Given the speed at which technology is advancing, data is developing and risk is getting riskier as a result. The insurance industry cannot keep up without doing things differently. Mike McGavick, CEO of XL Catlin gives a snapshot of the state of the industry and makes projections into the future.
What are the roadblocks preventing the insurance industry from growing?
“We (as insurance companies) are not making the difference we can”. McGavick makes this statement due to a gap emerging in the insurance industry. This gap can be explained by the following statistics: from 2001-2011 global economic activity experienced 2.7% growth per year on average. The insurance industry accounted for 3.4% of this activity in 2001, and decreased to account for only 2.9% in 2011.
McGavick attributes this to three major roadblocks; namely, cost, insight and trust.
- Cost: Statistically, out of every $1 invested in insurance, clients received 62c doing what they actually hoped the insurance would do. The rest is lost to friction costs etc. quite a staggering figure. Psychologically two factors help explain the downward pressure on cost. Firstly, people don’t want to buy insurance, it isn’t something people get excited about. Secondly people are not sure if the insurance will work as they intend it to if a crisis were to happen, they feel is if they are ‘playing against the house’ so to speak.
- Insight: The industry is continually looking to the past to come up with policies and ways to bundle risk. This however may not match the current state of risk for the client. The nature of the risk is most important in order to match policies to how the client will experience risk.
- Trust: Due to the nature of insurance there is an inherent trust issue for clients. This is because when an issue occurs, they are unsure if the money they have already paid the insurer will be worthwhile whereby the insurer treats their claim fairly.
What will happen in the future for insurance?
McGavick believes the following trends will come to fruition due to the constant improvements in technology:
- Risk pools will become more precise. Rather than pooling the risk of entire factories for example, companies could pool the risk of specific types of machinery. AI will help in tracking the efficiency of the machinery and also their exposure to risk in order to better target these pools with appropriate insurance policies.
- Dynamic pricing therefore will become more pertinent where insurance packages can be priced to fit the risk being experienced through trackers.
- Under insurance will be attacked in a big way, and solving flood insurance issues will be a major key to achieving this.
- Future liability theories will need to be created, because with the boom of technology it will be harder to determine who is at fault and who is liable if and when the technology fails.
- The technology has also resulted in new types of risks which will need to be taken into account by insurance and better managed through tailored policies. For example, the risk of cyber hacking, identity theft and privacy issues have all increased.
What is the best way to approach the opportunity the industry faces?
In order to go about grabbing these opportunities presented by the industry with both hands, McGavick believes collaboration is key. Blending the expertise of major players within the insurance industry is where a potential breakthrough will come from.
These breakthroughs will cause a business model revolution that will be able to take all the challenges and rewrap the value chain of the industry around them. If the insurance industry can respond to the shifts in technology and harness the opportunity that data yielding insight is providing, the industry while be profoundly redefined benefitting those it serves and society at large.
