Insurance and more perfect information: transforming approaches to risk

Risk management and oversight, Regulation and supervision
/ Insurance and Asset Management

Insurance Governance Leadership Network, July 2018

Insurers have always sought to use information to sharpen underwriting and claims management. Today, aided by technologies like blockchain, sensors embedded in Internet of Things (IoT) devices, and low-cost genetic sequencing, insurers have access to vastly more information, allowing them to analyze, price, and manage risk with much greater precision. See Appendix A, on page 11, for a description of new technologies that are having an impact on the industry. Moreover, a new range of information is becoming available to insurance customers, both individuals and organizations, and many will use it when deciding whether to purchase coverage.

All of this is changing both insurers’ and insureds’ relationships to risk. While richer information will never entirely eliminate uncertainty or risk, it can reduce both, significantly changing the nature of a business that has for hundreds of years focused on managing uncertainty and pooling risk. Shrinking risk pools, micro-segmentation, and adverse selection brought about by more perfect information have the potential to dramatically transform the insurance landscape. One executive said, “If risk is gone, the fundamental insurance service of risk pooling is gone.” IGLN participants have raised the possibility that shrinking risk pools could lead to declining revenue and pull capital out of the insurance industry. On the other hand, better information could permit insurers to cover risks that had previously been uninsurable. In addition, higher-quality information creates possibilities for insurers to prevent and mitigate risks, complementing their traditional role of covering losses and paying claims.

Participants in recent IGLN meetings in New York and London, as well as dozens of pre-meeting conversations, observed several broad implications stemming from the widespread availability of information. See Appendix B, on page 14, for a list of participants. This ViewPoints synthesizes key insights emerging from these meetings and related discussions and centers on three themes:

  • More granular, detailed, and precise information is changing how insurers assess and price risks

  • Better information is pushing the industry beyond covering losses and toward risk mitigation and loss prevention

  • Insurers have new imperatives for competing in a world of more perfect information