Insurers should be wary of innovation

Junke's comments come against a backdrop of widespread changes in the industry driven by technology and innocation and a fear by some that the landscape could change quickly.

Google, Facebook or Amazon are seen as potential new competitors in the insurance sector because of their close relationships to consumders and the large amount of data they have access to. This data could potentially be used to better assess customers’ risks and tailor insurance products to their needs.

Potential opportunities offered by big data are attracting new competitors into the insurance market such as The Climate Corporation. The San Francisco-based firm examines weather, soil and field data to help farmers determine potential yield-limiting factors in their fields.

The company's proprietary Climate FieldView platform combines hyper-local weather monitoring, agronomic modelling, and high-resolution weather simulations to deliver Climate FieldView products, mobile SaaS solutions that help farmers improve profitability by making better informed operating and financing decisions, according to the firm’s website.

Such new entrants may threaten the business of traditional insurers, said Florence Tondu-Melique, European chief operating officer at Hiscox.

The insurance industry is not only watching the competitive landscape change, but is also taking advantage of opportunities technology may offer such as telematics in motor or drones in property/casualty and using the gathered data to better assess risks and to develop new products. Big data is seen as a major driver for change in the industry.

One example of innovation is parametric weather insurance, which uses ‘big data’ to protect businesses from the impact from adverse weather. It can, for example, protect a bar chain from revenue shortfall in a rainy summer. The insurance can include paying out a pre-defined amount for every day that daily rainfall is above a specified level.

“This year we have concluded more transactions than ever, we have more markets asking us for business and have more clients coming to us talking about weather risk management,” said Kurt Cripps, managing director at Aon Benfield.

But Junke warns of the pitfalls of some of this innovation. He stresses that the models used can only be as good as the quality of statistical data and the assumptions the models are based on. If something is skewed at the front end it can produce inaccurate outcomes with significant implications for the product line and the insurer.

“In this sense, reinsurers have the daunting task of validating all these ideas, testing to see whether they are sustainable in the long term,” he said.

For insurers, innovating through big data may come with risks as shown in the case of Admiral, a UK-based primary insurer. Admiral planned to analyse the Facebook accounts of first-time car drivers or owners to look for personality traits linked to safe driving, which could result in discounts of up to £350 a year, according to media reports.

Under the scheme, Admiral would identify personality traits through examining posts and likes by Facebook. As part of the plan, Facebook users who write in short, concise sentences, use lists, and arrange to meet friends at a set time and place, rather than just “tonight”, would be identified as conscientious. In contrast, those who frequently use exclamation marks and phrases such as “always” or “never” rather than “maybe” could be overconfident, according to media reports.

“The interpretation of the data is tricky,” said Erik Abrahamsson, founder and head of operations at insurtech start-up Digital Fineprint. “How do you look at a person's Facebook data and determine whether someone is more or less at risk?”

At the beginning of November, Admiral was forced to scrap plans to use Facebook posts to analyse the personalities of car owners and set the price of their insurance after the social media company said the scheme breached its privacy rules. At the same time, the case caused controversial discussions about the limitations and the pitfalls of big data for insurers.

Junke worries that the insurance industry may be at risk of losing the view for the essential, driven by fear of falling behind in a quickly changing operating landscape.

“The insurance industry does not need to implement every form of innovation and technology available to the business,” Junke said. The sector has to get involved with digitisation and disruptors, but it needs to be smart about it and connect its reactions with the core competencies of insurers, he added.

Innovations driven by IT and new technology should be seen only as a way of increasing efficiency, Junke noted. The insurance industry’s task is to try to take as much as possible of potential risk losses from the individual players in the economy and distribute it to the community, he said.

“What should drive the industry should be only their clients’ need for risk protection, nothing else,” Junke said.