The Race to Find the Next Insurance Credit Score (or How, Maybe, to Reinvent P/C Insurance Pricing)

The Race to Find the Next Insurance Credit Score (or How, Maybe, to Reinvent P/C Insurance Pricing)

What is an insurance credit score? Basically it is a set of algorithms applied to data from credit reports which provide guidance for pricing and underwriting personal lines insurance. Although it has been a source of political and regulatory controversy over the years, the use of insurance credit scores is now widespread.

Much of the controversy has been over possible disparate impacts on various societal groups. But a root cause of the controversy has been the non-intuitive relationship between a given person’s use or misuse of credit on the one hand—and that person’s probability of incurring insured losses on the other hand. It just doesn’t seem to make much sense. But statistically there are correlations, which in general have passed regulatory review.

Insurance credit score controversies now ancient history (i.e. were settled before most millennials graduated from high school).

But suddenly something interesting is happening.

The race is on to find the next insurance credit score—and the winners (if there are winners) will gain a pricing (and underwriting) edge.

There are only two requirements to enter in this race.

  1. You have to forget about all the kinds of data and information that insurers have been using to price and underwrite risks.
  2. You have to use your digital imagination to find some new data and models which provide the same or better lift as the old data and models which you have just thrown out the window. (Lift is the increase in the ability of a new pricing model to distinguish between good and bad risks when compared to an existing pricing model.)

So what kind of new data might a digital imagination look at?

  • For personal auto, connected cars will provide a rich data set to mine. How about whether a car is serviced at the manufacturer’s suggested intervals (correlated with whether the car is serviced by a dealer or by an independent repair shop)? Or the use of a mobile phone while the car is in motion (correlated with time of day, precipitation, and whether satellite radio is also playing)? Or use of headlights during daylight hours (correlated with the frequency of manually shifting gears in a vehicle with an automatic transmission).
  • For homeowners insurance, connected homes could supply all types of new data. For example, whether Alexa (or other IPA) controls the home’s HVAC systems, correlated with setting security alarms before 11 pm). Or, electricity and gas consumption, correlated with use of video streaming services on week nights. Or the number and type of connected appliances, correlated with the number of functioning smoke, CO, and moisture detectors.
  • For commercial liability insurance, telematics and IoT will be the key data sources. Does a business with 10 or more commercial vehicles use both fleet management and telematics solutions? What mobile payment options are offered (correlated with dynamic pricing capabilities)? The business’ use of social media and messaging apps, correlated with the degree of supply chain digitization.

Of course obtaining a lot of this data will require permission from policyholders—and even with permission these methods may raise social or political issues. But premium discount and loss control incentives for telematics programs have proven effective. And for better or worse, Scott McNealy got it right in 1999.

CES 2017: JUST HOW SMART IS AI GOING TO MAKE CONNECTED CARS AND CONNECTED HOMES?

CES 2017: JUST HOW SMART IS AI GOING TO MAKE CONNECTED CARS AND CONNECTED HOMES?
Walking the exhibit halls and attending sessions at the mammoth Consumer Electronics Show, it was easy to identify the dominant theme: AI-enabled Intelligent Personal Assistants (IPAs).
  • Manufacturers and suppliers of connected cars and homes are betting big on IPAs: overwhelmingly favoring Amazon Alexa.
  • Impressionistically, Google Assistant, Siri, Cortana and others trailed some distance behind.
Natural language commands, queries and responses provide a vastly more intuitive UX. And these capabilities in turn make owning and using a connected home or car much more attractive. But there is a deeper potential benefit for the connected car and connected home sellers: developing context-rich data and information about the connected home occupants and the connected car drivers and passengers. This data and information include:
  • Who is in the house, what rooms they occupy—or who is in the car, going to which destinations
  • And what they want to do or see or learn or buy or communicate at what times and locations
Mining this data will enable vendors to anticipate (and sometimes create) more demand for their goods and services. (In a sense, this is the third or fourth generation version of Google’s ad placement algorithms based on a person’s search queries.) Here’s what this means for home and auto insurers:
  • As the value propositions of connected cars and homes increase, so does the imperative for insurers to enter those ecosystems through alliances and standalone offers
  • The IPA-generated data may provide predictive value for pricing and underwriting
  • IPAs are a potential distribution channel (responding to queries and even anticipating the needs of very safety- and budget- conscious consumers)
A note on terminology: the concept of “Intelligent Personal Assistants” is fairly new and evolving quickly. Other related terms are conversational commerce, chatbots, voice control, among others.

When plumbers sell insurance

When plumbers sell insurance

Digital and digitization in insurance are terms that have been increasingly used in the insurance industry over the past decade and not only by insurers but also by consultants, IT vendors and research firms. I have already provided my high level definition of digital and digitization in this blog.

While attending RGI's Next event, where an innovation for the connected home was presented, I reflected on the visibility of the relationship between the insurer and the end-consumer. Many innovation and digital gurus claim that with digitization insurance will become invisible. At the first sight, it sounds like an interesting idea and of course it would be logical to believe that if there is less or no human intervention then it would be difficult for a consumer to get a physical representation of an insurance product and the company behind it. However, I don’t like the idea of insurers becoming invisible. Insurance is a difficult product to understand for average consumers because it is not something they can touch and feel. In addition, risk is a concept that is highly conceptual especially for young people. Many consumers, who buy insurance for the first time, do so because it is compulsory and in general they don’t try to analyse the details of the product, which is nothing more than a list of benefits, terms and conditions that are painful to read and difficult to understand. I think digitization represents a great opportunity insurers have to seize to better productize insurance products. Making insurance invisible does not properly address the consumers’ needs and expectations I think. In our open world where information is so easily accessible and transferrable and where transparency is important, insurers need to make insurance more palpable and digitization is a great opportunity to democratize the knowledge of insurance and risk among the public. Let’s take the example of home insurance. What if home insurance is sold on top of a box (an Apple TV style one) that controls various sensors that monitor home parameters including thermostats, smoke detector, video surveillance and water usage? The insured would be able to regularly check these sensors via a smartphone app and be informed quickly about abnormal events. With this box, the insurer would add home insurance at a preferred price (maybe included with the box warranty). The connected home model is an interesting example demonstrating that digital transformation can contribute to making insurance products more palpable and risk easier to understand and to monitor from a customer point of view. So when will we see plumbers and electricians sell home insurance!

It’s Not Just Twitter’s Problem: What Insurers Need to Know about DDoS and the Snake in the IoT Garden of Eden

It’s Not Just Twitter’s Problem: What Insurers Need to Know about DDoS and the Snake in the IoT Garden of Eden

On Friday October 21 a massive Distributed Denial of Service (DDoS) made over 1,000 websites unreachable, including, Twitter, Netflix and PayPal. Two cloud providers, Amazon Web Services and Heroku reportedly also experienced periods of unavailability.

The attack was directed against a key part of the internet’s infrastructure, a domain name system provider, Dynamic Network Services aka Dyn. When a person enters a web address into a browser, such as google.com, the browser in turn needs an IP address (a string of numbers and periods) to actually connect with that web address. Domain name system providers are a critical source of IP addresses.

On Friday Dyn was the target of perhaps the largest ever DDoS, when its site was overcome by tens of million of requests for IP addresses. Because Dyn could not provide the correct IP addresses for Twitter and the other affected sites, those sites became unreachable for much of the day.

It also appears that the DDoS was mounted using a widely available malware program called Mirai. Mirai searches the web for IoT connected devices (such as digital video recorders and IP cameras) whose admin systems which can be captured using simple default user names and passwords, such as ADMIN and 12345. Mirai can then mobilize those devices into a botnet which executes a directed DDoS attack.

There are a number of potentially serious implications for insurers:

  • An insurer with a Connected Home or Connected Business IoT initiative that provides discounts for web-connected security systems, moisture detectors, smart locks, etc. may be subsidizing the purchase of devices which could be enlisted in a botnet attack on a variety of targets. This could expose both the policyholder and the insurer providing the discounts to a variety of potential losses.
  • If the same type of safety and security devices are disabled by malware, homeowners and property insurers may have increased and unanticipated losses.
  • As insurers continue to migrate their front-end and back-office systems to the cloud, the availability of those systems to customers, producers, and internal staff may drop below acceptable levels for certain periods of time.

The Internet of Things will change insurance and society in many positive ways. But the means used to mount the October 21 attack highlights vulnerabilities that insurers must recognize as they build their IoT plans and initiatives.

Insurance IoT – you can sense the disruption: Innovation Roundtable summary

Insurance IoT – you can sense the disruption: Innovation Roundtable summary
We held another in our series of Innovation Roundtables in NYC last Friday. These are small gatherings, attended by insurers and banks, meant to provide an open forum for a deep discussion of a chosen topic. As Mick Simonelli, one of the facilitators put it: “The format provides a chance for innovators to come out of their day-to-day battles, take a tactical pause, gain some perspective and share their knowledge with other practitioners.” This edition was focused on the Internet of Things in insurance. More than any other previous Roundtable, the threat of disruption amongst the group was very prominent. The discussion was best summarized by one participant: “We have been doing the business of insurance according to “effects analysis” for 300 years. That is, actuaries and underwriters have been looking backwards and projecting what contract terms (rates, guidelines, etc.) should be going forward. IoT in insurance will provide new territory, which is as yet unclaimed by any provider. It will allow insurance to move toward “causal analysis”: what are the true causes of loss and in what interventions can be undertaken to avoid them?” Much of the discussion was about how insurance risk professionals can accomplish casual analysis using IoT tools and techniques. However, there was also a recognition that other entities, outside insurance, may figure this new approach out before insurers. This may be the well-know data firms such as Google, Amazon, etc., or may be a group of data scientists yet unknown. Other main points from the session include:
  • These practitioners report that they sense that the velocity of change around IoT is different than what has been seen before. Unlike other changes in insurance, decision-makers cannot wait for the data to roll in and the “case to be proved” or it will be too late to respond. Companies reported that they have lost partnership deals with start-up firms because they were unable to make a decision in a timely manner. This dynamic supports the need for a “dual governance track” that has been reflected in Celent’s innovation research.
  • Donald Light presented Celent’s model of IoT, and the group engaged in a good deal of discussion about what part of that ecosystem insurers will want to “own”. There was recognition of the incredible predictive value of the data that will be produced by IoT. However, it was pointed out that what has happened in commercial lines fleet IoT applications is that insureds prefer to retain control over the data as the value for them of using it to manage their fleet vastly outweighs any premium discount that might be awarded. It remains to be seen if this will play out in other lines of business.
  • Regarding commercial lines applications of IoT, it was notable that the group spent as much or more time discussing these opportunities as it did discussing the usual suspects – auto telematics, connected home, and health/lifestyle. Celent sees this as a further maturation of IoT in insurance. The consensus of the group was that commercial IoT is not yet widely addressed and is beginning to be a focus for their companies going forward.
  • A lack of cross-industry integration standards was recognized as a significant barrier to expansion. The participants expressed that there is a need (and opportunity) for a data standards group to facilitate this between insurers and potential device providers. Without such agreement, progress will be more expensive and will take longer than it should.
A final discussion point was perhaps the most exciting. The group is tracking the manner in which IoT is changing the profile of the skills required in insurance. Actuarial science is giving way to data science as more predictive techniques and more non-traditional data sources are used. The participants discussed forming a consortium of insurers to partner with NYC-area universities to establish an insurance data scientist training program. Stay tuned!