A perfect storm of technological, economic and societal forces is accelerating the insurance industry’s investment in digital and data science to drive better product structuring, price differentiation, claims management, customer engagement and risk profiling.

This is according to a new report from consultancy firm Capco, which identified three factors that threaten the status quo within the historic industry:

• A “tidal wave” of structured and unstructured data generated through digitalisation of the economy and wider society.
• Developments in techniques and technologies to scale the application of machine learning and artificial intelligence approaches to actuarial analysis.
• Accelerated globalisation, simultaneously lowering international barriers to entry, while rendering supply chains more susceptible to increased transmission of global systemic risk across borders - as seen with COVID-19.

Against a backdrop of claims inflation, increasing catastrophe loads and market entrants from the InsurTech sector which are unencumbered by legacy infrastructure, agility is key. Capco stated that a lean and agile approach can help reduce the burden of data curation and preparation while managing risks and maintaining stakeholder buy-in.

Organisations that build lean and agile data management foundations can perform data science and digital innovation at greater scale, effectiveness and with quicker returns on investment, read the report. This provides immediate competitive advantage through enhanced business insights and customer engagement, and the ability to sustain these advantages in the long run through uplifts in data culture.

Capco suggested that it is becoming increasingly critical that AI implementations are not only fair and beneficent, but also transparent and explainable, so outcomes can be ethically audited. “Insurers must implement controls to review ethical risks and mitigations related to intended outcomes before solutions are deployed, and mechanisms to enable the lid to be lifted on how AI engines process data to generate the outcomes and the logic underpinning those outcomes.”

Tailoring products and prices to individual preferences, behaviours and price sensitivities “is a double-edged sword”, according to the firm. It enables insurers to access more of the market, but also increases the risk that well-intentioned outcomes can be perceived as discriminatory, biased or otherwise in breach of fiduciary duty to clients, customers, employees, the market, or society as a whole.

Managing and mitigating legal and ethical risks related to data usage requires an integrated framework that provides for consistent results that can be appropriately calibrated to local variations in law and ethical norms, noted the report.

Alvin Tan, principal consultant at Capco and author of the paper, commented: “In the hunt for rate adequacy, product innovation, and market differentiation, insurers are rapidly increasing investment in data science and digital platforms to leverage competitive advantage from the vast quantities of data potentially accessible.

“Data is at the heart of an insurer’s ability to remain competitive in the long run,” he continued, adding: “It must be managed as an asset to ensure that management of implementation, operational, legal and ethical risks do not overly ‘tax’ the organisation, and to build the foundation of a strong data culture.

“To get it right requires a sustained investment not only in data science labs and consolidation of data architectures, but also in the organisation, the people and the data processes involved.”

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