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High time for risk management’s ‘digital disruption’

Insurance Consulting and Technology|Future of Work
Insurer Solutions

By Frederic Lucas | September 16, 2019

Data gathering and analysis — the very heart of risk management — are activities that are custom-made for artificial intelligence-enabled digitalization.

In a future that is already taking shape, an archeologist will stumble into a warehouse of Excel spreadsheets. The archeologist will study the archaic documents just as her ancestors studied cuneiform tablets in ancient Mesopotamia.

“Ah!” she’ll exclaim. “These must be business interruption coverage calculations!”

Risk management has been slow to fully exploit digitalization, artificial intelligence (AI) and other features of the information age. Risk managers, insurance advisers, brokers and underwriters — the whole risk ecosystem, really — remains highly dependent on spreadsheets and questionnaires to conduct many aspects of the risk management process.

While few people may have anticipated the disruptive impact of digitalization on newspapers, entertainment, brick-and-mortar retail and other sectors, risk management would seem to be in a different category. Data gathering and analysis — the very heart of the profession — are activities that seem custom-made for AI-enabled digitalization.

Why insurers are slow to adopt digitalization

Insurers have evaded digitalization for a variety of reasons, not the least of which is the regulatory web in which it operates. But it’s also a business with a distinctive need for the experience and instincts of risk managers and underwriters, traits that were beyond the original capabilities of the early digital age. And, let’s face it, the profession often has been reluctant to change.

Unfortunately, the words “digital” and “disruption” seem to be used interchangeably. That’s too bad. Disruption has strong negative connotations within traditional businesses. It’s important for risk professionals to see digitalization and other new tech developments as an exciting new phase for the business, with significant opportunities awaiting companies in the form of risk avoidance, risk identification and modeling, and cost-effective risk hedging (including insurance).

Underwriting quotes provide an instructive example. Underwriters pull together data and arrange peer comparisons that, in general terms, have been done the same way for decades. This process will become increasingly automated by drawing on reservoirs of industry data as well as client internal data that might have been overlooked in the past.

This is not to say that risk professionals have avoided digitalization. Far from it. We have used computers and cloud-based software for years to gather and analyze high volumes of data needed for many facets of risk management. But digitalization has been slow to spread in many areas, such as risk mitigation. And when a company determines that it needs to hedge its risks, we’re still basically relying on spreadsheets and questionnaires at key stages.

I’m finding that clients, insurers and their business partners are ready for a new way to work. Clients, in particular, don’t want to bother with spreadsheets and questionnaires. They increasingly prefer to work through social or virtual networks that provide the same speed, accuracy and convenience of the digital services and mobility options they are using in their homes or in many facets of their business, from supply chain management to customer service.

How digitalization might help

In a risk management context, the next phase of digitalization has the potential to radically streamline data gathering and analytics. This includes the client’s internal data as well as data held by risk advisors, brokers, insurers and other business partners.

Policy renewals, for instance, will be transformed. Take the example of a questionnaire that requires a listing of office locations. Instead of inputting this data at each renewal, digitalization might mean simply pulling the information from a company website or internal database. To use an old American expression, this is small potatoes. With a boost from AI, there is no practical limit to the potential of text mining and data mining to develop quotes.

Think of digitalization’s potential value in developing parametric or index-based solutions that can complement traditional insurance solutions. After a triggering event — a hurricane, for example — parametric solutions can provide prompt payout of pre-determined size to a client without a time-consuming on-site loss assessment.

To establish the approximate loss after a catastrophic event, parametric solutions depend on the extensive modeling. The modeling will be vital for indexes correlated to specific windstorm risks. Modeling will also inform insurers and other capital providers about a client’s risk management preparations and business continuity plans.

While parametric insurance has attractive features — it may cover previously excluded items, for example — it has been slow to take off. One reason is the basis risk that might surface if, say, property is destroyed in a windstorm that did not meet the trigger indexes. With better data and analytics available through digitalization and AI, the possibility of financial loss through basis risk can be significantly narrowed.

Digitalization also will play a growing role in risk mitigation as we get better data mining and analytics. As we gain knowledge of various risks, we can use that information in a variety of new ways. It might influence building location or building design and construction. It might help shape hiring and training programs for a global workforce. The possibilities are exciting.

I sometimes think the workers comp model may expand to other risks as digitalization matures within risk management. In this scenario, incident prevention will become a much bigger focus than hedging through insurance or financial instruments. For workers comp, companies have gone beyond on-site safety measures to include focus on secondary or less obvious exposures, such as workforce health. Digitalization will enable companies to address the total cost of risk, reserving risk transfer for critical risks.

Although it’s ultimate value in risk management is yet to be realized, digitalization is already deeply embedded in the way most companies run their business and serve their customers. It’s high time that risk management accelerates its use of digitalization and adds more to enterprise value.


Western Europe Industry leader, Technology, Media & Telecommunications at Willis Towers Watson

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