Four key challenges facing the specialty insurance industry

When Edward Lloyd opened his coffee house on Tower Street in London in the late 1680s and initiated what is believed to be the origins of modern insurance, the world was very different. The cargo that was being underwritten was travelling across the world in ships built from oak and powered by the wind, and the assessment of risk was based on stories gleaned from the captains of returning ships. 

Accelerate forward almost 350 years and the world is very different. We are underwriting human cargo being flown into space, autonomous vehicles powered by renewable energy, and we have at our disposal trillions of gigabytes of real-time data to help us to assess risk.

Since the 1680s insurance has evolved into a $6 trillion market, however today it faces far greater challenges than ever before. This is driving transformation across the industry and in this paper, we look at the mega trends that are creating the need for change and the technology developments that can enable this change.

#1 – Technology is creating a new world of risk

The staggering rate of technology innovation is creating a new dimension of risk never previously seen and this presents both an opportunity and a challenge to specialty insurers. How do you assess the risk associated with crypto currency? How do you underwrite the risk of an autonomous submarine crashing into an oil pipeline causing an ecological disaster?

When two NASA astronauts set out to the international space station in May 2020, it marked a significant milestone. This was the first time a private space company had taken passengers to the space station and brought commercial space travel one step closer. But how do you model and price the risk of commercial or recreational space travel?

Assessing risk is all about taking the known factors and using these to model the unknown. New technological possibilities are creating far more unknowns, and this requires utilising data and technology to create better ways of doing things.

Specialty insurers are contending with 21st- century risk, and these can no longer be modelled and assessed with 20th-century tools and practices. Where once a thousand rows of data modelled in Excel was considered complex, today this is seen as simplistic as far more data is required to truly assess risk and as such, tools like Excel are simply no longer fit for purpose.

This new world of risk is also driving a fundamental change in the way we manage this, with a move from solely risk-on-risk assessment towards a greater focus on managing portfolios of risk. This requires insurers to take a holistic approach to their exposure and the need to constantly assess and reassess risk across their full portfolio adding greater complexity and actuarial workload.

#2 – The explosion of internal & external data sources

Digitalisation is creating an explosion of data. According to IORG, 90% of the world’s data has been created in the last two years and Statista projected that 74 Zettabytes (74 trillion gigabytes) of data was created in 2021, up from 59 Zettabytes the previous year and this is likely to reach 200+ Zettabytes by 2025.

A McKinsey technology architect estimated that the average person now generates 1.7 MB of data every second of every day3, but it is not just people causing this explosion. There were 35.82 billion connected ‘Internet of Things’ (IoT) devices in 2021 and according to McKinsey Digital, 127 new devices are being connected to the internet every second.

For an industry that relies on data to model future risk, this must be seen as a positive. However, the challenge we face is how we turn this overwhelming amount of data into meaningful ‘data assets’ that we can trust and utilise.

Actuaries are already spending a significant proportion of their time collating, ingesting, and manipulating data. To take advantage of the sheer volume of data that is now available, something must change. Insurers need to leverage technology that can support data management and processing, freeing up their actuaries and underwriters to focus on analysis.

#3 – Disruptive eco-systems & digital value chains

We do not have to look too they only remain as a disruptive eco-system have transformed markets.

In 1998 Nokia became the world leader in mobile phones and looked to dominate this space. In less than a decade the market changed with the arrival of the iPhone in 2007, quickly followed a year later when Google launched its Android operating system, a pivotal moment that created a new eco-system for smartphones.  Today, the market is dominated by Apple and Samsung, and as for Nokia, they only remain as a licensed brand name.

When Google Maps launched in 2005 it turned the map industry on its head. Instead of getting money from consumers buying maps, Google collected revenue from businesses that wanted to pin-drop their location on these maps.

The lesson for every industry is the need for agility - the ability to adapt at speed to changing markets. Digitalisation is enabling new eco-systems to be generated and for every business to become a technology-driven business. The technological revolution is redefining the value chain and challenging long standing institutions to become part of the fast- paced, innovative eco- systems.

We are already seeing digital first brands being created within the insurance industry. We are seeing a new generation of Insurtech companies enabling transformation and the creation of powerful decentralised eco-systems consisting of brokers, insurers, reinsurers and MGAs connected by effortless collaboration.                                                                                                                                                                                                                                                                 

#4 – Agile & real-time risk management

Autonomous vehicles will generate as much as 40 terabytes of data an hour from cameras, radar, and other sensors - equivalent to an iPhone’s use over 3,000 years, as well as sucking in massive amounts more to navigate roads, according to Morgan Stanley. As more data becomes available to insurers in real- time, how do you leverage this to continually evaluate and optimise your risk portfolio?

More diverse and complex risks require a different approach and actuaries need the ability to quickly develop new models and adapt existing ones to keep pace with the changing world around them. The explosion of data is not just creating a significant data processing challenge, but the real-time nature of this data means we are no longer dealing with static data sets, but dynamic data assets. 

The move from managing risk-on-risk to taking a holistic approach is also changing the actuarial model with a need to continually assess and reassess risk across the full portfolio. This requires continually adapting models based on new data and maintaining real-time visibility of portfolio risk.

This is driving the need to master data and create platforms that enable new models to be built in days, modified in hours, released in minutes – and then for the data from this model and all your prior models to be analysed instantaneously.

Deloitte talk about the need for insurers to stop being single threaded around an individual but expedite and streamline across teams – leveraging the right skills for the right task. 

We would take this even further by stressing the important role that technology can play in this workshare, leveraging cognitive technologies to derive value from data and removing the data processing burden from actuaries to enable them to focus all their efforts on making better decisions. 

Final thoughts

What is clear from the trends we’re seeing is that the speciality insurance sector faces increasing complexity in the risks that they need to model and underwrite. The exponential growth in the data that is available to actuaries will play a significant role in being able to make better decisions, however, the challenge is in being able to turn disparate sources of information into meaningful and trusted data assets. 

How can speciality insurers thrive in this environment? Unsurprisingly, technology is the key. Speciality insurance needs to fully leverage all the capabilities that technology advancement can offer to transform the actuarial model and embrace the digital era. To explore how, check out our roundup of the trends defining the technology-driven future of insurance here.