The insurance industry might be flirting with AI, but it's still lagging behind in CX

Neil Raden Profile picture for user Neil Raden April 18, 2023
At times, the insurance industry appears to react at a glacial pace - while paying lip service to the customer experience via massive ad budgets. But is change afoot? In some segments, AI is enabling InsureTech transformation, but we're not there yet.


Two businessmen race with laptops in competition - © alphaspirit -

As I noted in 2019, Insurance is a complex industry with many layers, disciplines, markets, and regulators. It is, however, more reliant on data and analytics than most industries, with a few exceptions, but has struggled to keep up with waves of technology.

Of all the sectors highlighted in case studies and sales pitches for big data analytics and AI/ML, Insurance is infrequently cited, if not conspicuous, by its absence. It desperately needs digital transformation and can benefit from various technologies and applications. 

Some facts about the insurance industry:

As per Zippia, in 2021, the US insurance industry recorded $1.4 trillion in written premiums, split 52%/48% between Life and Annuity companies and Property and Casualty companies. Insurance contributes about $674.2 billion to GDP (about 3.1%). Health insurers are not included in these totals. Still, private health insurance spending of $1.15 trillion accounts for 28% of US healthcare expenditure.

To put this in perspective, this places Insurance just below the federal government's contribution to GDP and just above the information technology sector. The industry has cash and invested assets of over $5.5 trillion (about $17,000 per person in the US) and employs over 2.5 million people (about twice the population of Hawaii). The US insurance business represents about a third worldwide, split evenly with Europe and Asia. 

More from Zippia: The average Insurance industry profit margin is only 3-5%. However, this number is highly dependent on the type of Insurance, as some can have net profit margins higher than 20%, and others need more profit margin. While insurance companies have the management of risk in common, How they make a profit depends on the type of market they serve. Insurance companies are in the business of indemnifying their clients against uncertainty.

Commercial Casualty insurance companies carry substantial reserves for future and unknown claims in the "long tail" for which they earn significant income, often exceeding underwriting profits. Health insurers operate with a short tail of claims emergence. Therefore they underwrite and price to make a profit and carry relatively low persistent reserves.

The motivation for digital transformation starts with AI

AI is an essential aspect of digital transformation. Therefore, it is necessary to understand what motivates organizations to invest substantial resources in digital transformation. Digital transformation is not a precise term. All organizations have undergone a continuous digital transformation for decades. Today, the primary motivations for any organization to invest substantial sums and effort in digital transformation are: 

  • Cost: streamline operations by replacing human effort with AI. E.g., simplify and accelerate the overall process, such as the claims management procedure and underwriting. 
  • Consistency: underwriting and claims, for example, can be completed with uniform consistency and have results that can be auditable from transaction log analysis. 
  • Quality: Any work subject to audit can improve with better processes and AI. 
  • Fraud: ML algorithms can spot patterns of fraud that would require a great deal of effort for humans. The advantage is to not only detect fraud but act on it proactively. 
  • Sustainability: Sustainable Development Goals (SDG) is maintaining change in a stable environment. The exploitation of resources, the orientation of technological development, the direction of investments, and institutional change are all harmonious and promote the future potential for human needs and aspirations. 
  • Streamline Interactions with stakeholders: Insureds, providers, regulators, and others. 

The insurance industry struggles to keep up with technology. As one of the first business industries to use "data processing," the gravity of legacy investments tends to slow the transitions to new technology. This is especially true for life insurance companies whose contracts can remain in force for fifty, sixty, or even one hundred years.

The "drift" moving records from one epoch to another are expensive and painful. The pressures of digital transformation, with the promise of increased efficiency, new products and services, and new markets, come with increased risk, especially from the application of Artificial Intelligence (AI).

The effect of InsurTech firms 

A well-funded international business of Insurtech threatens to upset practices from customer-facing to underwriting to actuarial modeling. Moving from manual methods to unattended decision-making systems can subject an organization to risk from bias, privacy intrusions, security, and issues of fairness. The roles of actuaries will also change, and new guidelines for ethical practice are needed. 

Range of insurance types 

Insurance products are contracts, and risk drives policies and decisions. Some types are highly regulated, while others are virtually unregulated. Insurers need help communicating their offerings to individuals. At the same time, complex commercial Property and Casualty insurance policies for newly emerging products such as robotics are almost custom-made for each risk. Life insurance policies can stay in force for decades, while some coverage certificates may last only a day or a few hours. Liability policies may cover occurrences on a claims-made basis (only those claims made during the policy period) or a claims-incurred basis, where a policy may still cover losses incurred long after the policy expired; claims can still emerge months or even years later. Reinsurance is sharing or taking on other insurance companies risks. Only those in the industry understand the nuance of reinsurance.

Large and complex risks are usually "placed" (sold) by brokerage companies with highly trained specialists and managed by risk management professionals within the client (insured). Companies may wish to insure an umbrella policy called Difference in Conditions (DIC) that "drops down" to fill any gap. For example, a multi-national manufacturing company may require locally regulated policies in different countries with a patchwork of regulated Terms and Conditions.

So-called "personal lines" Insurance protects individuals against death, injury, or property loss. While commercial Insurance involves professionals deeply knowledgeable about their roles, personal lines typically involve a transaction between providers (brokers, agents) with a range of capabilities and customers who mostly don't understand the products. Improving this aspect of the industry is an area of mechanisms of innovation involving both technology and a reorientation of the relationship. 

Now that you are an expert on all aspects of the insurance business, we finally get to the point of High-level trends:

  • The insurance industry has pockets of intense competition, such as personal auto and homeowners and commercial Insurance for property and casualty. However, in all sectors, technology allows competing on price somewhat to recede in favor of expanded products and services that add value to customers. Still, there are mechanisms for avoiding competition, particularly the agency system.
  • Presently the reserve of the actuarial function, all forms of advanced analytics, data science and AI are spreading beyond actuarial to underwriting, marketing, finance, claims and product creation.
  • Underwriting, the process of evaluating and pricing an insurance application, is already the area of the most significant transformation within the insurance space. This trend looks set to continue in 2023 and beyond. New technologies are driving fully automated programs that streamline the process. Less underwriting cycles hinder life insurance carriers, in particular, from having a modern agent/customer experience that is fast and self-service. 
  • Insurtech data sources will continue to increase. Urban areas will expand the use of IoT in the infrastructure, drones will replace expensive and slow examiners, and wearable technologies will yield streaming data. Still, questions of ethics and privacy must be resolved. 
  • As the InsurTech sector continues to evolve, market share for legacy insurers degrades, forcing hasty adoption of high-cost/high-risk point solutions to access and manage new channels. 
  • Eventually, the insurance industry will be more competitive. Those applying digital technology will outperform others, as adopting core technology creates more agile contenders.
  • Regulators, always a mixed bag across fifty states and six territories, are slowly addressing the need for customers to be more informed and more transparent about their coverage, make choices with their providers with fewer barriers, and act more fairly. Traditionally accustomed to neglect and witnessing the leaders' progress, consumers will be encouraged to demand more flexibility from their insurance provider. Ultimately, this will help the industry to implement modern CX pioneers, provided it is funded as an opportunity rather than an obligation.
  • New embedded insurance offerings will drive further growth with an estimated US$3.7T market potential.
  • New customer engagement and risk removal approaches will see similar potential and help redefine Insurance and its role in people's lives. According to reinsurer RGA: "An insurance-in-a-box model offered by Insurtech Bubble7 enables mortgage and real estate companies to embed homeowners and life insurance into real estate transactions. The model allows a range of companies to embed widgets, APIs, and URLs; tailor quotes in real time; and appropriate Insurance offers seamlessly into existing home and loan purchase customer journeys."
  • Via InsurTech Magazine: ESG will be front and center. Reducing carbon emissions and achieving net zero goals will be an investment focus for the insurance industry, supported by increased digital sustainability and risk exposure. New regulations will deal with greenwashing and proceed toward a more sustainable industry. 
  •  It remains to be seen if InsurTech companies will upend the legacy insurers or if the latter will absorb the digital practices of the newcomers or merely absorb them. 
  • Over the course of 2023 and peaking in 2024, a combination of automation technologies (RPA, ML, low/no code), analytics technologies AI, predictive analytics) and connected Insurance (IoT, usage-based) will result in more targeted insurance products and increased loyalty.- via EIS
  • Despite the cost of living crisis, Insurance will continue to be considered an essential product. While consumers will cut back on other expense areas, Insurance for home, auto, and health, amongst others, are necessary and will remain a steady source of income for investors. - via EIS

My take

It is dangerous to generalize about the state of digitalization in the insurance industry. After all, the current day's loss book, displayed on a lectern in the center of Lloyd's Underwriting Room, is still updated using quill and ink. The messengers who carry notes around the syndicates are still dressed in livery dating back to the origin of Lloyds as a coffee house in the seventeenth century and are still called "waiters."

When Lloyds pays a claim, the "Head Waiter" rings a bell. Tradition in Insurance may not be as pronounced as it is at Lloyds, but it's still a factor. Equitable Life Assurance Society was founded in 1762. The Hamburger Feuerkasse is the oldest insurance company in the world, founded in 1676. 

In attempts to appear less aloof and adopt more of a customer experience, insurers have only sometimes succeeded. The application process is still a marathon, not a sprint, but many companies are on their second or third attempt at online and even automated underwriting. Advertising with mind-numbing, paternalistic lines like, "Nationwide is on your side," "You're in good hands with Allstate," or the maddening  “Liberty Mutual customizes your insurance so you only pay for what you need," (since when couldn't you select policy provisions in your auto and homeowners Insurance?) complete with a squawking emu, do nothing to establish a customer connection.

Clever commercials like Progressive's sometimes dark but usually funny bits, Geico's gecko, and Allstate's Mayhem character do much for brand recognition, but the customer experience still needs to be there. It took MetLife thirty years to realize that Peanuts cartoons and life insurance did not resonate. However, they must still nail an effective approach to help potential customers understand their complicated products.

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