Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Ince | Apr 26, 2022
The rapid development of converging technologies is bringing about fundamental changes to the insurance industry. In the long term, organisations that are slow to embrace these new technologies will struggle to compete and to retain their place in the market. These innovations initially impacted the consumer market and the markets servicing small and medium-sized enterprises but as the technology beds down, it is expanding into more complex risks. This is a trend that we expect to continue in the coming years, not least as a reflection of the drive to reduce costs.
The real-time analysis of data obtained in this way also allows more opportunity for insurers to cross-sell and upsell targeted products to customers. In particular, the introduction of robotic process automation (RPA) means that underwriting decisions can be made and policy documentation issued much more quickly than in the past.
Detecting fraudulent claims is a major issue for insurers. Recent figures from the Association of British Insurers show that approximately 107,000 fraudulent claims with a value of approximately £1.2 billion were detected in the United Kingdom alone in 2019. It is no surprise, therefore, that insurers are developing algorithms that use big data and machine learning to identify the markers of a fraudulent claim. Claims are then tested against these markers by the AI so that suspicious activity can be subjected to closer examination.
One of the major innovations that insurtech has introduced is usage-based insurance (UBI), which is used to develop more personalised insurance products. Personalisation is achieved by the use of algorithms to analyse the insured's own data together with external information from a broad range of sources to generate a bespoke risk score. This process is intended to significantly improve the relevance of the insurance to the buyer, as well as the underwriter's ability to assess risk.
Pay-as-you-drive insurance is at the forefront of this process and there are a number of examples in the market. This insurance is usually priced on the basis of a fixed cost for the car's stationary risk, such as fire and theft, and a flexible element that is based on the number of miles driven each month. Mileage information is collected through the use of telematics. Initially this involved a 'black box' in the car to relay information to the insurer in real time; more recently, however, smartphone apps or preinstalled devises have been used to collect data. Drivers can also see the cost of their insurance as it is incurred.
The Internet of Things (IoT) has brought about a fundamental shift in the insurance industry, allowing insurers to provide more customised products to their customers. IoT devices such as smart thermostats and geographic information systems allow insurers to collect real-time data on the behaviour and location of policyholders, allowing them to develop products tailored to their customers' individual circumstances. It is important for both insurers and insureds to learn more about the potential benefits and risks of IoT in insurance to make informed decisions about its use.
Additionally, IoT devices can also play a crucial role in risk management, such as monitoring water usage to detect unexpected increases in consumption. As IoT units become more widespread, insurers will continue to use them to gain a deeper understanding of customer behaviour and needs, but they have also raised concerns about data privacy and security.
For example, the use of location-based sensors, such as smart thermostats and geographical information systems, which relay information to insurers in real time, not only facilitate more accurate underwriting but can also play a part in risk management. Thus, devices monitoring the insured's water usage can respond to any unexpected increase to warn of leakages.
Many commercial transactions require the existence of relevant insurance contracts to be verified. Blockchain will allow all the parties to the transaction to view and verify the paperwork in real time, thus significantly speeding up the shipping process by removing the requirement for the physical transfer of documents between banks.
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