Insurtech, Disruptive Technologies, and Reinsurance

Insurtech and Reinsurance

So what does insurtech have to do with reinsurance? In my March 2017 Expert Commentary, "Blockchain Technology and Reinsurance," I wrote about blockchain and how a consortium of reinsurers was developing a distributed ledger platform for reinsurance purposes. Just recently, a marine insurance blockchain platform was released. Blockchain is an example of a "disruptive" technology being brought to the insurance and reinsurance industries. The theory is that a secure distributed ledger technology platform will remove friction points, be more confidential, and process transactions much more quickly with fewer errors.

But there is much more. For every new insurer licensed and issuing polices based on new technologies, there will be reinsurers providing the security to allow the new policy issuing company to innovate and compete. Startup insurance companies leveraging new technologies will need to partner with reinsurers to be able to scale or, in some cases, even to do any business. Platforms already exist that bring insurtech startups together with licensed insurers and reinsurers to speed insurtech companies and new insurance products to market without having to reinvent the wheel.

Moreover, reinsurers are working with technology entrepreneurs and technology intermediaries (including some, if not all, reinsurance brokers) on ways to innovate within the reinsurance industry on the pricing of assumed and ceded business and the handling of claims and premium transactions. Reinsurers have moved from the days of paper files to more automated electronic contracting, underwriting, and premium and claim processing. While that was a bit of a sea change for many, what's coming with insurtech is going to make going electronic look like a walk in the park.

Insurtech Innovation

There are lots of articles and conferences out there on insurtech. Many of the larger global reinsurance companies have set up incubators and technology subsidiaries to better access innovative technologies both from an investment and user perspective. And, while blockchain technology is certainly part of this revolution, it does not end there.

As a 2017 JLT Re report titled JLT Re Viewpoint: InsurTech: Rebooting (Re)insurance puts it, insurtechs "are harnessing cutting-edge innovations such as robotics, artificial intelligence (AI), the internet of things, big data, and predictive modeling." This report is worth reading. It discusses the types of innovations that are and will take place in insurance product development, which create new pools of business that close longstanding protection gaps and by updating underwriting by deploying modeling and AI to big data. On the claims side, the process will become optimized by automation by using AI and machine-learning technologies.

This is just the tip of the iceberg. All of this innovation on the direct insurance side will affect how reinsurers interact with and provide capital to their cedents. Plus, these innovations will be able to be used by reinsurers themselves in underwriting and monitoring their assumed business and addressing their retrocessional coverages.

Many commentators are saying that if insurance companies are not involved in insurtech now, they will have missed the boat and will be marginalized by the marketplace as the innovators take the lion's share of the business. Run a Google search on insurtech and see what's going on out there. Those that are not innovating will likely be gone within several years.

Insurtech Investment

One of the biggest obstacles to any startup is raising capital. For insurtech entrepreneurs, reinsurers are natural capital providers because that is, in effect, what they do for cedents on every assumed reinsurance contract. Reinsurers have recognized this and have formed investment subsidiaries to work with emerging insurtech companies so that they can become engaged in the technology early on and have a stake in the innovations that will potentially change the industry.

Besides capital deployment, reinsurers offer many other soft investments to insurtech companies. For example, reinsurers offer expertise in certain lines of business from both the underwriting and claims perspectives. Many traditional cedents rely on their reinsurers to help them improve their underwriting and claims operations. Insurtech startups will also need this broad insurance expertise and knowledge to begin their operations and decide the lines of business where their innovative products will have the best chance for success.

Another area where reinsurers may be able to help insurtech startups is with licensing and rating issues. Reinsurance programs sometimes involve fronting in certain jurisdictions where the cedent wants to do business, but neither is yet licensed or has the rating agency rankings sufficient to attract business. By partnering with a strong reinsurer, an insurtech cedent may be able to overcome some of the economic barriers to the marketplace caused by the regulatory and rating requirements. Reinsurers and their direct writing subsidiaries may be able to provide the licensing necessary to launch innovative products while the insurtech company learns the ropes of the insurance business.

Insurtech Disintermediation

One of the big fears about insurtech in both the direct and reinsurance space is what will happen to the traditional insurance broker and, more importantly for reinsurance, the reinsurance intermediary. No doubt some of the technological efficiencies that will arise with insurtech will eliminate the need for certain products and in certain lines of business the need for an intermediary.

For example, using blockchain for a reinsurance program may require a reinsurance intermediary to set up the program but will not need the intermediary to handle premiums or claims. For that matter, a direct cedent/reinsurer private blockchain could do away with the intermediary altogether.

Obviously, reinsurance intermediaries are all over insurtech and are seeking to become necessary players helping insurers and reinsurers innovate through technology.

Insurtech and Reinsurance Disputes

Innovative use of automation, AI, big data, and machine learning will truly change the claims process at both the direct claims level and at the reinsurance claims level. Thus, disputes over poor recordkeeping and failure to pay claims because of poor claims handling processes will likely diminish as it has been doing for several years. Additionally, traditional reinsurance audits—both claims and underwriting—may be rendered unnecessary by innovative technologies.

But, even with technology, the handling of complex claims and long-tail claims will still require the judgment of experienced claims handlers and executives. Additionally, reinsurers who invest or partner with insurtech companies may find a reason to dispute where representations made and reality does not comport.

There are many kinds of reinsurance disputes ranging from large-scale misrepresentations to a dispute about how a single claim was settled and ceded. Some are contract disputes, and some are matters of custom and practice. Smart contracts and the use of blockchain technology will eliminate some of these disputes. Use of AI and machine learning to underwrite may reduce claims of improper underwriting or breach of underwriting or treaty guidelines.

Nevertheless, AI and machine learning are only as good as the data provided and the information used to build the software. The old adage, "garbage in, garbage out," will continue to apply. Overreliance on AI could result in underwriting decisions that violate the terms and conditions of the reinsurance contract if the software learns but learns incorrectly.

As insurtech ramps up, and as technological innovations alter the insurance and reinsurance landscape, new issues and new disputes will arise. At the end of the day, businesspeople will still be negotiating contracts, and mistakes and misunderstandings, or misrepresentations, will likely never go away completely.

Conclusion

So, what can we look forward to? Insurtech will likely revolutionize the insurance and reinsurance industry by providing innovative solutions to complex insurance problems. Reinsurers will be right in the mix, providing the capital necessary to support insurtech cedents as they try to bring new products to market. The way we buy insurance is changing, and the way reinsurers provide security for insurance companies will have to change, too.