Smarter Insurance for a Less Risky Future

Future Market

The insurance industry is being transformed by technological change – from drones to driverless cars. Duncan Sutherland considers how this will shape the future.


At first thought the insurance industry might not spring to mind when someone mentions technological change. However, ever since the first fire and accident insurers were set up in the UK in the 1700s, insurance has been a key enabler of every industrial revolution, transferring risk and helping business confidence in the process. While the dry-as-a-desert text of an insurance contract may not elicit the same excitement as the new ideas coming out of Silicon Valley, insurance continues to play its quiet role in the background and is itself wide open to technological change.


Despite the relative dullness in the industry, insurers must also adapt their business models to the fourth industrial revolution – technology – and align themselves for the future. Those that can successfully do that will be great income investments for the long term.


Take one of the largest segments in the sector, car insurance: if autonomous vehicles become the norm, will there still be the same need for car insurance? If there is an accident, who would be to blame? The ‘lead’ passenger in the vehicle? The car company that provides the software? The street sensor provider whose equipment monitors the traffic on the road? These are not questions that can be answered now but they are the questions that insurers are starting to consider as they assess how the sector could develop.


Even if not all future insurance offerings might face the same tectonic shifts as suggested above, technology is likely to have a significant impact on the sector. Let’s look at three further examples of how insurance is already changing as technology develops.


One area where technology is likely to be crucial for insurers is the innovation needed to navigate the perils of climate change. The wildfires of recent years are one such example; in the last decade they have led to approximately $55bn of insurance losses, compared to approximately $14bn over the previous 30 years. With wildfires unfortunately likely to continue, insurers need to develop ways of minimising the risks, while still offering insurance to policyholders. Increased use of drones is one method being used, with insurers able to highlight preventative measures that can be taken, such as the removal of the vegetation surrounding their property.


While drone technology helps insurers with the practicalities of the physical world, the enormous amounts of data that are being created provide opportunities for insurers to improve their risk assessment which should allow for better price policies. Hiscox, an insurer whose bonds we bought for some of our funds, has been forward-thinking in its use of data analysis to discover that small businesses with PO box addresses are much likelier to claim substantially higher insurance losses. As more data becomes available and the capability to analyse it increases, the potential advancement in Hiscox’s risk assessments could be significant.


Blockchain is making headlines thanks to the rise of cryptocurrencies. Yet blockchain also offers significant utility to insurers, especially when it comes to improving efficiency in a field renowned for its bureaucracy. Is it any surprise that Franz Kafka, the author of memorable depictions of nightmarish complexity, worked for an insurer?  


If we turn to the insurance intensive maritime sector, the use of blockchain allowed the Danish container shipping company Maersk to make a step change towards greater efficiency. Traditionally, Maersk could end up processing 100 documents from several intermediaries for the insurance of just one vessel. Through working with insurers, elements of Maersk’s insurance are now implemented with blockchain, not only providing Maersk with an improved service but also allowing insurers to reduce their costs. While it is still early days, blockchain usage will likely grow in importance, and those insurers developing it are likely to benefit materially. Indeed, further afield ZhongAn, a Chinese insurer and recent investment for our clients, is making blockchain a focus for the future of its business and could lead the sector in this area in the years to come. This progressive company’s bonds yield a healthy 3.5 per cent, with the potential for rating upgrades as the business scales in size.


Through this trio of examples, we have only scratched the surface of the changes that are likely in the years ahead, painting a picture of why insurers need to adapt. Cutting-edge data technologies have a huge role to play in refining the pricing of risk and cutting down red tape. As investors, we are continuously adapting our understanding of evolving business models, because technology changes are affecting even the apparently more mundane sectors, such as insurance. Ultimately, we believe this will help us pick great companies positioned for opportunities of the future and deliver sustainable income for our clients.

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