Optimising Trust, not Price & Claims Optimisation: World of Digital Insurance!

Market events in India – around underwriting and claims have become rarer compared to those centering distribution. Very recently, I had the pleasure of speaking at one such and congratulated the organiser. Underwriting and Claims are the heart and soul of our business. What was unique about this event – it had a significant presence of technology practitioners and vendors. Thanks to the rapid advancements in Artificial Intelligence, Big Data, Block Chain, IOT et al there is renewed hope. That service levels will lift, customer journey would become less bumpy and trust will return. To what extent is it a wishful thinking and what do global trends portend for us?

Ground reality: The underlying business predominantly remains loss making. There is a creamy layer of valuation that excites ‘irrational exuberance’. The knowledge business that we are supposedly into is stunted by a shallow and shrunken knowledge pool. In the words of a visionary leader “the industry is good at paying small losses but not the big ones”. Underwriting information is not always forthcoming when contracts are entered into. This paves the path for ‘contract uncertainty’. The glamour at the ‘Point of Sale’ overshadows the demands at the ‘Moment of Truth’. Future growth potential drives most stakeholders into a tizzy. Lack of a channel specific value proposition induces channel conflict. NCOR (Net Combined Operating Ratio) loses hands down to ROI (Return on Investment). Needless to mention the ongoing interplay between excess capital and pricing pressures!

Learning from some global trends:

Like in any fast growing emerging market, here too the pace of growth and level of fulfillment will be increasingly technology enabled. If traditional insurers do not get their act right, tech players will quickly displace the old order. However, sheer speed and resulting transparency will not guarantee a new version of loyalty and trust. At this juncture I would like to draw liberally from Duncan Minty – a London based independent ethics consultant and a prolific blogger. In his recent paper titled “The Great Accountability Challenge Facing Insurance Leaders”, Duncan reminds us, “The insurance industry is changing. New technologies and new business models are presenting strategic opportunities that firms are pursuing with enthusiasm. Yet this reshaping also presents new challenges to the accountability of insurance firms.”

Two particular challenges noteworthy amongst a long list of data transformations are: 1. “The accountability gap: The complexity of AI can open up a veritable gulf between the decisions of individual people, and effects that those decisions produce. Even though the detriment is evident, no one in the insurance firm sees it as their responsibility.”

2. “The accountability imbalance: The reach and depth of AI makes it an empowering technology for those utilising it. This can cause insurance firms to see their decisions as perfectly rational, while seeing the decisions of policyholders as much less so. The danger is that such empowerment could cause insurance people to just not see ethical issues associated with AI”, he warns.

Duncan then goes on to remind readers of “Some Harsh Lessons”. “There’s an ironic mismatch happening in insurance at the moment. Many insurance people think that AI and big data are bringing their firms ‘closer to consumers’. That’s confusing proximity with intimacy. And it’s also mistaking proximity to the customer as an informational object, with proximity to them as a person. Consumers will want to get closer to insurers because of the outcomes they experience. AI has the potential to deliver outcomes that push consumers away.”

“Trust falls through the floor when consumers see insurers as just not recognizing, let alone accepting, their accountability for the decisions their businesses are making. And it’s not just consumers – investors and business partners will expect insurance firms to keep a firm handle on their accountability, seeing it as an indicator of performance, confidence and ownership.”

Price and claims optimisation:

It was a couple of years ago that Duncan put up a red flag to remind us on the vices rather than the virtues alone of big data. He saw an emerging trend of regulatory push back on price optimisation. “The price version has the insurer setting the premium for insuring a risk according to what the policyholder is prepared to pay, rather than the level of risk that the policy is presenting. It involves using big data to work out the price at which particular types of customer will start to look for alternative quotes, and then progressively raising the premium to just below the amount.”

He is now going a step further and flagging claims optimisation as yet another potential trust buster. “With claims optimisation, insurers would seem to be abandoning all remaining hope of sustaining trust in a digitized market. Claims optimisation involves using big data to establish the amount that a particular claimant would be prepared to accept as settlement of their claim. So if all those algorithms pinpointed the claimant as someone in financially tight circumstances, then the settlement offered to that claimant would be optimised to reflect their greater and more immediate need for cash. This would involve tweaking the comparative speed of a cash settlement versus a replacement service and setting their relative offers to achieve an optimised position.”

He goes on to emphasise “Let’s be quite clear: claims optimisation is an exploitation of the unequal balance of information and economic power between a consumer and an insurer. It is unprofessional and it is unethical.”

Three cheers for Lemonade!

Given this backdrop, here is something to cheer about. Just over a year old, this New York based insurer does not just have a very non-conformist brand but is vigorously shaking the old order.  They fancy calling themselves the tech company ‘doing’ insurance. Arguably the most disruptive startup the insurance industry has ever seen! While many continue to question its potential longevity – Lemonade is winning laurels for its innovative ways. Amongst the things that stand out the most – donating part of profit from a policy to the insured’s preferred charity; zero deductible covers; drawing a significantly higher proportion of women to insure with them and the super speed of transactions. Behavioural change and reinforcement of trust are their two key accomplishments. They have for instance already seen customers returning back claim monies which they thought were not actual claims.

In conclusion:

So there is indeed hope for underwriting and claims. Perhaps there will be more versions of Lemonade sooner than later delighting customers with speed, transparency and fairness. As more and more individuals and businesses in emerging markets seek to transfer their risks to insurers – optimising trust will not only ensure loyalty but a win-win behavior. This will surely be a welcome prescription for insurers in the growth phase.