Edward Plowman explains some of the developments currently taking place in insurtech, and why actuaries must embrace this change if they are to succeed
Technology is changing the very nature of insurance. Internally, technology can transform operational efficiency and customer experience. Externally, technology is profoundly changing society and the economy, affecting the whole risk landscape.
While disruptors such as Lemonade, Root and Hippo may dominate the insurtech headlines, the true focus of insurtech is the digital ecosystem that will underpin this future insurance industry. Component solutions are being developed across the value chain, from distribution to underwriting to claims.
The data funnel
Data flows at far greater velocity, detail and scale than ever before – the floodgates have opened.
Internet of Things (IoT) devices – embedded and networked sensors and actuators – are a key source of data, connecting the physical and biological world to the digital world. This is the essence of the Fourth Industrial Revolution.
By some estimates there were 10bn IoT devices at the end of 2019, with 2,000 more being connected every second. Vehicle telematics is one example, but IoT devices are spreading to residential and commercial buildings, manufacturing processes, agriculture, urban infrastructure, energy, supply chain logistics, healthcare and so on. These areas all have clear parallels with major insurance lines.
Video, image and audio capture is another rich source of data. Cameras are everywhere, from the smartphone in your pocket to satellites up in space. Like the IoT, this data is effectively digitalising the real world.
AI and IA machines
The adoption of artificial intelligence (AI) in insurance is in its infancy, and most practical solutions are rules-driven ‘intelligent automation’ (IA), rather than learning-driven AI. However, this will evolve as significant investments are made and interesting use cases emerge. AI is critical to making sense of all the new data.
Still, there is a degree of hype and magical thinking around AI. While AI leaves humans in the dust when applied to certain defined tasks, such as the game of Go, more general intelligence remains elusive. We may be a long way from AI solutions that can fully replace underwriters and pricing actuaries, especially in London Market business.
Even so, two interesting concepts have emerged in this space. The first is algorithmic underwriting. The trailblazer here is Ki – a Lloyd’s syndicate set up by Brit Insurance. Ki can offer instant follow lines through an algorithmic decision process. In the co-insurance model, this portfolio approach to assessing follow business makes a lot of sense.
“At Ki, we have looked for inspiration outside of the specialist insurance industry to help us define our operating model,” says Melanie Zhang, senior portfolio manager at Ki. “Underwriting and actuarial expertise will continue to play an important role in developing algorithmic underwriting capabilities, but there’s a huge learning opportunity in collaborating with our colleagues who have come from technology companies, hedge funds and academic backgrounds.”
The second concept is bionic underwriting, using AI-based tools to ‘enhance’ human skills and enable better and faster decisions. “Data is now a commodity,” says Michael Crawford, CEO of Describe Data, a Dublin-based insurtech and data science start-up whose Kompreno product is an
AI risk engine and bionic underwriting solution for Financial Lines Insurance. “Bionic underwriting uses techniques such as AI, machine learning and Bayesian statistics to give underwriters the ability to quickly ingest and evaluate new data sources, extract actionable insights and do this repeatedly at scale. We are only at the start of the adoption curve with these technologies; they are going to have the same transformative effect on our industry as the introduction of spreadsheets did in the 1980s.”
What does this mean for actuaries?
Insurtech represents a tremendous opportunity for actuaries. Its abundant data and complex analytical tools put it firmly in the actuarial wheelhouse, as we are the recognised scientists and technicians of the insurance industry. As analysable data pervades more of the insurance value chain, new fields will come onto our radar.
However, there are also challenges here for our profession. Our niche is changing; we need to evolve and adapt. Many of our traditional approaches and methodologies do not translate well to this new world of high-dimensional, high-velocity data.
Additionally, actuaries are seen by some in the insurtech community as conservative, not transformative; driven by regulation, not innovation. “Seeing growth and risk both improving dramatically, as we have, flies in the face of insurance orthodoxy,” said Daniel Schreiber, CEO of Lemonade, in November 2019. “But in a tech context, it makes sense. Lemonade is built on a digital substrate – bots instead of brokers, machine learning instead of actuaries. While brokers and actuaries can be overwhelmed by big data – bots and machines thrive on it. Torrents of data do not degrade their performance – they boost it.”
Happily, this is not a universal view. “I have great respect for the actuarial profession,” said Tesla CEO Elon Musk in July 2020. “You guys are great at math. Please join Tesla, especially if you want to change things and you’re annoyed by how slow the industry is. This is the place to be. We want revolutionary actuaries.”
Enterprising actuaries who can embrace collaboration and creativity are thriving at insurtechs, as employees and business founders. Even Lemonade is hiring actuaries. The digital revolution is happening; let’s make sure we are on the right side of history.
New business models
Insurtech also enables new business models that can deliver protection for risks underserved by traditional insurance products or distribution.
On-demand or usage-based insurance is one such model. Zego, for example, recently became the first UK insurtech ‘unicorn’, with a valuation of more than $1bn. It started out providing coverage to self-employed drivers for companies such as Deliveroo and Uber Eats, embedding the insurance product into their work platforms to make it simple for the customer.
“At Zego, pricing actuaries have been heavily involved in both our early stage growth strategies and product design process,” says Akash Mapara, a pricing actuary at Zego. “We’re a tech-driven venture capital-backed start-up constantly trying to challenge convention – it’s very different from working at a traditional insurer. Broader skills like creativity, strategic thinking, design thinking and an eye for trade-offs and work-arounds – these are what will help us succeed in the insurtech environment.”
Parametric insurance is another business model achieving traction within insurtech. No longer limited to large bespoke deals for catastrophe risks, the new breed of parametric insurance uses new technology and data sources to offer a much wider range of indices as the basis for cover. These can embrace risks that are difficult to insure under a traditional indemnity policy. Furthermore, through digital efficiencies, cover can be pitched at smaller-scale retail markets.
“Actuaries build new things all the time, create new products and bring them to life with a price,” says Laurent Sabatié, actuary and co-founder of Skyline Partners, a London insurtech start-up specialising in index-based insurance. It has designed parametric products covering agroclimatic, terrorism, marine, renewable energy and catastrophe risks. “Starting up a business is not such a leap. I feel lucky to have a job that lets my curiosity and hunger to learn turn into new business opportunities.”
Edward Plowman is chair of the General Insurance Insurtech Working Party