Insights from an EY industry survey indicate that large commercial (re)insurance markets are inline to experience $600bn in revenue growth by 2030, and combined operating ratios drop of 25%-30%, providing the industry becomes more agile, increases connectivity between market participants and intelligently applies the use of data. The opportunity for growth and profitability gains is significant only if organizations can overcome the technological hurdles that are stifling operational efficiency and underwriting excellence.
Achieving underwriting nirvana relies on a harmonious interplay between systems, processes, data models, and organizational culture to enable a succinct presentation of decision-making data that is supplemented by the Underwriters’ tacit knowledge. Despite mixed reports about Underwriters’ misgivings towards using intelligent automation and underwriting tools, a survey over 99 NA P&C organizations undertaken by Willis Towers Watson (WTW) indicates otherwise, with a majority of respondents saying that “their forays into advanced analytics have had a positive effect on the top line and, in particular, the bottom line.”
In today’s digital age, an insurance organization's effectiveness is underpinned by a robust data and technology foundation. However, the industry must consider the delta between where organizations stand today in regards to restrictions in legacy technology, processes, obsolete data models, and cultural bias towards technology against a path of enablement aligned to appropriate resource availability.
If we begin to position the organizational challenges of adaptation to maintain competitiveness with a focus on operational efficiency (and the bottom-line expense), alongside new threats and opportunities in the context of change across insurance lines such as Cyber and the existential menace of increasingly higher severity and frequency of catastrophe losses, amongst all this Insurers need to create a foundational view-of-risk in which they can grow without disrupting business-as-usual. To do this, Insurers must take a pragmatic approach to adaptation, layering the components of system, processes, people, and culture as a wrapper around the existing organizational fabric as an incremental low-risk approach.
As the industry losses to Covid-19 become more apparent, along with threats to reserves and spiraling underwriting expenses, the digitization of processes is the competitive advantage. Big Data and sophisticated models have begun to enable immediate risk pricing at an increasingly granular level, with secondary data sourcing supplementing the underwriting datapoints.
Although Artificial Intelligence (A.I.), Machine Learning (M.L.) and Robot Process Automation (R.P.A.) usage are on the rise, the industry’s expectation is that they should be further along on the journey than they are now. WTW notes in their survey that Insurers are 30-40% off where they are today (from two years prior) to where they want to be two years from now.
In a 2020 EY survey, Insurers indicated that the use of A.I. and M.L. is predominantly going to focus on building risk models for better decision-making, secondly; the reduction of human-in-the-loop, and thirdly to better understand risk drivers (EY Insurance leadership team, 2020). This aligns well with the WTW 2020 survey insights. This author believes that although advanced algorithms focus on risk and exposure, the insurance value-chain is rife for disruption. Insurtech is driving efficiency across the weakest link of the insurance value-chain segments being distribution and claims. This focus is indicative of the size of the market opportunity for enhancement.
Regulatory pressures should also not be overlooked. The current political climate, along with geographical, state-level and classes of business are creating a lot of regulatory change. The implementation deadline for regulation such as the much delayed IFRS 17, which is less than two years away, remains a concern for some Insurers.
The 2020 Insurance CEO PWC survey notes over-regulation as a key concern in CEO’s outlook; the ability to field regulation at both the federal and state level will play as much a part as the top and bottom-line focus. There is an impact from the regulators’ technological capabilities exceeding that of some Insurers and bodies such as the Global Capital Insurance Standards (ICS) and the California Consumer Privacy Act (CCPA) are likely to lead to Federal regulation with a similar impact to GDPR or IFRS-17 in Europe.
Recently, we have seen Covid-19 Business Interruption court rulings in the UK impact retrospective policies, terms, and conditions for Property policies. Improvements to the accounting for Long Duration Contracts (which is delayed to 2024) are likely to further affect technological choices for core systems and processes. Insurers engaging in new lines-of-business for state-level transactions, negotiating the path of individual regulators (with recent changes to requirements seen in Texas, Massachusetts and New York) are a further driver for Insurers to ensure technological alignment to the emerging threat of regulators in a more advanced position than they are. Keeping technological pace is vital to ensure organizations do not fall foul.
As the insurance value chain becomes more digitally connected and shortening the cycle, Insurers will have a clearer line-of-sight of clients with a higher level of expectations (due to expectations of the information age). They must field new risks and emerging markets, enabling them to respond and adapt in near real-time.
However, core processing platforms based on legacy systems and antiquated technology significantly curb the adoption of the latest digital toolsets and technology, and all the benefits of modern systems. The inability to automate low-value tasks, collect and analyze data in real-time, and moving to the cloud blocks Insures from achieving operational excellence. All aspects of the end-to-end underwriting process are impacted by optimizing the pre/post-bind workflow; submissions, underwriting administration, exposure, capital, and claims.
The expectation is the industry P&C non-life expense ratio (typically around 30%) will decrease through the successful adoption of technologies. The key constraints identified by consulting companies around components of “Operational Excellence” are centred around reducing costs through workforce/culture, digitization of workflow, technology enablement and data model adoption. The recommendation is to have clear, measurable goals to effectively manage the technology ROI. Although this provides a sound basis, this author believes that organizations must consider this within the context of their wider strategic objectives, current constraints, available resources, and relative maturity of the organization.
There is a broad recognition (and acceptance) that data-driven decisions provide an increasingly strong foothold as Insurers leverage the technologies to sift through the overwhelming abundance of data to get to the data points that make a difference. Risk and exposure will focus on decision-making improvements through portfolio steering, pricing adequacy, risk selection, capacity optimization, and coverage design. Claims will center around effective loss prevention that makes a significant bottom-line contribution, the inclusion of precise data-driven risk assessments, and real-time risk visibility at point-of-underwriting/claim assessment.
What brings all this together is digitization. The foundation of the data insights is the unification of data that creates performance and risk indicators that the business controllers can adapt to. The ability to provide foresight, simplification, accuracy, and speed of all data processing across the insurance value-chain will be a differentiator.
Data-enabled processes will minimize friction and streamline the customer insurance journey from a request for coverage to claim. Reinsurers will benefit from the upstream technological efficiencies as and when the exchange of data is either streamlined or augmented through the Internet of Things (IoT), third-party providers, or agreed governance across the industry. Digitalization will thus help improve the customer experience and the efficacy of back-office processes, which will reduce overheads and spearhead multi-dimensional views-on-risk that will drive the industry to EY’s lofty prediction of $600bn in revenue growth by 2030.
Based on the research, these are the three items that Insurers must prioritize today:
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