Modern Insurance is only around 250 years old, about when the necessary statistical and mathematical tools to underwrite a business venture came to be. But statistical models, even the most advanced ones, need a very specific type of enriched data-diet for it to work optimally. Since then, the industry has always had to rely on data for ensuring its long financial health. For insurers to take on considerable risk, regardless of size, it draws on the reassurance of statistically-sound data that underpins the coverage needed (for issuance) to a fixed number. This ‘number’ will influence the amount of coverage (or claim) provided to the insuree and consequently the amount of premium to be collected.
Such is the reliance on data, that even the slightest erroneous mistake in the underwriter’s predictions could bankrupt, at times, even the economy. We’ve seen it before — when banks took on unqualified risks and approved subprime mortgage loans to borrowers with poor credit, creating the imploding housing bubble of ‘08.
The nature of risk simply evolves and devolves; while Insurers learn progressively with each individual case, adsorbing enormous amounts of data into their carefully crafted risk-models. These models then naturally aid in the manual effort of several hundred data scientists (in the case of large insurers) poring over immense amounts of psychographic, behavioral and environmental attributes for evaluating an entity’s risk profile. Yet, even with these measures, the risk is unquantifiable if the data scientist doesn’t have a large or clear enough picture to make sense of all the inbound information.
In the age of machine intelligence, data is prime fodder for these advanced algorithms. They are designed to thrive on large datasets — in fact the larger the size, the better the system learns. How could it not? An AI system is decidedly 1000x faster than human computing, raising accuracy levels to near perfection and improving straight-through processing to nearly one in every two decisions made without human intervention, today.
Source: Accenture Report — Machine Learning in Insurance
20.4 billion things will be connected by 2020 creating an unprecedented level of data handling & insight derivation capacity, as BFSI companies alone will spend US$25 billion on AI in 2020 (as reported by IDC research). Since 2012, more than $10 billion has been invested in insurtechs.
For 2020 and beyond, customers will come to expect better personalization from their insurance policies, especially millennials and younger. While the incumbent, slow-moving giants of traditional insurance should surprise no one as being the last to innovate — new insurtechs like Flyreel are changing the paradigm by piloting Machine Learning projects that directly translates to critical business goals.
According to McKinsey, digital insurers are already achieving better financial and efficient go-to-market results compared to traditional players.
Here are three ways, insurtechs are gaining ground with Machine Learning (specifically where learning from data is involved):
- Risk Prediction
Predicting and evaluating risk is insurance’ oldest use case, and research reveals it will continue to be so. With ML and advanced algorithms, insurers can process big data from multiple data points such as policy contracts, claims data, weather parameters, crime data, IoT and sensor data.
By Analysing existing data, identifying anomalies, tracking recurring usage patterns and then delivering accurate predictions and diagnosis through vertically-tuned algorithms — ML-based platforms can identify risk ratios and risk profiles that enable insurers to customize policies for individual customers in real-time. This differs from ‘off-the-shelf’ platforms which can only be utilized to solve a narrow set of problems.
- Customer Lifetime Value (CLV) Prediction
CLV is a complex metric that represents the value of a customer to an organization as the difference between the revenue gained and expenses incurred – all projected onto the entire relationship with a customer, including the future.
Insurers can now predict CLV using customer behavior data that allows them to assess the customer’s potential profitability for the insurer. Behavior-based learning models can be applied to forecast retention or cross-buying, all critical factors in the company’s future income. ML tools also help insurers to predict the likelihood of particular customer behavior – for example, their maintenance of the policies or surrender.
- Personalization Insights Engine
User data from AI, machine learning and behavioral and social sciences can provide actionable insights in real time. For example, simulation and learning capabilities allow companies to discover new customer groups, to help companies personalize customer engagement, risk assessment, and forecasting by combining data from multiple sources.
A common challenge is capturing data from multiple sources and turning the data into insights that can inform business decisions across many functions. With machine learning, insurers will be able to underwrite, adjust customer journeys, resolve claims and adapt offerings.
ML-based solutions bring back real value to insurers — either delivered as a standalone product or as a part of an embedded process/service. The key for insurers is to pilot ML projects of smaller scale that can bring about cost and time savings across the organization almost immediately and then improve in easier iterative sprints for more future-ready permanence, rather than taking on the task of a complete enterprise makeover from day one!
For more information about how we can help enterprises begin their ML transformation, reach us on firstname.lastname@example.org