Actuarial Expertise

Actuarial Threat Assessment of Insurtech and Digital Disruption

The news is filled with stories about insurtech, innovation, digital disruption, telematics, connected home, connected worker, connected everything, data science, unstructured data, machine learning, artificial intelligence — it can all be a bit overwhelming. Actuaries have varying opinions on the nature, scope, degree and timing of the impact of all these changes on the profession. What we do know is major employers of actuaries (insurers, reinsurers, consultancies, intermediaries), as well as technology companies and even venture capital firms are investing significant time, effort and money into disrupting the insurance value chain. If the value chain is disrupted, we actuaries will be disrupted. It’s a matter of when, how much and what, if anything, we can do to survive and thrive these turbulent times.

I am moderating a general session on this topic at the upcoming CAS Spring Meeting in Boston. Our panel will be performing a full SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the actuarial profession during this disruption. For those unable to attend, this column will give you highlights of some of the threats.

It will be helpful in this threat assessment to separate the impact of insurtech into three distinct waves, each with its own timing and characteristics:

  1. Digital modernization.
  2. Automation and augmentation.
  3. Loss elimination.

1. Digital Modernization

This first wave focuses on applying existing technology to areas of insurance that are highly comparable to other industries, such as consumer banking and online retail. Examples include digital and mobile customer acquisition, seamless digital customer experiences, and application of new data sources or analytic methods for customer segmentation. Think of this as modernizing the insurance interface by using established technology that appears “new and innovative” from the perspective of the insurance industry. These technologies and approaches will disrupt business-as-usual and require investment and change management. Over the past few years, this has been the low-hanging fruit that insurtech companies have gone after first because knowledge of historical insurance industry practice has not been particularly necessary nor helpful. Motivations for insurers to invest include breadth of digital footprint, expense savings, scalability and ease of doing business, including response time. This first wave is well underway, and insurers need to make progress soon or face potential adverse selection in distribution and market access.

Actuarial threat assessment: MINIMAL. We don’t generally get involved in customer acquisition or engagement technologies.

2. Automation and Augmentation

This second wave centers on applying new technology to core, proprietary areas of insurance — from rate/quote/bind to underwriting and pricing, from claims to traditional actuarial functions. EY recently put out “Robots join the team,” a report that discusses specific applications of robotic process automation (RPA) in actuarial functions.1 EY highlights promising target areas for RPA in P&C and health insurance, such as data preparation (extraction, reconciliation and formatting); reserving analysis, including rules-based selection; standard report preparation; pricing and rate monitoring; rate filing and rating quotes; experience monitoring and trend analysis; and data visualizations.

The new technology is made up of automation replacing human effort through such items as machine learning in claims triage as well as augmentation through the use of supplementary underwriting information with artificial intelligence.

Wave two will be more deeply disruptive than the first wave. It will require hiring and training staff with new skills into many core departments like IT, claims and actuarial. Also, current leadership cannot necessarily rely solely on the assessment of their existing experts as to the impacts and investment priorities, because they “don’t know what they don’t know.” The timing of wave two is just starting, but insurers need to start making targeted investments in proof-of-concept projects, either on their own or partnering with consultancies, brokers or reinsurers.

Actuarial threat assessment: SIGNIFICANT. We should be on top of this second wave or run the risk of being overwhelmed by it.

3. Loss Elimination

The third and most disruptive wave will bring causal analytics via the internet-of-things (IoT). Wave three will be massively disruptive to the insurance industry because of elimination of previously insured events that produce claims. The IoT model will look a lot like equipment breakdown insurance (e.g., Hartford Steam Boiler, FM Global), with insurance integrated with engineering, inspection and preventive maintenance. The IoT revolution will mean more lines of business can be integrated with monitoring and prevention, supported by sensors, embedded intelligence, connectivity and AI engines to process the information. See my presentation “Actuarial Engineering and Preventive Analytics” for more on this.2

The insurance impact will be felt in reduction of “attritional” claims — smaller claims that in aggregate make up a substantial portion of the overall loss volume. The premiums associated with supporting these attritional claims pay for a lot of an insurer’s overhead expenses. We will be seeing a material reduction in premium volume, along with an increase in volatility for the remaining premium, as the mix of claims shifts to a higher percentage of larger claims. There will also be an accompanying increase in the “cyber-as-a-peril” component of all lines of business. For example, a factory that automates with IoT sensor systems and AI-powered preventive analytics will proportionally reduce physical staff. An internal network outage will effectively shut down the entire operation, because the manual operation option is no longer feasible. That means cyber incidents that disrupt the network could turn into contingent business interruption events.

Actuarial threat assessment: EVOLUTIONARY, for both actuaries and their employers. This will change the very nature of risk measurement, management and transfer.

Next Time: What are the Opportunities?

In a future Explorations column, we will look at the opportunities for the actuarial profession in this exciting evolutionary landscape.