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Tech revolution ‘brings underwriting, operational’ dangers

Automated underwriting and the prospect of intelligent software selling policies to customers will require a “different way of thinking about insurance risks”, a new report says.

Consultant Oliver Wyman expects insurance advice and policies to be managed by intelligent software within six years, with automated pricing and underwriting facilitated by huge amounts of unstructured customer data.

This could create a “very dynamic asset-liability mix” and a “volatile market and insurance risk profile”, which must be managed in real time, the Guy Carpenter affiliate warns.

“Robust, automated asset-liability management processes and approaches are required to stay within risk limits.”

The report, which envisages the insurance industry in 2025, says the new pricing and underwriting methods “also require a different way of thinking about insurance risks. Today, these are mostly modelled and managed using static risk factors, such as age.

“In the future, unstructured data from sources such as social media and the Internet of Things will play a much more significant role (assuming policyholders allow access). The associated risk factors need to be properly understood, modelled, and managed.”

Oliver Wyman says insurers’ operational risks will also become increasingly digital.

There is a danger that smart software will make “suboptimal decisions on behalf of the company”.

“As important, the use of ‘intelligent adviser’ algorithms changes the nature of mis-selling and conduct risk, making them much more systemic… than idiosyncratic. Both the controls framework and the risk assessment and quantification framework need to be adapted.”

Oliver Wyman warns risk functions in today’s insurance companies “are not set up to provide oversight and challenge for such a business model and risk landscape”, and may be outpaced by development in other parts of the business.

Insurers should automate their risk identification processes and make better use of other sources of data, including external structured data, social media and other unstructured data.

In terms of skill sets, financial and actuarial specialists will be less needed, while staff with business, technology and coding skills will be in higher demand.