Trade offs are common in insurance because of how products are manufactured, distributed and serviced. That’s why the management of conflicts of interest are so important. It’s the number one mitigation strategy for an insurer, situated at the heart of insurance.
Insurers are used to all this and have digital and human systems in place to get this right. The quid pro quo of this though is a risk that it becomes too common place, too ‘how things are always done round here’. So when a shift takes place, the danger is that it’s not picked up, not weighed up, as needed. A drum needs to be banged a bit to garner people’s attention.
I’m banging that drum now, for a key shift is underway and during 2025, insurers need to think carefully about how to accommodate it.
I’m going to explain this shift by reference to the innovations influencing the sector’s products and services, and how insurers work. It’s important though to remember that this shift will just as much impact existing things as it will new things. I’m just sticking to the former to keep things simple.
Beyond Pot Half Full
At the moment, the sector is full of stories about how this initiative or that innovation will generate all sorts of benefits for firms and consumers. There’s lots of enthusiasm to deliver, to make a difference, to change the game in some way. And that’s great, but it is also partial. There’s often more to such developments than what these stories talk about.
One significant reason for this partiality is the need to sound as ‘pot half full’ as possible for the investors both internally and externally who are providing their support. And that’s understandable, but rather dangerous. With all that money and reputation around, it’s not an environment that appreciates surprises.
This needs to change though. The reason for this lies in the political and legislative environment that surrounds the sector. It is signalling that not enough is being done to calibrate just what sort of impact those initiatives and innovations are going to have. For sure, benefits will come from them, but nothing else?! It’s a question that people in that political and legislative environment surrounding the sector have become a lot more open to.
And key audiences around the sector have been providing their answers, the most obvious one being consumer groups. For sure, these groups recognise that insurance does a lot of good, is pretty vital for modern life, but they’re turning those aspects around and giving shape and voice to what’s on the other side of the coin to all those benefits from this or that innovation or initiative.
Perhaps a coin isn’t the best of analogies, for both of its sides are equal. Indeed, the coin wouldn’t exist if they weren’t. A better analogy might be of driving a car: it can certainly go forward, but paying attention to bends and bumps in the road is a good tactic for reaching your destination intact.
Both Sides of the Story
What I often hear from the sector is akin to how fast their ‘car’ can go, how well equipped it is to service users, how great the outcomes will be. All very nice, but again, very partial. This was exemplified for me by a recent online conversation I had with an influential person in the insurance, technology and innovation arena.
He kept on emphasising the number of people who would benefit from a particular development, and challenged me to acknowledge that that made the innovation worthwhile. This I refused to do, not out of any disagreement with the figures he presented, but because of the figures he was not presenting.
It seemed pretty clear to me that the innovation he was talking about could have some form of downside. However, those downsides were not being considered at all. The focus was on the upsides that the innovation had been built around.
The situation reminded me a bit of when I worked in the London market, and the occasions when someone would drive a book of business to superb new levels, then move on to a new job as a result, yet somehow be less visible when the claims subsequently poured in.
The key aspect here is time. Returning to our innovation example, the focus of so much thinking about innovation is on the benefits it is going to deliver when you buy it / invest in it. There’s little about the impacts it could have. That’s because those often take some time to emerge. Get your time dimension right though and the trade offs, the net position, the bigger picture become clear. It’s what’s referred to as the fairness of time (more here).
Think Upsides and Downsides
My first key point here is that insurers need to start calibrating their initiatives, their innovations, in terms of both upsides and downsides. Recognition must be given not only to those who will gain from it, but also those who will lose from it. In other words, don’t come to me with what I’d like to know ; come to me with what I need to know. Especially if the latter ends up putting me on the front page of a business newspaper or in front of a parliamentary committee.
That’s a measure of how policy makers and legislators are thinking now. In the past, their interest in digital innovations was orientated around the exciting things that could flow from them. Now there’s a great understanding that sometimes, what is exciting for some may be a real problem for others. What policy makers want to avoid is having to pick up the bill for what comes out of those ‘real problems’. They want to avoid being the ‘insurer of last resort’.
This new calibration needs to better understand not just your target market, but how others could be worse off. This needs to be scoped, explored and monitored properly. To return to the car analogy, the journey needs to be weighed up not just according to what is hoped for, but what the problems that might be encountered along the way.
A Very Simple Example
Let’s use a very simple example. Assume that we are weighing up an innovation, the promotors of which say that it will deliver 8 points of benefit. Insurers should now be looking at how many points of detriment it will deliver. Let’s assume 3 points of detriment. Great, the promotors will say ; you can now press the ‘invest in me’ button. Even after the net position is recognised, the benefits are still greater and so should take precedence.
Not so fast. This still under-estimates how policy makers think now. For sure, the position is a net benefit, but the equally pertinent question is : is this the only position?
If you study the history and nature of innovation (as I did at university), what becomes obvious is that it is rare for there to be only one position. Innovations often come in various forms and varieties, competing for prominence. What matters are the rules and circumstances that lead to one coming to the fore over others.
The Difference Principle
My second key point here is around how policy makers now prefer to have big developments in essential sectors like insurance weighed up. In other words, what are (to refer to my earlier post grad work) the new political, economic and social rules being put into play here?
I believe those new rules are increasingly being influenced by a social justice agenda. And the key reference work for fairness as justice is the work of the late John Rawls. Rawls’ book ‘A Theory of Justice’ is widely recognised as the most influential work on political science in the 20th century. It’s a challenging read, but at its heart are a number of simple principles.
The principle I think insurers need to pay attention to is what Rawls called the difference principle. Applied to something like insurance innovation, it would read something like this. The way in which you choose to innovate should be arranged so as to present the least harm to those most likely to be adversely affected by it.
To return to our earlier numbered example, the difference principle would apply something like this. If you could innovate one way and achieve 8 points of benefit and 3 points of detriment, or innovate another way and achieve 6 points of benefit and 1 point of detriment, then the latter should be chosen, as it leads to the least amount of detriment for those most affected by it.
Think of Flood Re
Now some of you will be thinking along the lines of ‘so what’. Is there really a significant problem here? Well, think back to the time immediately before the launch of Flood Re. The benefits of individualised underwriting were being much lauded, allowing many to receive what sector pundits were calling a ‘fair premium’. The problem was that a fair chunk of people were getting an unfair premium. And I saw some that were getting eye-poppingly unfair premiums.
Their problem came to the attention of policy makers, mainly because academics had started to research their situation. What became clear to policy makers was that the detriment side of this situation was going to be significant, and that they were the ones most likely to end up picking up the bill. The sector was told to return to the drawing board and come up with something that would resolve the situation without that level of detriment being present. The result was Flood Re.
It can sometimes be hard for innovators to move from the singularity of their big idea, to the plurality of a range of big ideas. And it can be hard for them to bring detriment into their innovation equation. Perhaps the problem here though is less about working these things out, and more about their plans to grow big quick, sell out and move on.
The language of innovators doesn’t like to include things like compromise. Yet that language is not one determined by innovators alone. The innovations that come to the fore are invariably those that deliver value sustainably and that the public support. Innovation is just as much a social process as a technological one. Aligning the language of innovation with the interests of key audiences is an increasingly necessary skill.
A New and Powerful Audience
The UK Government recently announced the launch of a Financial Inclusion Committee in the Treasury. Stir in an established interest in financial inclusion within the Treasury Committee and what we have now is a political establishment setting new expectations around tackling exclusion and vulnerability.
As I made clear in this article this summer, there are three levels to vulnerability…
“Scoping vulnerability is extremely important. The starting point are the people who are vulnerable in terms of well understood indicators like age and disability. Then there are the people who the sector makes vulnerable by setting digital ‘conditions for participation’. And finally, there are those whose vulnerability is exploited through market ‘walking and optimisation’ practices. At the moment, there’s a lot of work being done by insurers in the first of the above. There is some (but not enough) work being done on the second. And there is far from adequate attention being given to the third.”
This new committee at the Treasury will be looking at those second and third forms of vulnerability, just as much as the first form. And in doing so, they will want to know what insurers are doing about them. Not convinced? Then follow the money. It is the Treasury who will write the cheques should the Government need to act as the insurer of last resort. And they are far from keen to pick up the bill for market practices that it could have in some way been steered to a less exposed position
To Sum Up
Insurers have to step up how they think about new initiatives, products and other such innovations. That’s because others have got ahead of them on this and captured the attention of policy makers. Ten years ago, policy makers would have been happy to hear about how much benefit will flow from this or that new digital step forward. Now they want to know about the downsides that could emerge, and about what alternatives could reduce those downsides.
This new language has been in the making for a while now. Insurers need to put the learning of it on their to-do-list for 2025. Without it, they’ll be listened to far less and judged more harshly.
