Risk Insider: Martin Frappolli

The Digitization of Risk Management and Insurance

By: | May 21, 2018

Martin J. Frappolli, CPCU, FIDM, AIC, is Senior Director of Knowledge Resources at The Institutes, and editor of the organization's new “Managing Cyber Risk” textbook. He can be reached at [email protected].

When I think about insurance, I usually regard it as just one tool in the risk manager’s tool box. When a person or organization is faced with risk that carries a significant financial consequence, the prudent response is to begin to find ways to avoid or mitigate the risk. Often, the final step is risk financing — transferring the risk by insurance.

Sometimes, though, insurance is more out front in managing risk. Workers’ compensation insurance is a great example. When states began passing workers’ comp laws in the early part of the twentieth century, employers sought to insure that cost, and insurers responded with workers’ compensation insurance policies.

The wonderful upside was that insurers quickly understood that they had a financial interest not only in helping injured employees recover and return to the workplace, but also in the prevention of accidents.  So many of the leaps forward in workplace safety can be attributed to the motivation of employers to obtain good workers’ comp coverage at favorable rates.

In the early days of indoor heating and plumbing, boiler explosions were common and disastrous. Here again, the boiler insurers were the driving force behind safety standards that dramatically reduced the frequency of boiler explosions. The insurance wasn’t just a tool for the risk manager, but a force for innovation in risk management.

We can turn from those early examples to the modern waves of technology that are poised to change the world of insurance and risk management. Some are simple and easy to grasp; why should a claims adjuster ever again climb onto a roof to inspect hail damage when high-resolution images can be taken better, faster, and cheaper by a drone?

Insurers have a long history of capturing, storing, and processing data related to exposures and losses. With all the new external data generated by the Internet of Things, new methods of data storage become essential.

Perhaps even more promising are the advances tied to new ways of data generation/capture, data storage, and data analysis. The huge waves of data produced by devices on the Internet of Things offer insurers and risk managers information not previously available. For example, a tractor-trailer can be equipped with sensors that monitor engine oil and temperature, tire pressure, load factors, even the alertness of the driver. While these data points are useful for rating and underwriting, the most promising aspect is the value of the data for loss prevention. Much like the early days of workers’ comp and boiler insurance, every party to the insurance transaction has a deep interest in preventing accidents.

Insurers have a long history of capturing, storing, and processing data related to exposures and losses. With all the new external data generated by the Internet of Things, new methods of data storage become essential. Cloud storage isn’t brand new, but this decentralized technology enables efficient and affordable methods to organize the volumes of new data. More cutting edge is Blockchain technology, which enables storage of smart contracts that can automate a lot of otherwise labor-intensive processes in underwriting risks and settling claims.

My favorite insurance Blockchain example is index insurance for crops. Consider a farmer in a remote part of the world whose entire crop is worth $500. No insurer would ever visit to underwrite nor send a claims rep to investigate a loss. But now the farmer can insure his crop for $500 via index insurance, which pays out if there is a verifiable event that would destroy the crop, such as drought or flood. By a smart contract agreement stored in a Blockchain, an independently-verifiable source could confirm the weather event and automatically trigger the loss payment. Not only is the farmer saved, but Blockchain enables a new class of business not previously viable for the insurer.

Of course, all the new data with the new storage techniques require advanced data analysis techniques to turn data into actionable information. Smart insurers are already embracing these new tools for data capture, data storage, and data analysis. The good news is that these technologies don’t only make insurance more efficient, but that they offer a new path to better risk management.

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