Big Data Set to Transform Insurance Industry

”Technology in the insurance industry has reached critical mass,” says Michael Macauley, CEO of Quadrant Information Services, a leading supplier of pricing analytics services to property and casualty insurance carriers. “After a decade of incremental progress, insurers—especially property and casualty insurers—are poised to move rapidly into a new era of flexibility, technological capability, and much closer relationships with their customers.”

One region on the forefront of these changes is Asia, where government organizations such as Hong Kong’s Insurance Authority are encouraging insurance companies to develop financial technology as leading providers embrace the big data revolution to manage risk and lower the cost of their products. Another factor spurring progress in Asia—and worldwide—is that the changing data landscape has led technology firms such as Tencent and Alibaba to enter the insurance sector.

“Traditional insurance companies are facing challenges from new technology firms that have expanded into the insurance sector with new technology,” George Sartorel, regional chief executive of Asia-Pacific for Allianz, said. “This is why we have placed high importance on digitizing our business model. We have to change ourselves very quickly to meet the technology changes.” Sartorel added, “The use of big data will benefit not just the insurance companies but also customers, as it will drive prices down up to 30% over the following years.”1

In addition to investments by large tech firms and traditional insurance companies, change in the insurance sector is being driven by venture capital-funded startup companies in insurance technology, or insurtech. The likes of So-sure, Friendsurance, Lemonade, Guevara, and a host of others are aiming to disrupt insurance in the same way that Uber, Airbnb, Netflix and Spotify have caused upheaval in other industries. An estimated $2.6 billion went into insurance startups in 2015, up from $800 million the year before,2 and it’s estimated that 2016 saw a 32% year-over-year increase in the number of deals.3

While all this activity is generating a long list of capabilities and possible solutions, the coming major changes in insurance revolve around three basic areas of technological development: big data, the internet of things, and autonomous vehicles. The internet of things makes possible the field of telematics, where a sensor in a car can report a driver’s speed and safety patterns and thus enable an insurance rate based not on the driver’s membership in a particular demographic group, but rather on his or her particular degree of risk.4 Autonomous vehicles—driverless cars—are not only safer than human-driven vehicles, they transfer liability from the driver to (possibly) the manufacturer of the vehicle.5

But Macauley noted that it’s big data that holds both the greatest promise and the greatest peril for the insurance industry. Data from cars, homes, businesses and government could enable insurers to better analyze risk and anticipate loss events before they happen. By preventing bad things from happening to their customers, rather than just restoring things afterward, insurers could provide products that customers will want to buy—not just have to buy. However, insurance has traditionally operated like a closed shop. Insurers collect and hold data about those insured and their losses. Actuaries are like guild craftsmen trained to work on that data. In a new world, many other players will be able to collect and control the most important data; mere possession of information will not be sufficient to guarantee insurers a strong competitive advantage.

“Based on the conversations we’ve had with our customers,” Macauley said, “it looks like there are two basic things insurers need to do to reap the benefits—and avoid the dangers—presented by a transformed market. One, they need to knock down some walls. It’s essential that the data science teams and the business teams understand each other very, very clearly. Too often, data scientists are clueless about how the business makes money. Also too often, senior business managers are quick to kill a radical idea before it’s been given a fair trial. Those are both errors to be avoided. Secondly, insurers need to stay abreast of developments in the field. Insurance is traditionally a slow-changing industry walking into a whirlwind, and it will be essential to know—month by month, and even week by week—what changes are taking place and how a given company should react to them. At Quadrant, part of our job is helping our customers do just that.”