Insurers should move on from their recent focus on resilience and concentrate on adaptability. Social trends, market trends and regulatory trends all point to a flexibility to adapt mattering most. Insurers need to reflect this in their strategies, systems and continuity plans.
Insurers often talk now about the importance of resilience. That's hardly surprising when something like a pandemic comes along. However, resilience can be an impediment when the market is facing an ethical challenge. That’s because resilience emphasises an ability to persevere in the face of challenge, to overcome hurdles, to bounce back. When a challenge on ethical grounds comes along, such as fairness or discrimination, it’s the flexibility to adapt that matters. This is about recognising what form of change is needed, and to then make that change. This is what I believe will be crucial for the market over the next few years. And that's why adaptability is, for me, the big ethical challenge for insurers in 2022.
So what form of adaptability is needed?
As insurers have looked into the future being opened up by digital innovations, they’ve recognised that change is coming. Some have been influenced by providers of data and analytics to believe that ‘X is the future’. That focus shapes their strategies and culture. Other insurers see the future in more nuanced ways, recognising that change will be influenced by a myriad of factors. Their focus is on their capabilities and adaptability.
Pricing – the Beginning of Change, not the End
Many UK insurers have had to learn this the hard way. Five years ago, neither the market nor the regulator questioned the validity of lifetime value modelling for pricing. Now it’s banned. Some insurers think that the ethics of pricing are now sorted. However, they’ve only just begun.
Those who rewrote their pricing systems with adaptability in mind will find the next round of changes easier to absorb. That comes from having stood back and seen the overall ethical landscape for insurance, not just looked at one pricing technique. A good radar for ethical risk matters in such circumstances.
And that radar for ethical risks needs to scan not just within the market, but outside it as well. The future of insurance is not going to be determined only by insurers and the market. Some change will be driven by the market, but just as much change will be thrust upon the market. It was, after all, consumer groups which brought about the demise of lifetime value modelling and of gender as a pricing factor.
It’s Not Just Technology
I would go so far as to say that political and social issues will have just as much an influence on the future of insurance as technological developments. What we have seen so far is a digital transformation of insurance driven by technology. What we will see over the next three to five years are digital adjustments driven by the social and political re-shaping of that technology.
This should come as no surprise. Technology has always been shaped by social and political forces. This happens both as it emerges and as it matures. Those who succeed are the ones who listen to those forces and adapt to the realities within which their markets operate.
And it’s worth remembering that some market developments, while seemingly technological in nature, are not always driven by technology. Take personalisation. Many think of it as a digital development, but it is in fact a social development that has used technology to shape many a business mind. The social has shaped the technical, which has in turn shaped the market.
The Drivers of Adaptability
It is really important that the market understands this. The insurers who end up being judged to have got it right on personalisation will be those whose strategies for personalisation are sensitive to the social issues that shape the overall development. Fairness and justice are prime examples of such social issues. Those insurers who just focussed on what could be done with digital, rather than what should be done with digital, will ultimately find themselves struggling, perhaps even in the dock at the court of public opinion.
Those judgements are starting to be made. That’s because investors are now aware of the implications. And academics and consumer groups no longer see insurance as a mystical science best left to its professional communities to shape and drive forward. They’re making their views known, both privately and publicly, in papers, conferences and of course, a super complaint.
This opening up of the insurance market to the influence of a range of unfamiliar yet often powerful actors is something many insurers need to get their heads round. And it’s a process that will continue, bringing change, not certainty. That’s why I believe insurers should focus on adaptability instead of resilience. They need to recognise and response to the flow of public opinion, rather than resist or ignore it.
Signs of Firms Adapting
Let’s take a quick look at some of the events triggered by all this.
Several of the big tech firms are said to have introduced ‘granularity levers’ into their systems, in recognition that the public find only so much surveillance acceptable. We don’t know of course about the extent to which those levers are actually being used. The fact however that they’re being installed is significant, for it recognises that the future is less certain than previously believed.
Firms using data brokers are now recognising that they may have to do without some of their brokers’ data, after the UK's data protection regulator found that three big data brokers had inadequate consent strategies. If the data broker has to delete it, then so do its clients.
And the same goes for algorithms, after a US regulator told a firm to not just delete the data it had gathered without consent, but to delete the algorithms that were trained upon it as well (more here).
The Levers of Change
Decisions systems built into the heart of an insurer’s underwriting, claims and counter fraud operations now have to be capable of dealing with such changes. Insurers already prepared in this way will have done an ethical risk assessment of such systems and built them a) around the best estimate of what will be ethically acceptable, and b) with variance levers in case that best estimate turns out to be wrong.
So what sort of levers are we talking about then? You can roughly match them with particular ethical issues, which for insurers chiefly means fairness, discrimination, privacy and autonomy. It is around issues like these that adaptability needs to be prepared. Notice that none of them are technological, but all of them are political and social.
Show Your Workings
What should insurers look out for then? I think we will see more and more instances of insurers being asked to show how underwriting, claims and counter fraud are fulfilling regulatory obligations in relation to issues like fairness and discrimination. There’s clear evidence for this in the UK and US insurance markets.
The emphasis is going to be on ‘show us your workings’. In other words, the usual assurance statements that confirm compliance will now be downgraded. In their place will emerge structured data flows that allow regulators to slice and dice the inputs and outputs to determine in their own judgement whether the insurer is complying with their regulatory obligations.
Combine this with personal executive accountability and synthetic datasets for benchmarking purposes, and the scene is set for a lot of change. Bear in mind though that, looking forward, this is less likely to be as seismic as price walking and gender. The time and expense of big investigations can be counter-productive in terms of outcomes. It’s too much like picking up the pieces after the event.
Instead, what insurers are more likely to see are adjustment requests, like ‘move that pricing level up a bit’ or ‘pull that claims level down a bit’. This is more real time, dealing with issues as the data tracks their emergence.
Clearly, the more adaptable your systems, the more easily will the impacts of all this be absorbed. The future of insurance is of course all about change, but now that change is being recognised as more nuanced, more fluid and just as much to be driven from outside the market as from within. Personally, this makes it more interesting as well.
Try this Practical
Every insurer has a business continuity plan. And it’s a plan that every insurer should be testing on a regular basis. When the next round of tests are being scheduled, include one that reflects some of the recent events mentioned above.
This could be for example, the data you receive from a leading data broker no longer being allowed to be used in your decision systems. The trigger for this would be issues around the consent associated with that data.
Another example could be an algorithm provided by a software house. Perhaps a court case has established that it’s been training on data that breaks equalities legislation. How would your firm respond to that algorithm being no longer available?
Change is perhaps the only certainty in relation to the future of insurance. Some of the most powerful drivers of that change will be orientated around ethical issues like fairness, discrimination, privacy and autonomy. This means business adaptability is going to be a key attribute of a successful insurer.