Risk Reinvented: How Tech Transforms the Insurance Universe

By Scott Stephenson

In observing the skies overhead, mankind spent millennia using only the naked eye. Then, after a leap of innovation in the early 1600s, the scientist Galileo adapted an instrument — the optical telescope — that would transform sky-watching into the science of astronomy. It was a watershed moment that forever sharpened man’s insight and led to a new model of the universe.

Innovations such as the telescope have often sparked revolutionary advances — advances that divide a completely new worldview from the reality that came before. During the same period that Galileo was unraveling the mysteries of the universe, the idea of mastering and transferring risk was beginning to reshape trade, banking, and shipping to launch a revolution in business in ways nearly as profound. Today’s concept of insurance was being formed.

Risk Reinvented: How Tech Transforms the Insurance Universe In his groundbreaking book, Against the Gods: The Remarkable Story of Risk, the economist Peter L. Bernstein wrote that, “by showing the world how to understand risk, measure it, and weigh its consequences,” insurers and actuaries have successfully “converted the future from an enemy into an opportunity.”

Bernstein continued: “The ability to define what may happen in the future and to choose among alternatives lies at the heart of contemporary societies. Risk management guides us over a vast range of decision making, from allocating wealth to safeguarding public health,” and from “paying insurance premiums to wearing a seatbelt, from planting corn to marketing cornflakes.”

Now, and perhaps more than ever in history, rapid advances in technology are shaking our worldview and leading to new practices in business and science. The rise in the use of commercial drones means more than the possibility of aerial home deliveries of goods: Drones are changing the way that insurers handle claims, survey properties, and assess remote risks. Likewise, social media and the flood of data that it provides are signaling similar sea changes. Claims adjusters suddenly have a window into a wealth of relevant, real-time information about policyholders that may help speed the evaluation of claims.

In the auto sector, the advent of ridesharing is giving connected drivers and passengers uncounted opportunities, just as it presents challenges for their insurers. Endorsements will likely be needed to cover the many potential scenarios raised by sharing rides in a personal vehicle for a fee. As more drivers, homeowners, and consumers connect to what is being described as the “Internet of Things,” the issues related to safety, risk, and insurance become astonishingly complex. For the prepared, the upside for enterprise can be staggering, but those not repositioning for this new technology may regret their lack of preparedness.

Advances in data and analytics in Galileo’s time brought a deeper and more granular understanding of Earth’s relationship to the Sun and of our planet’s place in the universe. The technological advances now facing insurers are aligning the world of risk for a similar leap forward. “Today, we rely less on superstition and tradition than people did in the past,” as Peter Bernstein noted in his study of risk, “not because we are more rational, but because our understanding of risk enables us to make decisions in a rational mode.”

Drones: Opportunities Flying

With issues involving unmanned aircraft almost daily appearing in the media, businesses of all sizes are visualizing a future that includes drones in roles of delivery, surveying, and reporting. The Federal Aviation Administration (FAA) has been granting some approvals for commercial use of drones on a case-by-case basis and has introduced proposed rules for commercial drone use. Some insurers have already received inquiries regarding drone coverage.

In the current environment, and with federal drone regulation on the immediate horizon, it’s important to take a closer look at what type of insurance coverage may be appropriate for businesses and how those businesses can begin managing potential drone risks. The right coverage can vary greatly based on individual needs. For a start, agents will need to find out about the operator’s qualifications and the types of activities the drones will be performing. What is the risk tolerance of the insurance carrier when it comes to drones?

As the FAA continues its rule-making review, there’s an opportunity to inform the insurance buyer and consider how risk exposures related to drones might best be managed. It may be only a matter of time before businesses in nearly every industry are using drones in some area of their operations. As leaders in those businesses think about how drones might make them more efficient and profitable, insurers will also be evaluating how to address the expanding exposure.

Navigating the Challenges of Ridesharing

Providers of ridesharing services, also known as transportation network companies (TNCs), are growing rapidly across the United States and delivering the potential for new exposures in personal and commercial auto insurance coverage. As of January 2015, the three major ridesharing providers — Lyft, Uber, and Sidecar — operate in more than 130 U.S. cities, approximately 40 states, and the District of Columbia. These major players in an expanding TNC market are all reporting increased competition for riders, revenue, and drivers.

Perhaps the biggest potential challenge facing insurers is how to determine which policyholders are driving for a TNC and when that driving takes place. Stakeholders in the TNC arena have noted a wide appeal for young adults, college students, teachers, seniors, and the unemployed seeking to earn supplemental income as occasional drivers. The likely need to inform their auto insurer of participation as TNC employees may not occur to many of those drivers. Others may be reluctant to share ridesharing activity with their personal auto insurer because of concerns ranging from premium increase to cancellation or nonrenewal of their auto coverage.

The result can bring the worst of all possible worlds. Insurers may not be aware that a policyholder is driving for a TNC until after an accident and a claim is filed. At the same time, insurance agents and brokers might face exposures to errors and omissions under general or professional liability coverage. Policyholders could claim they were not properly informed of the possible exclusions or limitations in driving for a TNC. To help avoid such situations, it’s critical to talk to potential policyholders about the risks of ridesharing during the application and underwriting process.

Can Social Media Analytics Stress-Test Policies?

In the digital age, the practice of mining data from social media for mentions, brand comparisons, and other measurements of popularity has become nearly universal among property/casualty insurers.

More recent strategies have pulled social media data more deeply into decision making. For instance, some claims adjusters are using online dashboards to view information that claimants have made on publicly available social platforms. That information may include basic facts surrounding an event, such as a photo of a torn sail that led to a windsurfing accident. It may also include potential inconsistencies in the claim — for example, if the claimant “tweeted” a windsurfing picture following an alleged injury. Further, such windows of information are increasingly being opened to the insurer underwriting process and can help agents identify cross-selling or savings opportunities. Certainly, they can also be used to spot potential inconsistencies on policy applications.

Existing property/casualty use cases have only scratched the surface of what’s possible when predictive analytics are applied to social media data. In life insurance, consumer data (including online shopping habits and leisure activities) can predict policyholder longevity nearly as accurately as a cardiac stress test.

In this brave new world, information gleaned from social media may prove equally effective in predicting the longevity of a given policy. A recent survey of 30 insurer CIOs found that encouraging growth and retention are the most important influences on their information technology plans for 2015. Social media data is uniquely suited for such purposes because it’s timely, readily available (often through an open application programming interface, or API), and usually contains a variety of information, including past consumer experiences such as reviews of products or restaurants. Insurers that can read analytical tools derived from social media are well positioned to create higher value and a more meaningful conversation with each policyholder.

Cyber and the Internet of Things

The Internet of Things (IoT) is a by-product of the digital world, bringing with it both untold benefits and significant risks. As the technology and its applications evolve, insurers can become part of this accelerating and connected world in a variety of ways.

How many policyholders understand that cyber criminals can hack into IoT devices as easily as into a home computer? According to a Hewlett-Packard study conducted in 2014, about 70 percent of the most commonly used IoT devices contain serious vulnerabilities. Some policyholders may be using smartphones that contain business data or personal information, and it’s likely some of those phones will provide access to IoT devices in the future. In such cases, it’s prudent to create secure passwords that use a unique combination of upper- and lowercase letters, numbers, and special characters. Policyholders should also be wary of suspicious e-mails and text messages and avoid clicking on any unfamiliar links or attachments.

Indeed, IoT is growing so rapidly that it has become difficult to comprehend how these innovations may ultimately change the way we live. More than 40 percent of consumers think that most current “smart” products are more gimmicks than useful tools, according to a recent study by Affinova, a provider of insights into consumer habits. Yet it takes little imagination to envision what effects IoT might have on a wide range of industries, including manufacturing, retail, education, and financial services. Earlier this year, a research brief from the Computer Technology Industry Association reported the following kinds of companies are poised to benefit from IoT: device, data analytics/big data, telecom carrier and cable, and networking and sensor/chip companies; businesses skilled at tying services together; platform and ecosystem providers; and IT solution providers.

In the sector of personal health, the Internet of Things has fueled an explosion of wellness-related businesses, and the resulting information flow has the potential to add value across the property/casualty value chain. Already, some insurers offer group discounts to members of fitness centers, to attract policyholders motivated to improve or maintain good health. But the opportunities could transcend mere selection effects: Gene-sequencing firms now provide policyholders with practical reports that offer details on a range of potential health and wellness issues. Insurers might consider offering discounts to those interested in addressing easily detectable and treatable conditions (for example, myopia) proven to lead to auto accidents.

In a universe parallel to the one that Galileo found himself facing more than 400 years ago, the insurers of today are learning to direct dazzling technologies in surprising directions, in order to reevaluate the old world order. In our case, an array of technologies is bringing a sharper focus to bear on risk, claims, and the daily habits of policyholders themselves. To ignore these new tools and their promise for both defining and managing risks would be foolhardy.

As Peter Bernstein discovered in the course of his book, the origin of “risk” is rooted in an early Italian word that translates as “to dare.”

“In this sense, risk is a choice rather than a fate,” he observed.

Making a point that resonates in the insurance industry, Bernstein then concluded: “The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about.”

Scott Stephenson is president and chief executive officer of Verisk Analytics.