Property/casualty insurance industry executives peering out into the future aren’t singularly focused on capital providers as potential industry disrupters in the years ahead.
Brian Duperreault, chief executive officer of Hamilton Insurance Group, and William R. Berkley, chair and CEO of W.R. Berkley Corp., also identified innovators who will work to slash distribution and dispute resolution costs as likely game changers going forward.
They made their observations during the Casualty Actuarial Society’s 2014 Centennial Celebration and Annual Meeting in New York.
The meeting themed, “Celebrating our Past, Focused on the Future,” featured many speakers talking about the growth of actuarial science over the past 100 years, and plenty of forecasts about the growing impact of alternative capital providers, emerging technologies and analytical advances.
And while Berkley and Duperreault joined the chorus of executives who agree that third-party capital isn’t going away and that big data will change the underwriting landscape, they strayed a little from those themes during a session titled, “The Future of the Industry—The Next 100 Years.”
“We really have not been disrupted as an industry,” Duperreault said. “We can’t sustain this kind of high cost of transaction …It’s not going last any longer,” he said, referring to other industries that technology and data have turned “upside down.”
“Somebody’s going to do it” to the insurance industry as well. “We have to be prepared for that world just like Wall Street had to be prepared for all the changes in the way stocks are bought and sold.”
Berkley added, “This goes to the issue of balance of power in the business,” explaining that the costs of distribution are a huge part of carrier costs. “The costs of operating an insurance company are relatively modest” in comparison, he said.
Expanding on the cost issue, Berkley asked: “How do you change the dispute resolution mechanism to lower the costs?
“Right now, we all spend as much on dispute resolution as we spend on all the other costs …How do you change those [things] from a customer’s point of view to deliver more value to the customer?”
“Whether we like it or not, all those changes” are coming, he said.
Duperreault offered a similar perspective when panel moderator Matthew Mosher, senior vice president of rating services for A.M. Best Co., asked the executives about the costs associated with regulation and enterprise risk management during the session. “I don’t think that’s our cost problem. It’s this whole moving of this promise to pay through the system until you pay. It’s a very costly process,” Hamilton’s CEO said.
Co-panelist V.J. Dowling, managing partner for Dowling & Partners, primed the discussion of distribution and claims resolution costs with his opening comments about the current state of the industry.
“Capital does not have the value it did before because there was so much of it,” Dowling said. “What matters in the new world is having content—and content is everything from the ability to be a world-class underwriter, to having expertise on the back-end handling claims.” It is also “being able to access the customers and the intermediaries.”
Dowling continued: “One of the things we have to worry about as an industry is whether we are providing a good product to our customer. If we’re taking a dollar in and paying back 60 cents is that something that’s going to be viable in a new world where 65 percent of [consumers] say they would be willing to buy insurance from a noninsurance company be it a Google or whatever?”
“We have a high cost distribution [model], and high costs within insurance companies,” he said.
Viewing this through the lenses of potential disrupters in the technology space, Dowling said, “We operate in a world that plays chess in the insurance business. The folks on the West coast [in technology companies] play speed chess, and they also think [the insurance business] is simpler than it is.
“They’ve made plenty of mistakes but they’re spending a lot of time looking at all of our dollars and figuring out how might we do things differently to take advantage of the data, the analytics and the like that are increasingly becoming available at a much lower cost,” Dowling said, urging insurers not to just look at competitors within the industry but also “who’s off to the side.”
“The world is changing,” the futurist told the actuaries.
During the executive panel, Mosher asked Dowling and the two carrier CEOs directly, “Do any of you see big data a potential game changer in the way insurance is developed or in the way insurance is sold?
Berkley responded first noting that predictive modeling is going to allow insurers to gain competitive insights. “But I think the issue we talked about [earlier], which is driving the cost to the consumer, is going to be a key part of that,” he said suggesting that the manner in which insurers offer their competitively priced products will also change. “The question is are you going to offer it through the same intermediary in the same way or are you going to offer net-priced products and the intermediary will add whatever fee their customer is willing to pay?”
“We’ve started to see that just start to happen in property-cat. And I think it’s only the beginning of the transition of how that may happen. And then you have on top of that, the possibilities of attracting customers in new ways because of the data that’s going out on social media and whatever.
“There are a lot of things that can happen and I would not make the assumption that the current insurance companies are the ones that ultimately end up with all that risk, or even see it for that matter.”
Duperreault seemed to draw a distinction between advances in data analytics and advances in technology for processing business, eyeing innovations in making processes more efficient as the real game changers.
When we think about technology, big data is about the brains of the insurance system. Big data advances are focused on “the decision-making, the things you need to think about.”
“But there’s a lot more going on” in insurance. “It’s just handling it, it’s touching” the business,” he said, explaining what else is involved. He added, “I think there’s as much activity around that and the cost there [of handling business] as there is it is about the ultimate decision-making” around accepting risk.
“It isn’t just big data, it is technology. And the great innovations are usually process more than they are something new and different.”
Berkley noted that in the absence of big data, “the way we use information—financial or actuarial—is looking in a rear view mirror. What big data is allowing us to do is to aggregate and combine information in varying ways that lets us do a better job in looking ahead.”
In turn, the industry can create “models that give us better capacity to forecast,” he said, adding that more increased confidence in the ability to forecast “attracts this capital we’re talking about.” Uncertainty and “the volatility of outcomes is what keeps external capital out of the business,” he explained.
“As you get more predictive modeling capacity, and [as that attracts] more capital, you will start to see changes because people [supplying the capital] now say, ‘What else can we do? How do we compete? How do we add more value to the customer?'”
“It’s not a question of if, it’s a question of when that intermediary chunk—the cost associated with that—when is that going to have to change,” Berkley said. “That can be as quickly as every contract that you issue says all claims will be arbitrated. You suddenly change the economics.”
Addressing a different question—about opportunities in the industry—Duperreault seemed to sum up the conflicting messages of the three-day actuarial meeting. “This whole world of capital, data, potential disruption is either the scariest thing you ever heard of in your life or a wonderful opportunity,” he said urging actuaries in the audience to look beyond the time tested techniques of the actuarial profession.