The ‘new advanced’: technology, pricing and other stories
There has been plenty of talk about a new normal emerging out of the current crisis, but this underplays the scale of the digital transformation that is currently under way, say Jonathan Prinn at BGC Partners and Chris Bonard at Ed Bermuda.
The human tragedy of a global COVID-19 pandemic is clear and immediate to see. A death toll of in excess of 500,000 and still rising is a stark and instant reminder of what will be written into the history books of the future.
The longer-term effect has already hit global economies and we are about to enter a global recession with a singular proximate cause that was once only the topic of Hollywood movies and paperback thrillers.
The insurance industry faces a series of crucial tests, with reputation on the line. Whether coverage applies or not will be tested in the courts, but legitimate losses alone will perhaps make this the largest catastrophe in history. Simultaneously, adjustable premiums will not be paid due to ‘lockdown’ lack of activity and those businesses that survive might well cut back on insurance spend, but as the market hardens renewal premiums will significantly increase.
There is no silver lining to the tragedy of the pandemic but it has been the equivalent of petrol being thrown on to the slow burning fire of digitisation. The naysayers who have forever said face-to-face trading is a necessity have been proved wrong.
Travel and entertainment have ceased, yet new clients have still been won. Teams have not met physically for months but have still worked together. The pendulum has clearly swung to the other side. It will swing back, but our industry needs to find a better balance and use the opportunity of the ‘COVID-19 proof of concept’ wisely.
The term ‘new normal’ seems to suggest we should go back to our old ways—but wearing PPE. No, we must set the correct tone that this is the ‘new advanced’. Digital strategies, perhaps in our industry sometimes considered as nice to have, are now fundamental to remaining relevant.
Data and analytics will thrive as we capture more information online and less on paper. Lockdown enabled digitisation of every meeting overnight—videoconferencing with recordings and transcripts available moments after the meeting has finished has replaced notes and bulleted actions and more importantly, confusion and ambiguity.
This is just the start. Our processes will all move online, all of our information will be held centrally, all interactions recorded for all to see and share, ultimately leading to clients providing real-time information about their risks.
“We could see a much clearer delineation between good, medium and bad risks, but the overall premium pot could be higher in total.”
Will more data increase or reduce premiums? That is an interesting debate. Evidently, an oil refinery has 150,000 data items but the insurance industry uses only four to price the risk. If we use 150,000 will the price go down? Current pricing is not as scientific as it should be.
The heart of the problem is that the starting point is the renewal price, and looking at the combined ratio of most carriers over the last five years suggests that the ‘global premium pot’ has been too low.
Greater understanding of risk via real-time data and analytics should make it considerably easier to identify good vs bad risk. But what if it identifies that all risk is too cheap? We suspect we could see a much clearer delineation between good, medium and bad risks, but the overall premium pot could be higher in total as more data creates greater insight, which requires greater premium. Managing through this process will be important.
At BGC the view for some years has been that there will be two types of underwriting in the future. We call it stock picker vs market tracker. That’s not particularly new thinking, as most financial markets have an index that can be bet against and clearly there are many actors who look to beat the index returns.
Recent work on the lead/follow concepts at Lloyd’s has moved the thinking on, and the latest announcements regarding algorithm-based syndicates are a huge step in the right direction. The concept of an algorithm market tracker vehicle simply writing a support (follow) line but only following certain key leads for each class is just the start.
The first stage is to reduce cost. No more highly paid underwriters, no more time-wasting manual processes re-checking things that have already been checked (why does each party do their own know-your-customer and sanctions, for example?). No more costly back and forth—just data input and a yes/no answer. Combine that with an agreement to follow lead claims settlements and the existing cost model is fundamentally blown up.
That has to be good—but is a cost reduction perhaps masking the incorrect rate?
Stage two is augmentation of the data. A lead carrier will do everything it can to assess the risk but if an algorithm-driven market has all the data to trigger the ‘yes/no’ it will also be able to augment the dataset and perhaps take a view different from the lead.
That view might well be that they will follow—but at different terms. Perhaps they could follow at a lower price and thus make the offer very attractive, or perhaps at a higher price—perhaps even a short-term offer: ‘take it or leave it’ style?
At that moment the market becomes a true vertical market with everyone pricing for themselves. Good risks providing great data will benefit the most. Poor risks or lack of data will struggle.
A digital exchange
Could a true digital exchange be created? The buying and selling of industry loss warranties (ILWs) is a case in point where ultimately brokers are matching commoditised products using the ‘dark art’ of bid and sell, a process that could easily be replicated like other exchanges from the financial markets sector.
Given the significant capital impact of COVID-19, we are seeing a common theme regarding a new class of 2020/21 insurers being established. Several market veterans are predicting this to be one of the best underwriting environments in many decades. However, will it be enough to rely on the old model to raise the many billions of capital needed, or will they follow the lead of Convex and embrace technology to reduce costs, improve return on equity and create a new model of re/insurer?
It’s inevitable that the class of 2020/21 will set up in some of the most expensive jurisdictions in the world, such as Bermuda and London. Will they grab the chance to use technology to create agile working environments, AI-based underwriting decisions and to develop products that address the ever-changing risk exposures of a modern world? Or will they shy away from these possibilities?
We know for sure that the enormous cost structure of our business needs to be tackled to ensure capital is matched far more closely and more efficiently to customers.
We hope that some, if not all, of these new entrants become hybrids of what already works well in our industry, coupled with the rapidly changing digital world we now live in, merging talent and technology. It will be a truly lost opportunity if this is not the case.
Jonathan Prinn is a managing director at BGC Partners. He can be contacted at: email@example.com Chris Bonard is the chief executive officer of Ed Bermuda. He can be contacted at: firstname.lastname@example.org
Video: Elements.Envanto.com / TrackDealer, Image: Shutterstock.com / LightField Studios, Image: Shutterstock.com / PopTika
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