We know the future is digital. ‘Augmentation’ has been the most common application of digital technology in marine insurance to date, enhancing existing practices through new data insight. Today, we’re seeing a natural evolution, with algorithms applied to insight itself. The result is a powerful suite of tools that add-value by simplifying complex risk assessments. This varies in scale, from pricing adequacy through to the automated underwriting of high-volume, transactional business. These achievements were shaped by a single market requirement, to improve the way we assess risk. Now, they are helping us realise operational benefits by ensuring existing expertise is focused on complex risk. Doing so changes the way we approach the market, refining existing practices alongside the creation of new products. Both ensure improved customer service and relationship management, building competitive advantage.
“The true difficulty is to combine technologies into business capabilities.”
Andrea Tanzi, Transformation Manager, Swiss Re Corporate Solutions
Innovation is a ‘state-of-mind’
This month's virtual Marine Insurance London event saw several sessions reference the need to develop products that provide better, more flexible cover for shipowners. The application of algorithms in drawing insight, as well as applying it, falls into a new tiered approach to risk placement. This was presented by our VP Head of sales, Mark Phillips, in his keynote address on day two.
Fig 1: The new insurance operating model
The tiered approach reflects how augmentation and automation sit within the future digital marine insurance market. We’re already seeing those who have invested in their digital strategy position themselves relative to one or more of the tiers outlined. In doing so, they're delivering new connected policies, as well as automated cover. This approach to innovation is highly focused, applying data and technology to deliver new products and services for customers.
Fig 2: Emergence of digital insurers/algorithmic-led companies
Innovation doesn’t come without change. As the industry applies new technologies, it must remain open to new ideas. It’s a sentiment that was echoed in the emerging risks panel on the final day of Marine Insurance London, acknowledging its absence over the past 10 to 15 years. The panel emphasised the fact that resistance to new ideas is contradictory to how the London market made its name. Innovation is the key USP of the London market, and there’s a level of expectation from the insurance community.
The push of technology and pull of risk
The emergence of new products doesn’t just stem from the potential of new technology. The nature of risk itself is changing whilst the market remains rigid. New customer needs don’t have historical data, so the market has relied on exclusions which don’t cater for the risk presented. Owners themselves are therefore encouraged to seek new insurance mechanisms, eroding both the markets clientele and credibility. Clients expect the market to be more proactive in understanding new risk, and how it changes. Therefore, the approach, or ‘state of mind’ of those Insurers needs to change.
"There is a mismatch between current risks, emerging risk and the solution that leads to unmet needs for clients. This does lead to significant opportunity for new thinking and innovation… From a risk survey that goes to our top 500 customers every two years, only two of the top 20 risks that are at the top of client minds are currently fully insurable by the market."
Lee Meyrick, Co-Lead Global Specialities and Chief Executive Officer Marine, Global Marine AON
Relevance and credibility
The situation spirals depending on approach. If innovation isn’t adopted, the status quo remains, and the problem persists. If innovation is emphasised, the potential to cater for new market needs can be realised. Credibility amongst both clientele and shareholders, who will be required for further investment in the sector, will increase if targeted effectively.
"If you look at returns for our industry that we’ve made for our shareholders; we need to re-establish credibility…. if we’re going to meet these challenges, it requires innovation, which requires investment."
Howard Kingston, Global Head of Marine, Zurich Insurance
Given the application of big data and algorithms, technology exists that outlines the individual risk profile of shipping companies. Structuring policies relative to such risk profiles would enable an Insurer to provide a far more personalised service, understanding the individual challenges of each potential client. This can be reflected in the pricing of account, ensuring premium adequacy based on behaviour over static factors alone.
Fig 3:The potential opportunity from operational efficiency alone
New risk, new data
The receipt of information in real-time, backed by trends drawn from big data, provides a new understanding that can be applied to emerging risk. Extrapolating behavioural trends helps identify the potential outcome of real-time behaviour change. New products and services that focus on prevention, as well as changes in cover based on activity, become possible. Resulting policies are more flexible, catering to new client needs whilst ensuring risk is controlled. Receiving data in real-time provides a new view of risk, allowing Underwriters to stay up to date with changes in client activity and provide a far better service at renewal. The change in volume, and speed of data delivery has a huge impact on the level of innovation the marine insurance sector provides. Such connected policies have great potential for both Underwriters and Brokers.
Trust in machines
We need to be able to interpret data as fast as it’s received, it’s the only way to draw actionable insight that adds-value. A new ‘state-of-mind’ is key to understanding how this can affect business. Machine learning is applied to draw additional understanding so that those in the market can adapt swiftly to changing demand. The extent to which machine learning is involved in the process of insurance comes down to relevance and type of business, as outlined in fig 1. We will always have a human element to the market, focusing on complex business and the application of prospective knowledge. The more insight we have, the more effective we can be. That also goes for time, high-volume transactional business does not require much expertise. It’s far more efficient to apply an automated approach to these risks based on parameters set by an Underwriter. The expectations of customers with this type of risk vs customers with more complex cases is in proportion with the extent of the personalised service they expect to receive. The operational efficiencies that occur because of automation ensures clients are prioritised based on use case. Trusting machines is therefore not a choice due to the competitive advantage they’ll provide others within the market compared to the traditional, manual approach.
Fig 4: Aggregation of risk in ports and anchorages between October & November 2020
Competition breeds innovation
Competition provides a further catalyst for innovation. We mentioned that the tiered model is already seeing operators within each specialisation emerge. Competition within the industry is no longer just amongst peers that have, or have not, embraced change. It’s also amongst new digital entrants that are unencumbered by legacy systems. Algorithmic-led underwriting lowers the barriers to entry for establishing and scaling a new enterprise that wants to focus on high-volume, transactional business. The features it provides makes it just as competitive with larger organisations, meaning the underlying technology that compliments expertise will differentiate Insurers in the future.
The way technology can augment existing practice through both pricing and connected policies has been discussed.These policies are in themselves directly addressing the needs of the market by providing the Insurer with a new view of risk and circumstance. Further creation of new products around risk management become key for long-term adaptation. Additional risk mitigation services around helping clients understand their risk profile and how to reduce it will likely be how Brokers diversify and add-value to future services.
“The role of the broker is going to change. Much of the work they did in the past in presenting data to the market won’t be required. The value the Broker provides, certainly for more complex risk, is going to carry even more importance… The ability to sit and understand a client’s needs, differentiate between clients and take new products to market will increase moving forward.”
Andrew Yeoman, CEO, Concirrus
One of the key elements of insurance is no doubt price, consultation will be a big part of how a shipowner directs measures in improving their risk profile. Whilst Brokers will hold the client relationship on complex risk, Insurers will utilise a long-term view of risk over time to assess risk management efforts and structure policies so that they adapt as risk profiles change. Data transparency becomes the cornerstone of such activity, giving everyone within the value chain a complete view of risk.
“The risk transfer that a Broker passes to an Insurer stems from unaddressed weaknesses within the logistics and supply chain. We, as market, should be more interested in understanding what the drivers of macro/micro issues are in the supply chain so that we can understand our position in the future.”
Andrea Tanzi, Transformation Manager, Swiss Re Corporate Solutions
Fig 5: Example of supply chain disruption
Pace of change
The Insurtech community offers the fastest way to adopt the practices discussed above in a secure way. Whilst organisations can make efforts to create proprietary systems, the cost and expertise required will lead to a significant development cycle. The compatibility with existing standards and resulting view of proprietary applications will always be based on internal data that’s supplemented with big data. Meanwhile, Insurtech’s can operate outside organisational constraints to create market-based models. One example is Concirrus’ market model, which utilises the learning of multiple deployments to deliver pricing based on a market-wide view of risk. This perspective is only possible from a third-party, and helps Underwriters make an informed decision around the risk they intend to write outside of their own experience.
The role of technology within an organisation, and the products derived, will entirely depend on the strategy in place. The wealth of data available will continually increase, along with new collation and interpretation methods. As these processes evolve, their relevance will persist, making them the primary driver for understanding new risk and catering for it in a timely, innovative way.
Hear from a variety of marine insurance leaders on some of the key challenges facing the industry, and how action can be taken to make your business more resilient. Download our Beyond COVID: The Marine Insurance Business Resilience Blueprint today.
Click here to download the full infographic