Insurtech-led change in the Lloyd’s Market

The recent Oxbow & LMA report has raised some interesting questions with our Pricing Manager, Durgesh Vyas; here he gives his thoughts.

Improving Loss Ratios…

Given the backdrop of the current market conditions, it’s interesting that there is a lack of focus on the role InsurTech can play to improve loss ratios. Particularly, as it is a predominant driver for market results.

The report suggests that the bulk of InsurTech is a volume driven play, with everything being aimed at improving customer acquisition or reducing the time taken to underwrite. Very little is covered regarding improving loss ratio. In fact, improving customer acquisition or filling protection gaps, goes against the overall market strategy of exiting lines of business and shrinking. This doesn’t mean the market becomes less relevant, actually, I’d argue that sustainable profit, combined with being a specialist, is a better differentiator than size.

Whilst operational efficiency alone is unlikely to have a transformational impact on market results; we are seeing a much-needed focus on this area. The efforts of the TOM initiative to drive operating efficiency is just one example. But, we also need to be looking at expenses, acquisition cost and loss ratio together, to build a more realistic picture.

Flooding the market…

Since 2016, there has been an explosion of new ‘InsurTech’ start-ups. Whilst it might seem like a distraction, we need to ask ourselves why? Is it a coincidence that this aligns with a point in the market where there is an abundance of capital and capacity chasing yield? My own hypothesis; PE and VC are chasing yield differently. Access to cheap debt in a low-interest rate environment means the model is simple – fund an InsurTech and look for a volume driven play where the InsurTech extracts fees from the market or for a sale of the business achieving a desired multiple. Understanding the utility of founders and backers of these start-ups is crucial.

Strategy for enabling…

Technology should be an enabler for change, rather than a driver. There are too many instances where businesses look for solutions before understanding the problem first. Therefore, it’s important that businesses think strategically about where to build capabilities and where data or analytics partnerships are preferred. In both cases, the partnerships must be structured to create value long term.

Many believe that performance would be better with perfect insight. But, not everyone is investing and enabling this element. As an industry, we need to establish whose role it is to find sources of insight, particularly who is best qualified to find insight that competitors have not yet discovered.

Establishing a strategy doesn’t always have to be about the ‘new’. We should also be looking at how effectively we are capturing and recording existing data to enable collaboration that yields positive results. As an industry we should be treasuring our data, being precious about what we have and seeking out new relevant data.

InsurTech should be part of a strategy, not the definitive solution.

The impact of data on underwriting…

The report suggests that there are four key areas where data can have an impact on the underwriter:

1. Next generation industry databases: these are external third party data providers. I’d argue that this is not new! It’s been around for years and certainly can help underwriters improve their view on risk.
2. Insight from unstructured data: the report cites the example of risk engines scraping the web and then adding new insight on pricing, risks selection etc.
3. Behavioural data – real-time analytics that shows the behaviour of the insured, or the wider demographics behaviour.
4. Quality of data  – both regarding new data but also improving existing data. Software that can scan existing data and look for errors such as building-risk and exposure information

I’m certainly a big believer in 1 and 4 above, providing additional insight on risk exposure features and improving on data quality as big enablers in the underwriting pricing process. On their own, or put together, neither will directly improve implied loss ratios, but they might give an extra edge during the risk selection process.

At Probitas, we believe in the art of underwriting and science of analytics; this isn’t a hollow strapline, we live and breathe this during our working day!