THE FUTURE OF INSURANCE: PERSONALIZED, DIGITALIZED AND CONNECTED
MATT HUTCHINS | ERNST RENNER
SIMON ASHBY | Professor of Financial Services, Vlerick Business School, Ghent University
DIMITRIOS KOLOKAS | Doctoral Fellow, Vlerick Business School, Ghent University
DAVID VEREDAS | Professor of Financial Markets, Vlerick Business School, Ghent University
The unprecedented public health crisis caused by COVID-19 overstretched the structures and mechanisms of the
European Union (E.U.), in particular those that deal with emergencies. To be ready for the next health emergency, we propose the creation of the Emergency Health Financing Facility.
In its broader version, this facility integrates some of the existing E.U. emergency structures and adds a new layer for the most extreme emergencies that does not increase the burden on public finances. This new layer essentially consists of securitizing health emergency risks in the form of fixed income securities that are sold to institutional investors. The facility follows the growth of market-based risk financing facilities across global and regional initiatives, led by the World Bank.
CHRISTOPHER P. HOLLAND | Professor of Information Management, Head of Data Analytics, and Co-Director of TECHNGI,
ANIL S. KAVURI | Research Associate and Visiting Lecturer, Loughborough University
Artificial intelligence (AI) is recognized as a strategically important technology because it has the potential to exploit human-like intelligence at machine scale and speed. However, the hype surrounding its business use masks the AI phenomenon and makes it difficult to analyze and evaluate in a systematic manner. Current approaches to defining AI tend to focus on its technical aspects and neglect the business, ethical, legal, and regulatory context.
To remedy this deficiency, an AI systems approach is taken that defines AI within a broader systems framework. This is important because it provides a richer set of concepts that relate AI technology to business processes, business models, ethical considerations, and the legal and regulatory environment. A new framework of digital transformation is proposed, which is based on a synthesis of a new AI systems definition and business model concepts.
The digital transformation model is illustrated with two global leaders in insurance markets, Ping An and TESLA insurance. In both cases, a similar causal model of digital transformation, continuous innovation, and rapid growth is identified that exploits the AI digital flywheel effect. The managerial and regulatory implications of the case study analyses and conclusions are described, and future research opportunities are outlined.
JÉRÔME JEAN HAEGELI | Group Chief Economist, Swiss Re
PATRICK SANER | Head Macro Strategy, Global Economic Research & Strategy, Swiss Re
The extreme weather events seen worldwide this year underline the need for decisive global action on climate change, as it is among the biggest societal risks of our era. Rising global temperatures and more extreme weather events will increasingly set economies back through physical risks such as property damage, disruption to trade, and lost productivity. There will also be transition costs as we move away from systems and infrastructure underpinned by fossil fuels and carbon-intensive resources. Swiss Re Institute set out to assess how climate risks will impact economic output (GDP) in countries globally. The analysis covers 48 countries representing 90% of the world economy, using global warming of 2.0-2.6°C by mid-century as a baseline scenario. For the economic impact of climate change, the tail of possible economic outcomes is what matters. The research uses a scenario approach to capture uncertainties around temperature paths and economic implications, complementing typical climate risk models that identify the average expected GDP loss. The research also tested countries’ resilience by building a model that combines the findings on the economic impact of gradual climate change with countries’ vulnerability to extreme weather events and their adaptive capacity.
The research finds that the world stands to lose around 10% of GDP by mid-century if climate change stays on the same trajectory and the Paris Agreement and 2050 net-zero emissions targets are not met. Achieving the Paris Agreement target would reduce the impact, but there would still be a global GDP loss. The extreme weather analysis indicates higher likelihood of droughts in southeast Asia and Latin America, and higher excess precipitation and flooding in northern and eastern Europe. The Swiss Re Institute Climate Economics Index ranking finds that those most negatively impacted by rising global temperatures are often those with fewest resources to adapt to and mitigate the effects. More global, coordinated action to mitigate climate change is an imperative. Swiss Re Institute makes policy recommendations for both the public and private sectors to accelerate climate-related action and collaborate to ensure equitable progress in greening economies.
ANITHA RAO | CEO and Founder, Neurocern, and Board-Certified Geriatric Neurologist, Department of Neurology,
University of Toledo College of Medicine
MARK WEINDLING | Chief Technology Officer, Neurocern
PAUL RIDGEWAY | Strategy, Chief Financial Officer, Neurocern
LIZ KENNEDY | Project Manager, Neurocern
HARRIS A. EYRE | Chief Medical Officer, PRODEO, and Co-Lead, Neuroscience-inspired Policy Initiative, OECD
PAULO PINHO | Vice President and Medical Director of Innovation, Diameter Health
As the global population ages, neurological diseases such as Alzheimer’s disease, stroke, and epilepsy will represent a top data attribute in disability and mortality predictive modeling. Clinical shortages of geriatric specialists globally have led to missed diagnoses and delays in care leading to untoward clinical and financial outcomes. Research has demonstrated a clear trickle-down impact in underwriting, latent mortality risk, and reserving for the aging population.
Advances in technology and artificial intelligence have given rise to innovative analytical modeling that have benefited both insurance and overall population health. This paper will discuss the application of a neurologically trained artificial intelligence data engine and case studies to provide understanding on how AI-enriched data insights can improve the quality, costs, and context of care.
STEVEN W. KOHLHAGEN | Former Professor of Economics, University of California, Berkeley
D. SYKES WILFORD | W. Frank Hipp Distinguished Chair in Business Administration, The Citadel
Mismeasured GDP is now the norm. In a period when policy implications for inflation, new structures in monetary and fiscal policies, and the efficacy of historical models of policy are being argued, with hyperbole, it is time to move away from the narrow, typical GDP-centered economic analysis to look holistically at the measurement problem. The COVID-19 shock has led to multiple mini-shocks and numerous policy actions while at the same time the Third (and maybe Fourth via AI) Industrial Revolution is taking place. Responses to shocks are often driven by historical measures of GDP and the ancillary issues of inflation, productivity, and economic wellbeing. Unfortunately, they are likely based upon incorrect, badly measured data.
This paper discusses these measures, the problems associated with them, and the implications arising from mismeasurement. It points out that while macroeconomic models are calculus-based and can, thus, be used effectively to analyze and predict what will happen to, say, GDP if there is a small change in an independent variable, they are absolutely ineffective in predicting what will happen if there is a massive pandemic or a series of massive exogenous government actions. It further suggests that the actual real economic output being experienced in the United States and the advanced economies is terribly underestimated and concludes with policy and forecasting dilemmas created by the lack of reliable measures for output, inflation, productivity, the actual state of the economy and the ineffective forecasting ability of macroeconomic models in a period of massive shocks.
CHARLES SINCOCK | ESG Lead, Capco
HUGO GOUVRAS | Senior Consultant, Capco
The environmental, social and governance (ESG) agenda has become an increasing priority for the financial services sector, including insurers. The Paris Agreement in 2016 was a landmark event for climate action, and subsequently there has been an increase in social justice considerations.
This article explores what insurers need to consider when approaching their ESG agenda, including integrating ESG within the core business and operations, as part of underwriting, investing and risk management decisions, and developing tailored ESG products and services.
PAULA NELSON | Co-Head of Individual Markets, Global Atlantic Financial Group
New insurance technologies and digital tools can help financial professionals integrate insurance into a client’s holistic wealth management plan with ease and transparency. This space is rapidly evolving and transforming how financial professionals conduct business on a daily basis. This evolution brings operational efficiency and simplifies business not only for financial professionals with insurance product expertise, but also for the many other financial professionals who lack adequate knowledge and understanding of how life insurance and annuities can be used to provide a complete wealth management experience.
By clearly demonstrating the products’ potential within the context of their client’s overall strategy, even less experienced professionals can confidently offer these solutions to their aging clients. These new wealthtech tools can also help professionals comply with regulatory and administrative requirements embedded in the legacy business practices of the industry. We believe that by leveraging existing digital capabilities, as well as supporting the development and standardization of new technologies that are under development today, we can drive innovation in the areas of new product development, user experience, and sales access for life insurance and annuities.
This paper discusses how technology can make it easier for professionals to incorporate annuities, life insurance. and other insurance-based solutions alongside traditional stock and bond portfolios. The paper also discusses specific technology tools that we believe can make an impact.
JÖRG TOBIAS HINTERTHÜR | Former Head of Smart Home Innovation Lab, Zurich Insurance
Internet of things (IoT) devices already provide an infinite treasure trove of data that is often overlooked among insurance companies. Using the example of how data from a water detector can fundamentally change the claims process of an insurer, this article will examine in more detail how IoT can help insurers improve the efficiency and effectiveness of their services and create entirely new customer experiences.
LUDOVIC SUBRAN | Chief Economist, Allianz SE
ARNE HOLZHAUSEN | Head of Economic Research’s Insurance, Wealth, and ESG team, Allianz SE
Climate change has a very simple effect: risk is rising in the world. This poses an existential challenge for the business model of insurance, the transfer of risk.
Impact underwriting and impact investing describe the new mindset: the industry no longer only prices and transfers risk but tries to change outcomes from non-sustainable to sustainable ones. For that, public-private partnerships are essential, both on the strategic level, steering the transition with long-term policy guidance, and on the operational level, building adequate risk-protection schemes and supporting investment.
But climate change is not the only challenge that threatens today’s societies. Behind lurks the protracted issue of growing inequality, which could easily be exacerbated by climate policy. Consequently, a new social contract is urgently needed. Insurers can play an important role here too, not only as good corporate citizens but also by embracing the pivot to equality in their business models.
BARBARA LIEBICH-STEINER | Chief Digital Officer and Head of Digital Strategy & Solutions, UNIQA Insurance Group
This article highlights the transformational journey of the author, the Chief Digital Officer of UNIQA Insurance Group, one of the major players in the insurance industry in Austria and CEE, during the implementation of UNIQA´s digital strategy and transformation of the way the company does business in order to stay relevant in the digital world.
The four essential dimensions of digital transformation and their impact on the current hybrid work environment will also be addressed.
ALEXANDER BOCKELMANN | Group Chief Technology Officer, Baloise Group
The ability to innovate is key for any company to survive and prosper over time, independent of its industry. Digital transformation has significantly accelerated the innovation cycles and led to the megatrends that are groundbreaking for the insurance industry. With its corporate strategy Simply Safe, the Swiss insurer Baloise is facing the challenges of continuously evolving itself. This article shows how an insurance company can structure the innovation process in a way that the strategic focus is not lost and explains why the corporate culture plays a decisive role in this.
RICHARD ROBERTS | Investment Director – Global Insurance
In this article, we consider current sustainability practices, future objectives, and the views of key decision-makers from a wide range of European insurers. Given their long-term investment horizons, risk-management capabilities, and stringent regulatory framework, insurance companies are both highly exposed to ESG (environmental, social, and governance) challenges and, potentially, well equipped to turn some of those risks into opportunities.
We discuss the key themes that arose from our research, including an overwhelming focus on environmental factors driven by risk management considerations and regulation. We go further to assess the practical challenges associated with developing and adopting decarbonization targets for insurers’ investment portfolios. These challenges are not insurmountable, but they will require insurers, asset managers, policymakers, and regulators to work together to find practical and scalable solutions.
ALVIN TAN | Principal Consultant, Capco
This paper examines industry conditions within the context of Blueprint Two (BP2), sets out the details and plan to deliver the second phase of the Future at Lloyd’s, and considers the wider challenges of industrializing AI. It sets out why conditions are ripe for insurers to engage in enterprise AI, and provides an overview of the key challenges that insurers face in doing so.
MATT CONNOLLY | CEO, Sønr
MATT FERGUSON | Managing Partner, Sønr
The insurance landscape has changed and continues to evolve at pace. Fueled by record levels of startup investment, new market entrants encroaching, and BigTech circling how should insurers respond? How can they balance the pressure of near-term commercial requirements and effectively manage resources today while simultaneously driving innovation to ensure they are still relevant tomorrow? Indeed, is this even possible?
What is for certain is that this cannot be achieved with an incremental approach to transformation alone. This paper explores the critical role that “open innovation” – the partnering with external innovation – will play in enabling incumbents to adapt and thrive in this rapidly changing market.
ALEXIS LOUAAS | Postdoctoral Researcher, CREST-Ecole Polytechnique
PIERRE PICARD | Professor of Economics, CREST-Ecole Polytechnique
The COVID-19 crisis has highlighted the deficiencies of business interruption insurance when the economic activity is deeply impacted by a worldwide pandemic. Pandemics have a systemic nature, which distinguishes them from other catastrophic risks such as natural disasters or large-scale industrial accidents.
This specificity makes it impossible to mutualize the pandemic risk through insurance or reinsurance. In facing this challenge, capitalization-based insurance mechanisms – so far limited to life insurance - offer a renewed perspective on corporate risk management and provide new opportunities to the insurance industry.
In this perspective, we explore the reasons why business interruption insurance should be backed by a specific portfolio-management strategy, and how such a combination would allow insurers to offer coverage against pandemic risk.
PIERPAOLO MARANO | Professor of Insurance Law, Catholic University of the Sacred Heart, Milan, Italy, and University of Latvia, Riga, Latvia
MICHELE SIRI | Jean Monnet Professor of European Union Financial and Insurance Markets Regulation,
Department of Law, University of Genoa, Italy
The European Union (E.U.) is one of the leading financial and insurance markets in the world. Fintech and insurtech have also developed in the E.U. The European Commission has taken numerous steps to fully comprehend and evaluate the challenges of applying new technologies to the financial services sector.
This study provides an overview of the E.U. approach to insurtech from a regulatory point of view. Thus, risk governance within the E.U. Solvency II regime, including the role of the actuarial and risk management functions when dealing with this risk, will be illustrated. This analysis outlines the need for fair treatment of the clients, as protecting policyholders is the main objective of E.U. regulations and supervision in insurance.
PAULA JARZABKOWSKI | Professor of Strategic Management, University of Queensland and Bayes Business School,
City, University of London
ELISABETH KRULL | Postdoctoral Research Fellow in Strategy, Bayes Business School, City, University of London
MUSTAFA KAVAS | Lecturer in Strategic Management, University of Sheffield
KONSTANTINOS CHALKIAS | Senior Lecturer, Department of Management, Birkbeck, University of London
The pandemic has an ongoing financial impact on the global economy, resulting in its uninsurability and ultimately an insurance protection gap. While solutions exist to address other protection gaps caused by large-scale disasters such as repeated flooding, earthquakes, and terrorism, pandemics differ and require novel solutions. This paper builds on Jarzabkowski et al.’s (2018) strategic response framework to large-scale, catastrophic disasters and applies it to the pandemic insurance protection gap. Set in the U.K. context, the research empirically studies various insurance solutions that are being proposed for pandemic risk and presents and evaluates four types of responses.
JOHN PYALL | Senior Product and Wordings Manager, Great Lakes Insurance SE, Munich Re
COVID-19 has had a profound impact on the insurance industry, not only on the results of the business lines but also on the way customers, regulators, and the insurers themselves look at how the business operates. This article looks at the challenges that insurers have faced over the last few years, the potential issues insurers need to address in order to keep themselves relevant, and how they can take the necessary steps to adapt to the dynamic market situation they find themselves in.
CLAUDIA LEHMANN | Professor, Digital Innovation in Service Industries, and Executive Director, Center
for Leading Innovation and Cooperation (CLIC), HHL Leipzig Graduate School of Management
THOMAS ZWACK | Partner, Capco Germany
SIMON MEIER | Innovation Scout, ERGO Group AG
TIM MOSIG | Research Associate, Center for Leading Innovation and Cooperation (CLIC), HHL Leipzig Graduate School of Management
Like other traditional industries, the insurance industry is faced with the challenge of mastering the effects of digitization and digital transformation as well as other trends. To investigate the question of which business models will dominate the German insurance sector in the future, a total of 32 semi-structured interviews were conducted with representatives from the middle and upper management of German insurance companies. As a result, five business models, such as peer-to-peer approaches, could be identified, which the experts evaluated according to criteria such as complexity, risk, and radicalism.
MATT HUTCHINS | Partner, Capco
ERNST RENNER | Partner, Capco
Even before the advent of COVID-19 the insurance industry was undergoing rapid transformation, with many firms putting plans in place to meet the needs and expectations of tomorrow’s customers. There was already growing demand for insurance products that are tailored, flexible, and available anytime, anyplace at a competitive price.
As for so many industries, COVID-19 has proved an accelerator, forcing insurers to escalate change programs to ensure they can continue selling their products and services in an environment where face-to-face interactions have been significantly curtailed. New entrants are further spurring innovation, establishing new paradigms for customer experiences, and reshaping the competitive landscape.
In this article we highlight the key findings of Capco’s 2021 survey of consumers in 13 major markets globally, which confirms that the future of the insurance will be personalized, digitalized, and connected.
MARTIN ELING | Director, Institute of Insurance Economics, and Professor in Insurance Management, University of St. Gallen
WERNER SCHNELL | Researcher, Institute of Insurance Economics, University of St. Gallen
We study the extent to which extreme cyber risk events affect capital markets and propose a concrete model framework that might be implemented in internal risk models of insurance companies. The literature on disaster risks looks at extreme scenarios in an area of 15% or larger decline in GDP (world wars, financial crisis), while the cyber scenarios discussed in the literature are typically of smaller magnitude, i.e., up to 2% of GDP; only some very extreme cyber scenarios go up to 10% of GDP.
To empirically analyze the relationship between extreme cyber risk events and capital markets, we implemented two models: a simple model based on historical data showing an impact of up to -4.26% on an insurer’s assets for a stylized asset portfolio in two predefined cyber scenarios and an extended model in which we additionally implement the response of monetary policy and a consumption-based stock market response function. The latter model provides economically more sound estimators for the central parameters of interest (risk free interest rate, credit spreads, stock returns, etc.) and shows an impact of up to -1.99% for the stylized insurer’s asset portfolio.
We conclude that the impact of extreme cyber risk events on capital markets exists so long as the asset side of insurance companies remains limited, which is mainly due to the hedging properties of different asset classes.
PERIKLIS THIVAIOS | Partner, True North Partners LLP
LAURA NUÑEZ-LETAMENDIA | Professor of Finance, IE Business School
Unlike microprudential regulation that focuses on the stability of individual institutions, macroprudential regulation focuses on the stability of the financial system as a whole. However, despite the increased interest in a system-wide lens, our empirical research indicates that the design of the Solvency II and Basel II/III frameworks, while intended to strengthen the stability of each sector individually, may be the source of endogenous destabilizing effects across the financial system, due to incentives for increased asset concentration and capital standard procyclicality. The support for the capital arbitraging hypothesis was weaker.
MONTSERRAT GUILLEN | Full Professor, Director of the Riskcenter, Universitat de Barcelona
ALBERTO CEVOLINI | Associate Professor, Department of Political and Social Sciences, University of Bologna
While insurance was originally devised as a safety net that steps in to compensate for financial losses after an accident has occurred, the information generated by sensors and digital devices now offers insurance companies the opportunity to transform their business by considering prevention.
We discuss a new form of risk analytics based on big data and algorithmic prediction in the insurance sector to determine whether accidents could indeed be prevented before they occur, as some now claim is possible. We will use the example of motor insurance where risk analytics is more advanced. Finally, we draw conclusions about insurance’s new preventive role and the effect it may have on the policyholders’ behavior.
FLORIAN KLEIN | Corporate Strategy Manager, Helvetia Insurance Group
HATO SCHMEISER | Professor of Insurance Economics and Risk Management, University of St. Gallen
An analysis of the empirical data acquired from an online survey reveals the key drivers for policyholders’ relative
willingness to pay against the background of high insured values. We apply the insurer’s perspective to better understand which policyholder groups exhibit a high relative willingness to pay and which do not even cover the insurer’s expected expenses.
We find that the certainty effect underlies the probabilistic insurance, but not the underinsurance. This implies that insurance coverage does not have a relevant impact on the relative willingness to pay. Furthermore, the relative willingness to pay for high insured values decreases significantly with a higher default probability, older age, lower risk aversion, or lower wealth.
In addition, the average relative willingness to pay for individuals with medium financial literacy is close to 1, but policyholders with the highest financial literacy pay substantially less (0.621). We also find that, for overinsurance and full coverage, policyholders significantly deviate from the results based on the Expected Utility Theory. This insight is independent of the initial wealth and the degree of risk aversion. Concerning underinsurance, the deviation is either less significant or not significant at all.