks, while complex global business relationships and supply chains are making some traditional insurable risks difficult to predict and quantify. Even more transformative changes are on the horizon: clean energy, artificial intelligence and the shared economy all have the potential to bring about radical change.
Traditional insurer business models will have to keep up with this pace of change. Without a new mindset, we risk becoming less and less relevant to the economy and society.
Time is running out
A key factor in the success of the insurance industry has been its distinctive perspective on time. We take the long view of exposures and capital management: Insurers are adept at refining historical data to find patterns and are comfortable dealing with hindsight risks. Who else really thinks about events that happen once in 400 years?
This recipe worked well in the past—change tended to be slow, even when driven by innovation that was itself disruptive. This timeline allowed insurers to be there for society during the explosion of international trade in the 1810sth century, industrialization and modern finance in the 19th centuryth century, and the internal combustion engine and electronic communications in the 20th centuryth century.
Innovation in the 21st centurystr century is characterized by speed. Today, the pace of change is increasing, as many have noted, but the shortened time to adopt new disruptive innovations is just as prominent. Facebook was launched in 2004 and now has almost three billion users. In 2007, Apple unveiled the iPhone. Today, there are over 4 billion smartphone users, which is just over half of the world’s population. Last year, there were over 16.5 million electric cars on the road, a three-fold increase in just three years. Some car manufacturers aim to be 100% electric by 2030.
Race to stay relevant
Entrepreneurs, scientists and those who finance new ventures deal with the risks associated with innovation. It is the insurance industry that brings a disciplined approach to help society deal with the risks and volatility associated with widespread adoption. Digitization, for example, brings with it potentially large systemic risks from reliance on critical communications infrastructure.
Enabling the adoption of innovation, namely managing the volatility that comes from the use of new ideas, is the problem that insurers must address. We may not all know it yet, but the industry is in a race to solve this problem. Technology companies have access to a wealth of valuable risk data and are not constrained by a legacy business model. Insurers also face competition from their customers, who will increasingly be able to use data and technology to self-insure, and potentially share or trade their risks with others.
The industry has a stark choice. We can stick to our knitting and avoid (or rule out) risks that we don’t understand and that aren’t easily measurable. Or we increase our investments to find better ways to assess and evaluate risk. Adhering to historical time– based The approach of understanding risk is a straight recipe for irrelevance.
White sheet of paper
The solution to the innovation problem can be found, not surprisingly, in data. Historically, the industry has relied on descriptive information to assess risks, such as location or type. But technology is enabling greater access to behavioral data, from individuals’ shopping habits to a business’s cybersecurity posture. Behaviors reveal information about risk and exposure that descriptive information is blind to.
If it were to start over, would an insurer rely solely on descriptive data, or would it make better use of behavioral data? Would an underwriter ask a motorist how old they are or their gender? Or would they like to know how well they drive, or where they drive and how often? Behavioral data have always been able to complement descriptive data. In today’s environment, behavioral data has become a necessity.
Keeping pace to maintain relevance
Insurers are beginning to recognize the potential value in non-traditional data as an indicator of risk. But we collectively need to accelerate this development by investing in new ways to capture behavioral data and the agile tools needed to derive the right risk insights.
It is time for the insurance industry to reclaim its rightful role as an important participant in the wider innovation ecosystem – a key player, in fact, enabling society to benefit from the widespread adoption of new ideas and address challenges arising from new sources of volatility.
Paul Mang is the chief innovation officer at guiding, a provider of predictive analytics, risk insights and business intelligence solutions for the insurance industry. He is the former Global CEO of analytics at Aon plc.