The insurance industry is notorious for not being on the cutting-edge of innovation and technology, nor moving quickly to keep abreast of other trends. The insurance industry has a history of being stable, unchanging, and somewhat boring. Many insurance forms are old, many statutes were drafted prior to technological advancements, and "new" types of insurance products and services do not come out frequently.
Despite insurance's quiescent persona, there still is much happening in the industry in response to the world we live in. What's new with insurance, largely looking through the regulatory lens, is an important indicator of how things are evolving.
How Is the Insurance Industry Innovating?
In response to changing consumer behaviors, new technologies, and market opportunities, here are a few highlights of a few innovative changes emerging in insurance.
Big Data and Artificial Intelligence (AI)
In the Internet age, knowledge is power, and access to information is easy, quick, and never-ending. Insurance is taking advantage of this through its use of sophisticated data analytics and artificial intelligence (AI). This can be illustrated in claims adjudication by assessing coverage and completed claims at a much quicker pace. Human interaction is oftentimes not needed as new technologies allow coverage and loss verification to occur in highly automated settings. By using online portals or voice-activated telephone technology, a consumer can efficiently navigate the claims process to expedite the handling of their claim.
How are regulators responding? Consumer protection remains a vital part of regulator focus, and regulators are using existing tools to enforce fair claim settlement practices. Consumers must be treated fairly, be compensated to the fullest extent afforded under the policy, and be empowered to appeal claim determinations in which they disagree. Existing statutes enable regulators to perform market conduct exams and utilize other enforcement tools. Through these mechanisms, consumer protections remain paramount.
On the underwriting side, new technologies and tools are merging to help assess prices and risks. The Internet and public and private databases have treasure troves of data specific to loss locations, medicals costs, loss frequencies, and a host of other items. For certain highly automated, homogeneous risks, a human touch is no longer a big part of underwriting. For example, a property exposure can now be wholly underwritten using mapping technology, real estate records, historical loss-sharing databases, and other sources. In some instances, on-site inspections or human interaction is not needed.
How are regulators responding? Well, fair pricing and fidelity to filed rate plans remain a key focus point for regulators. When risks, especially commercial risks, are underwritten and processed, regulators still enforce the filed rating methodology to be utilized. If rates are developed outside of such rate plans, repercussions could arise. Furthermore, antidiscriminatory insurance statutes require careful compliance by insurers to ensure these prohibited practices remain at bay.
Loss Performance Management
A primary way insurers make a profit is by controlling loss ratios. When losses and expenses, such as allocated loss adjustment expenses, exceed premiums (and any investment yield), insurers lose money. With the advent of more sophisticated data mining and analytical software, insurers can now access real-time loss ratios that provide greater visibility into the performance of certain risks. Depending on the nature of the data identified, loss prevention controls can be deployed to reduce or eliminate loss expenses or to alert insureds for the same. In addition, the need for rate adjustments can be more accurately and timely identified.
This can be illustrated, to the consumer's benefit, through pay-as-you-go policies with vehicle telematics and other forms of AI. Insurers can now build pricing models based on driving frequency and behaviors. Cost-savings can be realized for insureds.
How are regulators responding? Regulators sometimes limit or prevent the use of certain data to influence pricing or risk selection criteria. For example, credit scores have served as a strong indicator of loss frequency and severity for certain drivers. Regulators oftentimes balk at this because of its disproportionate impact on less-affluent communities or protected classes.
Consumer privacy and the ability to use data continue to be a huge issue for regulators at the global, national, and local stage. How can data be used? How can data be stored? Can data be shared with third parties? Can customer data be monetized? These are some of the issues that are prevalent. Large social media companies are in the crosshairs, but insurers are certainly in the mix too.
How are regulators responding? One example that is percolating in California is the California Consumer Privacy Act, which is a new law with a 2020 implementation date that is forcing many insurers to assess their processes and develop a compliant action plan. This law extends several consumer rights in targeted stakeholders' ability to use consumer data. There are meaningful enforcement rights and penalties for noncompliance. Although the law continues to experience amendments and significant focus, the law's implementation will be interesting to observe and will likely influence other states to follow suit.
The state-based regulatory structure has historically focused on overseeing individual insurers that may exist in a broader holding company system. The historical approach limited visibility into intracompany transactions and how it strategically fit within a broader holding company system. The primary analog to consumer protection is the fact that regulators have a mandate to focus on insurance solvency to ensure adequate funds are available to pay consumers.
How are regulators responding? Recently, on the heels of European regulators' efforts, state insurance regulators are now taking a more holistic approach to financial examinations and how they assess large global insurers. As state regulators continue to build up their competency in this area, it will have an increasingly important impact on insurers and how they manage risk across their holding company systems.
As the insurance industry has a historical model with slow regulatory and product-innovation changes, recent years have seen an acceleration of these items. It is an exciting time to be involved in the insurance industry to observe how technology and new methods of communication are impacting the industry. Forward-thinking leaders must pay careful attention to the changing winds of technology, the political climate, and how consumers behave to ensure products remain relevant and responsive to market needs.
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