The Risks of Hazard

There is a great article over at Insurance Thought Leadership by Deb Smallwood describing the traditional interaction between agents and insurers. Or, to be precise, the lack of interaction between them (It’s not a good sign when the metaphor for the link is a trench!). The issue she explores is the difficulty in exchanging the necessary information between agents (or brokers) and insurers to ensure smooth business processes. The same problem could be expanded to include any interface in the entire insurance industry, including reinsurance brokers working with their customers and the reinsurers, and even the reinsurers working with the markets.

Over the past weeks, I’ve talked a bit about innovation in insurance (my trip to San Francisco and a look at VC’s perspective), and concluded that while there is no sign of true disruption (i.e. in the Uber sense), there is plenty of innovation to be excited about.

Just to be clear on what “disruptive innovation” means, here is what it might be like. Actual, real disruption in insurance would mean that in the space of a few years, the $3+ trillion insurance industry would need to find something else to do with their cash and investments because almost nobody would need their services and products anymore.

Last week I attended an event in San Francisco that was focused on Innovation through Big Data in Insurance. San Francisco in autumn is a pleasure (especially the St. Francis Yacht Club – what a great venue!), and the opportunity to connect with colleagues new and old is always really good. The show itself was interesting, too, but not for the reasons I expected.

Insurance has been working with big data since before “Big Data” was a buzzword – in fact, for centuries before the term was coined. Unlike other businesses that have been disrupted by software platforms and the enormous amount of data they can access and leverage, every insurance company in existence already leverages big data (with varying levels of efficiency). Showing up at this show, I was really curious to see what disruptive insurance might look like.

I recently wrote a blog about how the future of underwriting software is now, exploring this AM Best video. One of the things that stood out was that underwriters are going to be more responsible for building and managing their sales pipeline. This is particularly prescient for those underwriting non-NFIP flood insurance because of the impending rush into that market – building strong portfolios will be extremely important because those portfolios will represent an insurer’s initial position in the market. As early adopters turn into the full industry’s arrival, competition will be fierce* for good risks. Differentiation will be necessary for success. (* it will probably be fierce, but not necessarily…but that’s another blog).

The main source of differentiation for an insurer is going to be the flood risk analytics they use. Ideally, those analytics will be based on their own experience, data, and expertise because when everyone uses the same models it is more difficult to differentiate. Quality of the insurance coverage will also quickly distinguish the players.

AM Best has had some really compelling videos on their site this week, including this clip from Tuesday that showed us the future of underwriting through the crystal ball of Gail McGiffin of Ernst & Young. She and Meg Green discuss what property insurance underwriters of the future will be expected to do and how they will do it.