Bringing dinosaurs back to life: the future of insurance

The Economist has two articles on the future of Insurance. The first article estimates that the US general (P&C) insurance industry had a combined ratio of 100.3% in 2016, ie a net loss, due to its complacent refusal to modernise and a stubborn reliance on manual processes. It proposes two ways out:

  1. Monetise existing data in new ways, eg by becoming risk consultants, and

  2. Exploiting new data sources, eg by using sensors such as LeakBot to detect problems early and repair or prevent, rather than face potentially large claims.

However, the article is not optimistic, arguing that “insurers face many hurdles to becoming service providers and risk consultants,” which I would argue is putting in mildly, though many of those hurdles are self-inflicted from a change-resistant and overly risk-adverse culture. Furthermore, the article suggests, in a near future where data is collected everywhere and artificial intelligence guides the decisions, “the very existence of insurance” is under threat. For example, with driverless cars, the manufacturer will certainly choose to self-insure.

The second article discusses the darling of insurance startups, Lemonade, in the same way that has been covered many times before. The interesting bit is the one sentence that suggests a way forward for the incumbent insurers:

“And insurance dinosaurs have one advantage: data”

It is an interesting situation: you have an entire industry under existential threat sitting on an absurdly underused asset, namely the vast historical records. Meanwhile, the startups and disrupters are doing their best with what they have and are all in a land-grab mode in order to get the same proprietary advantage: more data than anyone else.

I have some background in the Insurance industry, most recently in private medical insurance, with responsibility for commercially exploiting data and insights, and I despair of the incumbents’ ability to change. I see isolated instances of genuine innovation but rarely a systematic and sustained approach. The old habits are just to difficult to change.

Please tell me in the comments that I am wrong and there is real change in an industry that has so much it could contribute and which should be at the forefront of making our lives better.

And here is a final thought. Should we force the insurance companies to share their data, through legislation? It is arguably a common good, as the risk management examples amply demonstrate. It is a vastly under-used resource that could be exploited to make us all better. And at the moment the situation is arguably getting worse with new companies such as Lemonade frantically building their own data silos.

I do not advocate legislation. But someone will, at some point. Imagine for a moment if all this data was available – what could we do? How much value could we create, how many lives could we save, how much could we do for the environment?

If the insurance industry will not innovate and is the blocker for innovation, surely there will come a point when change will be forced upon the industry?