The End of Insurance as We Know It

by Rob Galbraith

  Which parts will be disrupted?

  By what technologies?

  How soon?

  How quickly?

  Answers to these questions remain unclear today. Despite the lack of clarity, change will continue to play out over the next years (rumblings). It is a virtual certainty that some major aspects will be fundamentally and permanently altered within a decade (seismic shifts).

  Insurtech’s exact path forward is littered with unknowns and major risks, yet its continued growth and progress are inevitable. Considering the impact that insurance has on all aspects of our economy, it is important that startups are realistic about the challenges they face in this space and that traditional insurers take advantage of the improvements insurtech firms can bring to the industry. Forging a path forward will be challenging and wrought with conflict, but the insurtech success stories that emerge over time will bring new life to an old industry - one that has been and will remain an essential part of our society and economy.

  EPILOGUE - PARALLEL LIVES: OLD INSURANCE AND NEW INSURTECH

  I started this book by relating a story about my summer road trip with my dad, so perhaps it is fitting to end with another one. A couple of years back, my parents were over visiting my family at our house. From experience, I knew that we always had a challenge to find food that everyone liked to eat for dinner - even ordering pizza was an ordeal. I grabbed my iPad and brought up a menu from Buffalo Wild Wings to ask everyone for their preference. I knew that my mom and dad were likely not familiar with how a tablet worked - they had never owned anything more advanced than a flip phone - so I took time to show them how to use their finger to scroll up and down to review the menu. They seemed to really struggle using the device despite my instruction despite my efforts. I finally read off the menu to them and asked for their order, only to have them ask: “What are wings?” In my concern that my parents may not be familiar with new technology that had come out in the last 5 years, I overlooked the fact that they have not advanced beyond traditional fried chicken to chicken wings, a style that was popularized in the 1980s. When my parents finally gave me their order, they insisted they did not want any sauce on their wings, just plain and dry - like the fried chicken they were used to.

  The ability of my parents to go 30+ years without ever having eaten chicken wings as a meal sheds light on the fact that many times it is possible to continue on for some time without being impacted by progress fueled by technological change. Newspapers in paper form still exist. Taxis still exist. On a recent trip to New York City, a friend of mine posted Instagram pictures of her daughters curiously exploring a strange device known as a pay phone. So it should not be a surprise that “old” traditional insurance is still with us - and will likely remain a relevant business for many years, if not decades to come. The market is so large with so many different types of customers and specialized needs that change will not happen overnight.

  Despite the fact that many traditional ways of doing business have remained long after their demise was predicted, this does not mean that all of the buzz about insurtech is noise that can be ignored. Simply because AAA still provides paper maps does not mean that GPS is not relied upon by vastly more people in our modern world. The insurance industry, in part because of the many “fatal flaws” it possesses, is ripe for disruption. The technology that could lead to that disruption exists today in the form of cheap sensors and AI today and blockchain and smart contracts tomorrow. I repeat: the core technologies that can disrupt the P&C insurance industry exist now. It will take time, money, people, and ingenuity to translate these technologies into meaningful change in the industry. However, the pace of disruptive change is very likely to accelerate as the number of startups and funding for insurtech startups continues to grow exponentially. How this change plays out - who are the winners and losers, whether the change comes from within or outside of the industry - is anyone’s guess. Regardless of how it plays out, the insurtech adventure will be fascinating to watch over the next decade and even more exhilarating to be a part of.

  Tony Cañas recently shared that he asked a group of over 200+ actuaries how many subscribed to Coverager, the daily e-newsletter from Shefi Ben-Hutta that has quickly become a must-read for the insurtech community. Only a single hand went up. A grand total of five members in the audience have ever tried using a telematics device in their vehicle. It is quite possible that AI could eliminate 90% of their jobs within the next decade. This is perhaps inconceivable given regulatory pressures and corporate cultures that are slow to change, but the fact remains that AI will be able to do much of the work on its own than actuaries do today. Carriers may well look to hire more data scientists than actuaries over the next two decades. Are traditionalists ready for this sort of upheaval in the insurance industry? Will incumbents find ways to innovate faster and remain relevant in the world of tomorrow? What will the list of top 10 P&C carriers look like in 2040? Will all of the companies still have been founded in the first half of the 20th century - or will one or more names that rise to the top be founded in the first half of the 21st century?

  Old insurance will exist in a form much similar to today for a while longer and continue to serve those who do not wish to switch. New insurtech will also exist in some form: the question is whether or not these impacts remain on the fringes of the insurance ecosystem, where they are today, or whether they will move front and center in the insurance ecosystem of tomorrow? Change is the only constant in life, and change is coming to the insurance industry. The details remain to be seen: how big, how soon, how disruptive...and how prepared are you for The End Of Insurance As We Know It?

  1

  Glossary

  Lloyd’s of London has a comprehensive glossary of insurance terms and acronyms that makes a handy reference on their website: https://www.lloyds.com/help-and-glossary/glossary-and-acronyms

  The International Risk Management Institute (IRMI) also has an excellent glossary of terms available at https://www.irmi.com/glossary.

  accelerator

  An organization that provides support for insurtech startups to help them grow faster that can include funding, consulting, promotion, access to business and technical experts and more

  actual cash value (ACV)

  Claims settlement amount for the actual cash value for damage caused by a covered peril; essentially replacement cost minus depreciation

  actuarial science

  A specialized discipline in insurance using applied mathematics and statistics to perform a range of key functions that keep the industry robust

  adjuster

  A clams professional that determines the extent of damage and to what extent a loss is covered by the insurance policy

  admitted

  An insurance carrier or market that is licensed with regulators to do business in that jurisdiction and is subject to all relevant rules and guidelines set by the regulatory body such as a Department of Insurance

  advanced driver assistance system (ADAS)

  Any system in a vehicle that assists the driver in the driving process

  adverse selection

  The process by which carriers get outcompeted by more sophisticated competitors and are stuck with unprofitable business whose losses exceed the premiums charged

  aerial imagery

  Photographic images taken from the sky by satellites, drones or fixed-wing aircraft; these images are often geolocated and tagged with other relevant features to create a data repository

  affordability

  A measure of how easy or difficult it is for customers to afford proper insurance coverage that covers all of the exposures that they wish to at the levels they deem necessary

  afforded

  A term used to indicate that a policy will provide coverage for a given claim

  agent

  A licensed professional that is authorized to sell insurance through one or more carriers to customers

  agency management system

  An informat
ion technology platform used by agents to quote coverages with one or more carriers and manage customer and policy information

  all other perils (AOP) deductible

  The deductible applies for all perils that are not specifically covered by a special deductible such as a wind/hail or hurricane deductible on a policy

  all perils coverage

  Indicates that all perils not specifically excluded in the contract language are covered causes of loss for a policy; also referred to as open perils coverage

  all perils (AP) deductible

  The deductible applies for all perils covered by a policy

  analytical data

  Data that is packaged, stored and served to business users, data scientists and analysts for summarization and analysis of business results

  application

  A formal request, often taken by an agent, to an insurance carrier to quote and bind coverage

  application program interface (API)

  A set of programming code and parameters that allows for interaction between multiple systems

  artificial intelligence (AI)

  A set of technologies that use advanced algorithms to detect patterns in data

  assignment of benefits (AOB)

  Process by which an insured may pass contractual benefits they are entitled to receive from their insurance policy to a third party, often in return for something of value

  assume the risk

  The decision by an individual or organization to not purchase insurance or otherwise transfer risk, but to retain the risk of loss

  authentication

  The ability for a person or entity to verify they are in fact who they represent to be (not an imposter) and that their information is correct and accurate

  autonomous vehicles (AV)

  Vehicles which possess automated technology that either assist drivers or are capable of fully driving the vehicle without need for a driver to perform manual operations

  availability

  The ability for customers to find a wide range of insurance products in the marketplace that fully meet their needs for coverage

  average handle time (AHT)

  The average amount of time (usually in minutes) that it takes a customer service representative to service a phone call

  bad faith

  A legal concept that applies when an insurance carrier does not follow its responsibilities in handling a claim, resulting in legal remedies which may include penalties

  batch processing

  Term used to describe a computer process that affects multiple records at one set time, usually overnight, as opposed to real-time processing

  betterment

  Insurance concept where insureds and claimants should not be made better off following a claim to remove any motive to profit from a loss

  Big Data

  General term describing a world where the ability to capture, store, process and make sense of massive amounts of data is critical for business success

  bill of lading

  A detailed list of or receipt for goods in transit

  blanket

  A policy that covers a large class of items without the need to individually list or schedule each item for coverage

  blockchain

  A secure form of recording information and transactions using advanced encryption methods where each new transaction contains links or “chains” to all previously recorded transactions to make an immutable ledger

  broad form

  A policy form that goes beyond the basic causes of loss to include additional items that are more rare and unusual as named perils, but coverage is not as wide as special form policies which are written on an open perils basis

  bundling

  The packaging of multiple insurance policies with a single carrier, often resulting in savings in aggregate to both the carrier and customer

  Business Owners Policy (BOP)

  A commercial policy form that combines property and liability coverages in one for small businesses

  carrier

  An insurance company who collects premiums in return for policy contracts that provide coverage in the event of a loss to an exposure due to a covered peril

  casualty

  Broadly defined as any coverage other than life, health or property insurance, it usually includes coverage for direct accidents and resulting injuries as well as other liability coverages

  catastrophe bonds

  A financial instrument that is issued by insurance carriers who boost capital through the collection of principal paid by investors in return for a promised coupon payment in installments made over the life of the bond unless triggering catastrophe event(s) occur, in which case the investor loses money

  Chartered Property Casualty Underwriting (CPCU)

  A professional insurance designation granted to those who meet the requirements set forth by The Institutes which confers the designation

  claims adjustment

  The process by which a claim is recorded and investigated to determine an estimate of loss and what coverage (if any) is afforded by the policy, subject to contractual provisions that may apply

  claims process

  The entire process by which a claim is handled from First Notice of Loss through to the resolution of the claim, whether paid or denied

  claimant

  A party who is making a claim against an insurance policy for compensation due to a covered loss; the claimant may be the insured (1st party) or another impacted party (3rd party)

  chatbot

  A technology that uses natural language processing and artificial intelligence to simulate an interactive conversation

  click through rates (CTR)

  The percent of times a digital ad is clicked compared with the number of times it is displayed

  cloud computing

  A broad term referring to an array of technologies, servers and processors that perform computing tasks remotely as opposed to on a local computer

  coinsurance

  A type of insurance whereby the insured participates directly in the cost sharing by paying a fractional percentage of the overall claim

  combined ratio

  The sum of the loss ratio and expense ratio; indicates an underwriting profit when under 100 and an underwriting loss when over 100

  cost-benefit analysis (CBA)

  An analysis comparing the costs and benefits of a proposed action or investment using time value of money concepts to determine the financial viability and relative attractiveness of a project

  Commercial General Liability (CGL)

  A commercial policy that covers a broad array of liability exposures for businesses not related to any professional services

  compound annual growth rate (CAGR)

  The annualized growth rate of an investment from a beginning period to end period; calculated as (ending value / beginning value) 1/n - 1 where n = number of years

  contract of adhesion

  A legal concept where a contract is drafted by a more knowledgeable party and offered as a “take it or leave it” proposition to a less knowledgeable party

  corporate venture capital (CVC)

  A venture capital arm of a corporation that evaluates firms and invests in startups

  coverage gap

  A economic gap between the financial exposures of an individual or entity and those exposures that are covered by insurance (also known as the protection gap)

  covered loss

  A loss that is covered by an insurance policy

  covered peril

  A source of loss that is covered by an insurance policy

  credibility

  An actuarial concept to evaluate whether the size of a population is large enough to represent a statistically significant difference from members outside of that population

  customer journey

  The steps in a process that a customer follows to accomplish a goal, such as purchasing an insurance policy or filing a
claim

  customer service representatives (CSRs)

  A person who interfaces with customers in an office or over the phone; typically not licensed

  cyber insurance

  An emerging new insurance product to cover the exposure that businesses and other entities face from hacking and other cyber attacks

  data-driven decisions

  A process by which decisions are made based on data and analysis rather than conventional wisdom or professional judgment

  data mart

  A type of data storage tuned for fast querying and analysis by business users, analysts and data scientists; typically represents a subset of data from a data warehouse

  data mining

  A type of data analysis that explores granular data for hidden patterns

  data scientists

  A group of advanced analysts with expertise in algorithms, programming and predictive models, often possessing graduate degrees

  data warehouse

  A large store of analytical data that supports multiple business intelligence tools and interfaces to support many analytical use cases

  database schema

  A conceptual storage framework to organize how data tables relate to each other in a database

  declarations page

  An important summary form in an insurance policy packet that contains key features of the policy and important messages for insureds

  decline

  The formal decision by an insurance carrier to not offer a policy to an applicant

  deductible

  A cost-sharing mechanism common in insurance that an insured must first meet out of pocket before the remainder of a covered claim is paid by the carrier

  deep learning

  An advanced AI technique that is a subset of machine learning techniques that uses multi-layered neural networks to identify patterns and make predictions

  denial