Pushing at boundaries and challenging traditional notions is what innovation is all about. Rethinking something that people have taken for granted for too long can open up opportunities for enhancing service, increasing efficiencies and generating revenue.
Take claims for example. The idea that the claim settlement should reflect the insured loss has held sway for a great many years. Is it time for innovators to knock this one off its pedestal?
It looks like that time has come, for insurers in the United States are starting to turn to claims optimisation. To explain this, I should start with the perhaps more familiar concept of price optimisation. The price version has the insurer setting the premium for insuring a risk according to what the policyholder is prepared to pay, rather than the level of risk that the policy is presenting. It involves using big data to work out the price at which particular types of customer will start to look for alternative quotes, and then progressively raising the premium to just below that amount.
A leading figure in the UK insurance market recently described price optimisation to me as “recognising the true lifetime value of the customer and reflecting that in a better price”. It’s a nice quote, so long as you’re the insurer on the receiving end of that ‘lifetime value’ and that ‘better price’, and not the customer paying for them.
I’ve yet to hear how that description fits in with the regulator’s interest in ‘fair outcomes for customers’. It would struggle to do so, for reasons I explain in this paper I wrote for the UK’s Chartered Insurance Institute last year. In short, the nature of insurance makes price optimisation highly questionable on ethical grounds. It’s hardly surprising that a recent PwC survey found that 72% of insurance CEOs think it will be harder to sustain trust in a digitised market.
With claims optimisation, insurers would seem to be abandoning all remaining hope of sustaining trust in a digitised market. Claims optimisation involves using big data to establish the amount that a particular claimant would be prepared to accept as settlement of their claim. So if all those algorithms pinpointed the claimant as someone in financially tight circumstances, then the settlement offered to that claimant would be optimised to reflect their greater and more immediate need for cash. This would involve tweaking the comparative speed of a cash settlement versus a replacement service and setting their relative offers to achieve the optimised position.
This still falls neatly within that description of optimisation as “recognising the true lifetime value of the customer and reflecting that in a better price”. Indeed, an insurer happy to optimise on price would hardly need to bat an eyelid at optimising that other value determinant: claims expenditure. After all, they would say, if a claimant is prepared to accept that lower settlement, why shouldn’t the insurer offer it?
Let’s be quite clear: claims optimisation is an exploitation of the unequal balance of information and economic power between a consumer and an insurer. It is unprofessional and it is unethical.
Might this view perhaps point to me being a naysayer on innovation? Not at all – I have a post graduate degree from one of the earliest courses in the UK on the study of scientific and technological innovation. That course taught me to recognise the multi-sided nature of innovation and to see that it is not some nature force of business evolution, but a mix of social, economic, philosophical and technological drivers.
Despite what vendors of ‘big data solutions’ say about optimisation, it is not a natural next step for underwriting and claims. It is home to a number of quite radical assumptions about what insurance is there to do and how it should do it. It would be nice to see some of those assumptions brought out into the open and debated, but unless Andrew Bailey at the FCA follows through on some of his hesitations about price optimisation, then I fear such a debate is unlikely.
I have heard some chief executives at leading insurers wonder whether price optimisation was ‘the right thing to do’. If, as it would appear, they no longer have any such qualms on the pricing side, then it is but a small step to them being equally relaxed about using it on the claims side. In that case, I look forward to listening to them explain their reasoning for doing so on a public forum like, say the BBC Radio’s ‘Today’ programme.
