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Will You Survive the Great InsureTech Disruption?

An abundance of data and analytics technology creates both threats and opportunities for insurers.
By: | July 6, 2017 • 5 min read


In insurance, whoever holds the data, holds the power.

That’s because data is the key to effective risk assessment and underwriting.

Big Data and analytics are forcing insurers to adjust their processes when it comes to collecting and using data. With the expansion of the Internet of Things, sensor technology, machine learning and artificial intelligence, there is more information available than ever before.

The abundance of data – and the technology used to capture it – is driving profound disruption in the relationship structure of the insurance industry. As the traditional gatherers and guards of massive amounts of data, insurers face threats from new, tech-savvy competitors who can adapt to changes more quickly.

“There are very powerful trends coming together to cause serious industry disruption. That can be a big threat, but if insurers start responding now and embracing the change, it could also be a big opportunity,” said James Dodge, Senior Consultant, Advanced Analytics & Data Solutions, Milliman.

InsureTech Overturning the Status Quo

James Dodge, Senior Consultant, Advanced Analytics & Data Solutions

Technologists, data scientists and their deep-pocketed capital backers are jumping in with both feet. Though lacking insurance expertise, they see the vast opportunity to harness the data that insurers need. In doing so, they present a threat to traditional insurers, especially smaller and mid-size companies who lack their own large data stores.

“Not a lot of Insuretech companies actually want to be in insurance,” said Robert Meyer, FCAS, MAAA, Principal, Consulting Actuary, Milliman. “It’s a highly regulated industry that requires a lot of capital, and few have actually jumped into the pool of taking on risk. But they are positioning themselves as the purveyors of data.”

Distribution is a key area of focus for many Insuretech startups. Specifically, the new players think they can disintermediate brokers for small and mid-size accounts.

But there are other ways that technology can profoundly change insurance distribution.

Original equipment manufacturers (OEMs), especially in the case of IoT-enabled ‘connected cars,’ are one example of a new competitive threat to traditional distribution. Instead of providing auto coverage through a traditional carrier, they may try to capture more margin by partnering with an InsureTech startup.

“Say, for example, a young InsureTech firm builds a great app and sells it to a reinsurer. The OEM may decide they want to offer that as a value-added bundled offering to their customers,” Meyer said. “In doing so, they bypass the middleman, save costs, and create a more modern, digital experience for their customers.

“Insurers will then have a disintermediation problem, along with a new emergent competitor they never thought was their competitor before.”
Other insures could take a similar tactic by white labeling their products and selling them through InsureTech firms to trim expenses and expand their market share.

Insurers who are too slow to digitize or update their process could be pushed out altogether. They’ll lose customer loyalty to competitors who have refined their customer experience and engagement and fall behind those competitors who reduce their costs faster.

Opportunities Emerge

Robert Meyer, FCAS, MAAA, Principal, Consulting Actuary

The flipside to the threat of competition is that insurers who manage to stand out from the crowd win over customer support.

Small insurers, for example, are better positioned to adopt new technology and build ecosystems that are flexible enough to adapt to shifting trends and further technology advancements. Large insurers relying on legacy systems will have a harder time making that change and staying up to date.

But larger insurers can leverage their resources by directly investing in or acquiring InsureTech firms. Even if they can’t build the platforms themselves, partnering with InsureTech companies provides a closer look at their infrastructure and allows them to reap the benefits of access to data without storing or managing the data themselves.

“Using these firms as a stand alone data vendor also helps insurers avoid some regulatory overreach,” Dodge said.

Regulatory obstacles in the use of data science in underwriting often leave insurers unsure of how to apply new data sets, and therefore hesitant to embrace the new, interconnected technologies that help collect it. It’s a fear based on a limited view of data analytics.

“Insurers really do six major things. There’s product design, marketing and sales, pricing, underwriting, claims, and services,” Dodge said. “Regulators may not allow data science in setting rates if they perceive it as discriminatory, but you can absolutely still apply data analytics to the other five processes.”

Carriers can target marketing and distribution with demographic data, enhance their claims experience with user-friendly portals, improve claims handling through predictive analytics, and perhaps most importantly, incorporate data into the underwriting process.

“If regulators will not allow data to dictate pricing, you can achieve a similar effect in underwriting, outside of the rate structure,” Meyer said. Collecting data about a potential client’s financial reliability, exposure to different types of risk, and risk mitigation strength can guide underwriters to, for example, offer premium discounts for positive marks, or perhaps reduce sub-limits for higher-risk insureds.

“By taking in as many data elements as you can and applying them in other areas of your business, your organization will learn an awful lot about managing a high volume of data, learning from it, and then acting on it,” he said.

Digitize or Die

To reap the benefits of data and analytics technology, insurers have to act now. Taking a reactive instead of a proactive approach could do irreparable harm long term.

But throwing the latest technology at a problem without adjusting an accompanying process isn’t the answer.

“Clients are asking how they should embark on their own digital transformation. Not only do we have expertise in managing large data sets, but we can also advise on how to adjust relationship management within the industry along the way as the market undergoes continual disruption,” Meyer said.

Milliman is focused on working with both Insuretech players and traditional insurers to create a technology ecosystem built to adapt to continuing changes. They have dedicated themselves to staying at the leading edge of technology and the Insuretech trend.

“We are branching out from actuarial work and consulting into Big Data, machine learning, and analytics. We’re not focused on client-facing platforms, but rather building ways to combine human and machine learning to get the best outcome,” Dodge said. “We can help clients take advantage of the opportunities and plan for the future as changes continue.”

To learn more, visit http://us.milliman.com/.

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Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

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“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

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Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]