The rise of insurtech and new IT models of risk management

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The combined power of cloud computing and advanced data analytics is being harnessed to help insurers hone their modelling skills to better manage risk, cut costs and improve efficiencies

Just as fintech is making retail banks rethink their legacy IT systems, so insurers are examining what technology and insurtech can do for them. Insurtech might not be as well documented as fintech or as well financed – it received around $2.6bn in investment in 2015 against some $19.7bn for fintech – but it is quietly making a big impact in the areas where it is used.

An early adopter is Phoenix, a large, closed-fund consolidator of funds in the UK with £70bn of assets under management. It had accumulated more than 70 different actuarial valuation systems with the various funds it had taken on, making modelling and accounting extremely complex and time consuming. In 2013, it completed a three-year system transformation programme of its actuarial computing processes with consultancy and software specialist Milliman, replacing all these systems with just one. Microsoft is the cloud partner.

Andy Moss, Phoenix chief executive, says the benefits of the change quickly became clear. “We have been able to release some surplus funds to shareholders in the form of dividends, for example,” he says.

Prudence and profit

The surplus funds stem from improved modelling of liabilities and capital requirements (which provide a prudence margin above the likely best estimates to protect policyholders from unforeseen events) as well as efficiencies in terms of headcount and operational activities. Prudence is the name given to the funds an insurer must hold to ensure it is solvent. “The new system found areas where we were wide on assumptions, allowing us to release some prudence,” he explains, adding that some resources could also be diverted to value-add activities.

Not only did shareholders benefit, but policyholders also got a boost as the funds allocated to them – the distributable estate – grew. “The better modelling increases the size of the estate we can distribute to policyholders,” Mr Moss adds.

“The cloud can store all the data and deliver the computing power required to crunch and analyse it on demand and fast”

The benefits are clearly even broader, adds Ken Mungan, chairman of Milliman. “Insurance is about improving the health and wellbeing of people. If insurtechs are successful, improved health and wealth will happen everywhere,” he says.

Lessons from fintech

Fintech is changing the face of banking, making it more customer-focused and efficient. There are lessons there for the insurance industry

“There’s an opportunity for insurers to learn from banking’s experience of fintech,” says Ben Robinson, chief strategy officer at Temenos, the Swiss banking IT specialist. “The digital wave that is transforming banking is now coming to insurance.”

Of particular interest to insurers is how fintech companies are helping banks to capitalise on data to manage their businesses more efficiently, driving down costs, improving risk management and delivering customer intimacy at scale.

“Insurance is a highly data and IT intensive industry, where the gains can be just as exciting – especially regarding risk,” points out Mr Robinson. Temenos supplies core banking systems to some 800 of the world’s banks. Its experience of working with fintech companies to help deliver digital services to satisfy an increasingly customer-driven sector is informative.

Fresh approaches

Innovative disrupters have rewritten the banking business model. New banks such as Canada’s EQ Bank launched from scratch in just months to offer an online savings account with higher rates than competitors thanks to its lean and efficient cost base – it is branchless and employs just 27 people. M-Shwari, a new mobile bank in Kenya, is able to onboard a customer, make a loan decision and disburse the monies – all in under a minute.

But innovation doesn’t necessarily come cheap, nor is it swift. This is where fintech firms have been pivotal, developing not whole systems but discrete applications and services made available through application program interfaces. These offer fast, efficient and secure mechanisms to connect customers and technologies. Banks such as Santander, for example, use APIs to provide same-day business loans.

This “fintegration”, where banks access new technology from nimbler fintech firms, represents a win-win situation and one the insurance industry should emulate. “For insurance, the opportunity would be to work with partners to gain more data from sensors and to help improve data analytics. That way insurance could become more granular and the range of products would increase,” says Mr Robinson.

Safety in (big) numbers

The power of the analytics developed and implemented by companies such as Milliman – as well as the capacity of the cloud – are set to transform the insurance industry. The cloud can store all the data and deliver the computing power required to crunch and analyse it on demand and fast; the analytics can look for patterns, run models and test scenarios.

“It’s unbelievably difficult to calculate all the values needed, to analyse and report quickly,” Mr Mungan says. “What we deliver is a tremendous benefit. The heart of insurance is deploying the law of large numbers to manage risk effectively. The more relevant numbers that can be taken into account, the better, more accurate the risk calculation.”

It was this need for speed and accuracy that drove Phoenix to Milliman in the first place. “We knew our technology – a spaghetti mess of acquired funds’ systems – wouldn’t be able to deliver the reporting requirements demanded by [EU legislative programme] Solvency II. The new quarterly reporting within the timescales was beyond us. What we’ve got is a more straightforward but more powerful tool that is scalable and fast,” says Mr Moss.

Bringing customers closer

In the broader insurance industry, Mr Mungan believes that this greater computing power and cloud computing could be used in product development. It’s here that companies such as Apple and Google could come in. They already have enormous amounts of data on their customers; analysed correctly these could help insurance companies fight what are known as anti-selection activities – when a customer takes out a life policy knowing they have cancer and only three months to live, for example – or fraud. It could also help forge closer relationships between insurers and consumers.

UK insurer Aviva is already on to this. Its driving app monitors drivers’ behaviour and rewards good driving. It is hugely popular, improving the insurer’s relationship with its policyholders, helping reduce risk and bringing the customer closer.

“In emerging markets… mobile is the channel to reach customers and distribute products cheaply”

But according to Tony Jacob, head of insurance at Microsoft, only about a third of insurers are embracing and investing in insurtech today. The rest need to play catch-up or they will be swallowed or go out of business. “In mature markets, the insurers certainly face the burden of legacy. Moving to the cloud can help them modernise their technologies while also lowering their expenses, freeing budgets to invest in many new technologies such as social, mobile, big data and automation,” he says.

“In emerging markets, the challenges and opportunities are different. There, mobile is the channel to reach customers and distribute products cheaply. There it will be about technologies and channels to support high volumes of lower priced insurance products.”

Just as fintech has been a game changer in retail banking, so too the impact of technology is likely to be felt in the insurance world. “Insurtech will bring down the cost, help manage risk and help with timely compliance. Traditional carriers must move at a quicker pace to end their reliance on legacy core systems and become more agile, more efficient and more intelligent. It’s a very exciting time and will be good for everyone involved,” says Mr Moss.

This content was produced by FT², the advertising department of the Financial Times, in collaboration with Milliman.