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The fourth industrial revolution (4IR) brings new data, insights and risks to insurance

At the insurer of the not so distant future, transactions, there will be clean hand-offs and interactions between customers, brokers, underwriters, insurers, reinsurers and claims providers. The concept of multiple systems and platforms will disappear, replaced by seamless workflow integration—much like access to a full range of television content through a single app. This technology integration will reduce operational friction and increase competition for consumer and B2B business. As a result, insurers will provide more diversified services and have a different risk profile.

“Technology integration will reduce operational friction and increase competition for consumer and B2B business with new types of risks.”

Risks are dramatically changing because of the 4th industrial revolution

Unsupervised decision-making and transactions are already commonplace, and the technology that enables them is facilitating most of the world’s financial system. In fact, the vast majority of global stock market trades are made using unsupervised algorithmic processing.

The insurance industry has been experimenting with technologies (e.g., blockchain) that facilitate even more unsupervised transactions and decisions. Coupled with data and data analytics, these technologies are dramatically changing the way business operates. In addition to the obvious technology reliance and resilience risks, these shifts introduce a completely new set of risks to a company. For example:

  • How does a company attest to its compliance if transactions and interactions are based on deeply integrated systems in which machine learning and artificial intelligence continuously change decision-making?
  • Removing technology silos creates heavy reliance on third-party technology providers and blurs the lines between what is proprietary and what belongs to the cloud (e.g., who owns the blockchain?).
  • How can companies determine and manage liability and privacy risks associated with AI and connected devices, including drones, sensors and driver assistance technologies?
  • In a frictionless technology environment that places more emphasis on services, how does risk manage the balance between commercial pressures and effective risk management?
  • As focus shifts to value-adding services and new providers enter the market, how does the risk function balance regulatory obligations with the social, reputational, and other risks of collaborating with new entrants?

“Unsupervised decision-making and transactions are already commonplace, and the insurance industry has been experimenting with technologies that facilitate them even more.”

Managing risk faster than the speed of thought

As insurers increasingly use technology to support their customer bases, improve margin and become more competitive, the risk function will need to keep pace with technological change—both in terms of understanding it, and also in the way that the company uses it to assess, monitor, evaluate and report on the business.

Risk functions will need to ensure that, as technology develops and becomes more embedded, clear and seamless checks, controls and reporting are available. Moreover, risk managers will need to possess stronger technological, data and analytical skills and, as workplaces, insurers will need to better encourage creative thinking and broad-ranging predictive idea generation.

Most of the technology that can enhance the risk function already exists. The important question for CROs is how much it costs to acquire and embed within the business. Technology to monitor risk appetites and tolerances across a wide-range of measures is becoming more common, and awareness of movements against appetite (via notification-type messages through control and governance processes) are starting to create greater efficiencies. Moreover, the ability to specifically track exposures on a highly accurate and timely basis can inform the design of reinsurance products and their pricing.

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Data: Creating a new risk profile

In response to and as part of these technological developments, insurers are using increasingly diverse data sets and predictive analytics to build future-state risk scenarios. In fact, having a technology integration layer that facilitates this volume of data and hosts the required machine learning and AI capability could become an insurer’s intellectual capital and competitive advantage.

The ability to use more diverse data sets that provide real-time insights is truly transformational. The internet of things, home automation, social media and health data are increasingly allowing insurers to proactively tailor products and pricing to the individual. They also are expanding the possibility of providing assurance-related services, where data helps prevent a loss before it happens.

However, these developments create a very different risk profile for a company. Richer data and better connected technology also increase the speed with which risks can materialize. For example, introducing the capability to make near real-time or real-time, mid-term adjustments (for example, a customer adding coverage to their policy for just one day through an app) makes risk exposure a very flexible, real-time challenge. Being plugged into the data and the systems the business uses will be the only way for risk monitoring to be effective. The risk function also will need to understand how it can perform a preventative role and predict what may trigger a risk, likely going beyond using only the firm’s internal data. For example, augmenting internal data with external environmental and social data will be critical for future-facing decision-making.

“A technology integration layer that facilitates data and hosts the required machine learning and AI capability could become an insurer’s intellectual capital and competitive advantage.”

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Analytics: How to better explain and understand risk

With data as the lifeblood of business and the risk function and technology as the underpinning enabler, analytics becomes the way to explain and understand risk. Dashboards and visualization are alternatives to lengthy and wordy reports, but the industry still has a long way to go to harness the full power of analytics and visualization to explain the “so what” that end users need. The key factors that will increasingly help insurers close this gap are:

  1. Quality and speed of insight: Analytics are increasingly automated, with AI-driven predictive insights that continually learn and evolve to identify emerging issues and trends. This is the result of enhanced data (e.g., via satellite and drone imaging) about customers and exposures, supplemented by a wider range of global intelligence sources. In the near future, for any portfolio, product or segment, risk functions will be able to access exposures, critically assess risk forecasts as they evolve in any location and make near real-time decisions on changing risk footprint, adjusting rates and hedging exposures.
  2. One embedded view of risk across the organization: One version of the truth across all business segments can provide all parties access to a consistent view of risk in any segment. Interactive MI allows each team to drill down on issues of relevance to them, including customer behavior, aggregation management, risk concentrations, technical price deviation, etc. This enables businesses to much more effectively incorporate risk and volume and profitability throughout their decision making.
  3. Alignment to business strategy rather than just compliance: Risk will need to use enhanced analytics to determine if the business is operating within risk appetite, while also looking at an increased range of opportunities. As compliance activities performed by the risk function become increasingly automated, analytical information will help the business better understand the potential impacts of different scenarios, thereby facilitating more informed strategic decision making.

“The industry still has a long way to go to harness the full power of analytics and visualization to explain the ‘so what?’ that end users need.”

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Dana Hunt

Insurance Risk and Regulatory Services Partner, PwC US

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