Continuing InsurTech Rising Live digital week with more cutting-edge insights, we speak to Lakshan De Silva, Partner & CTO at Intellect SEEC about his view of commercial lines being deemed the laggard. This afternoon, he will chat to us in more depth about where the biggest opportunities for innovation are, the steps some insurers are taking now to win in the digital future, and the challenges InsurTechs are likely to face in cracking the commercial nut. Join the webinar here.
Commercial lines: the financial services’ laggard?
Yes I agree. I am a bit surprised more InsurTechs have not targeted commercial. I see this as a mixture of the fact that new InsurTechs have opted to show growth in terms of volumes, which is much easier in personal lines, and the fact that the combination of business types (architects, engineers, construction, florist etc.) and lines of business makes it difficult to apply a homogenous and scalable growth blueprint. I don’t think there is a technology barrier, as the combination of machine learning, IoE and other exponential technologies is more suited for commercial lines innovation.
How will commercial insurance pave the way for innovation within the industry in the next few years?
I see commercial insurance being a leader in two areas in the short term:
- Use of external data to underwrite – the digital footprint, with readily available public structured data, paid third party info and unstructured data/social data, through Yelp, Checkatrade and the fact that this is available without blurring lines on privacy, means commercial insurance is prime to take a leadership position in the use of external data in eligibility, underwriting, rating and renewals.
- Use of IoE to better assess risk and adjust premiums – even though consumer based IoE devices and low powered mesh networks and protocols have improved, they are way behind the achievements seen in Commercial IoE (industrial automation) over the last 30 years. The equivalent of the data warehouse for time series data (i.e. the Historians) is a mountain of data on logistics, collisions, safety violations, along with safety notes. Getting hold of this data by providing incentives of lowering premiums and in turn having a lower loss ratio (better risk) business is win-win for insurance.
The combination of both external data and IoE, with machine learning techniques, will help change the fundamental concept of Risk Pooling, creating the “Pool of One”, where you can underwrite and rate “the” company in question not just a company “like” the company.
How does InsurTech play into the hands of commercial lines? How do disruption and innovation weigh up?
I define disruption as the end results of a continuum, starting with digitization. This sees companies applying Exponential Technology over a period of 5+ years to remove elements of their value chain (i.e. agent, underwriters etc.) and their fixed costs (i.e. buildings) ultimately dropping relative price points 10 fold (not 10%) whilst increasing services 10 fold. As a result the amount of services, coverage and value you get from insurance will need to increase 10 fold and the “relative premium” will need to drop 10 fold. InsurTech’s role here is to aim for the 10x and fast track the introduction of Exponential Technologies, such as machine learning and IoE, resulting in the reconstruction of the insurance value chain by taking out things such as buildings, intermediaries, legacy core systems, as well as innovating the capital structure, using instruments such as Insurance Linked Securities (ILS). Without InsurTech, incumbent carriers will be happy with the standard 10% improvement over 3-5 years, to focus on superficial operational improvements, and continue the status quo. The first change you will see due to InsurTech is that the innovation budget alone for commercial carriers will have to take up an majority of the IT budget, which in itself will have to be way above the measly 3% of DWP for incumbents to compete.
What are some of the barriers and blockers accelerating innovation in commercial lines? What features create unique challenges?
Firstly there is the financial barrier imposed by linear 3-5 years business plans. This has led to incumbent carriers taking safe bets and not the bold 10x bets. This is further accentuated by the fact carriers spend around 3% of DWP on technology. This severely constraints innovation for commercial lines carriers who will be competing with technology spends of 40%+ in InsurTech.
Secondly, if machine learning is to truly be brought to underwriting and rating there is potentially a legislative issue. This is due to the ‘runtime’ (as opposed to being programmed) nature of learning. Essentially, the potential of not knowing the exact algorithm that lead to the rating, nor the decision criteria, means there is a legal quagmire for carriers to work through. This is assuming they will have the skills and patience to develop/partner on the technology side!
How mature are some of the technologies underpinning innovation commercial lines within insurance?
The ability to mine external data (non-real time) and apply machine-learning techniques is now at least 4 years old. I think in the last 12 months what has improved significantly is the real time Big Data capability, especially for streaming IoE. This will really take machine learning from being targeted at the underwriter to directly targeting the insured, enabling some truly innovative SME solutions that are not reliant on the horrible forms and are likely to move to conversational platforms (aka Chat Bots).
How does the structure and culture need to change within the industry to make way for commercial lines?
The accountant and actuarial mind of conservatism will have to change. This culture is focused on spending exorbitant time analysing and pricing on narrow and well-understood data, which almost all of incumbents use. The outcome is a heavy reliance on legal language, high expenses and commissions and ultimately a “bloated” low margin industry. Structurally the reliance on intermediated distribution will need to change. A lot of commercial insurers have forgotten that the customer is the insured not the intermediary. The focus back on the insured will make a large difference to gauging more about the insured and the creation of simplified yet personalized products focused on loss prevention.