Listed below are the key technology trends impacting the ESG theme in the insurance industry, as identified by GlobalData.
Insurers are developing innovative insurance products such as parametric policies that reduce the insurance protection gaps against physical climate risks such as extreme weather events. Technologies such as artificial intelligence (AI) and Internet of Things (IoT) can help in underwriting and monitoring such parametric policies in real-time.
The adoption of IoT devices in the insurance sector has grown in recent years, spurred by the emergence of innovative insurtechs using customer data to personalise insurance products and offer more affordable premiums. Use cases for IoT devices in the industry include using data collected from wearable tech to gain insights on customer health and using connected cars to offer telematics and usage-based insurance (UBI). Access to real-time customer data offer real-time pricing advantages and also reduces the likelihood of claims via sensors that detect potential issues.
Direct Line, for example, has partnered with LeakBot to provide home insurance customers with a leak detection system that will instantly notify users of leaks, thus limiting water damage. Using IoT devices in this way helps transition the claims process from protection to prevention. However, increased adoption of these data-collecting devices will draw greater attention to how insurance companies store and use this data. Insurers will need to implement data protection and privacy systems to ensure there is transparency over data use.
AI technology is mainly used to automate claims processes and customer service functions. It is also increasingly assisting with risk profiling, underwriting, and policy pricing. AI models are trained on vast sets of historical customer data to generate risk-predicting engines that ultimately inform these decision-making processes. However, recent cases where AI has contributed to discrimination and bias have reduced trust in the technology.
As insurance companies deploy more advanced AI solutions, both customers and regulators will call for greater transparency in AI algorithms. Accounting for potential bias in data and explaining the pathways models take to make decisions will help ensure fair and objective decision outputs. Using AI responsibly is vital to maintaining consumer trust.
AI also plays a role in modelling climate risk, a key ESG challenge within the industry. Global warming has led to a rise in extreme weather events, which are particularly difficult to model due to a lack of granular data. Natural catastrophes have a significant impact on insurance portfolios, thus, thoroughly evaluating risks is essential.
Growing cybersecurity risk
Insurers hold swathes of customer data, so the rising cyber threat means internal information technology (IT) systems need to be secure, with clear protocols in place to prevent any data breaches. Insurers will need to ensure that coverage is extensive enough for customers with cyber insurance policies to support clients and that risk is priced accurately. The ransomware epidemic is particularly concerning to insurers. Some of the most sophisticated attacks have resulted in ransom payments averaging $780,000, according to leading insurer Aon. The company estimates that global damages from ransomware in 2021 will be $20bn. The extent of these damages means that insurers face a trade-off between offering affordable premiums and providing robust coverage for their customers.
Cyber insurance premiums are already rising. Data from Aon shows that premiums rose by 27% from the start of April to mid-May 2021, compared to 2020 levels. Insurers are also placing increasingly stringent criteria on their cyber insurance policies. In May 2021, AXA announced that it would no longer cover French companies’ ransom payments to hackers following talks with local officials. Balancing the profitability of cyber policies while maintaining insurance accessibility will be a key ESG focus for insurers. Public-private partnerships may emerge as the most practical way of covering cyber risk.
Insurtechs offer customers a superior insurance experience that is often more affordable than services provided by incumbents. Insurtechs tend to be particularly socially oriented with products that aim to improve consumer access to insurance. Root Insurance, for example, offers car insurance premiums based primarily on driving behaviour rather than factors that often discriminate against lower-income customers. The company uses AI to calculate driving scores based on telematics data collected by its app making policy pricing fairer.
Insurtechs have responded particularly well to the growing gig economy. Gig workers face several barriers when applying for traditional income protection insurance due to the unpredictable nature of their work and varied forms of income. Insurtech Zego offers pay-as-you-go car insurance targeted at couriers, private hire, and delivery drivers.
Insurtech offerings will push incumbent insurers to consider the social sustainability of their products and services. Staying abreast of social trends and developing products to cater to the changing needs of consumers should be an essential aspect of insurers’ ESG strategies.
This is an edited extract from the ESG in Insurance – Thematic Research report produced by GlobalData Thematic Research.