Economic fluctuations are a topic of concern for insurers and for everyone, especially as the price of items continue to rise and the severity of natural disasters causes billions of dollars in damage. According to the
Insurance premiums for auto, home, life, and health are seen as mandatory budget items, but in times of economic hardship individuals can opt to decrease their coverages to better balance their budgets. This can backfire should they become sick, are involved in an accident, or impacted by a large storm.
Likewise, as the cost of materials increase and there is an upward pressure on salaries to match inflation and cost of living, businesses find their overall expenses increasing as well. Even where commercial insurance is necessary and regulated, businesses may choose to search out lower cost providers or reduce their coverages, creating long term risk for themselves.
Instead of individuals and businesses having to choose between coverage selections and managing their cost-of-living expenses, insurance companies can provide peace of mind and budget relief through innovating on how they partner with their customers to provide services and by leveraging advanced technology solutions.
How cost of living increases impact insurance risk
In some cases, higher prices for goods and services can reduce risk for insurers. If individual policyholders put off expensive travel, purchase fewer luxury goods, or look for entertainment closer to home, there may be fewer opportunities for high-severity claims. If a business has less clients or takes on fewer new projects due to rising costs, this can reduce liabilities. These are obviously not positive indicators but do have an impact on risk.
However, it's much more likely that higher cost of living increases insurer risks now and in the future, because it results in individuals and businesses delaying necessary preventative expenses. If a person puts off needs like basic car upkeep, roof repair, or regular medical visits, then they increase the likelihood of much higher severity issues down the road. If a business cuts costs by delaying an upgrade to their fleet, failing to keep their buildings up to code, or if they replace full-time experienced staff with less-experienced part-time employees, then liabilities can skyrocket.
In times of rising costs, insurers need to pay close attention to a drop in the up-front expenditure that prevents high cost claims later. These are the kinds of long-term risk prevention behavior that the insurance industry is very good at understanding (insurance is, in fact, built around this concept) while most every other person and industry is not.
Technology's role in risk assessment
For years, insurance companies have offered their policyholders discounts for loyalty to their firm, safety features in vehicles, alarm systems and sprinklers in structures, and more. Workers compensation insurances have long worked with their insureds on everything from safety training to distribution of workplace safety posters. Insurers continue to look for ways technology can offer advanced solutions that keep risks lower and customer premiums down.
Solutions such as Internet of Things (IoT) sensors can monitor for water leaks in a home, track how truck drivers follow safety standards, measure the status of industrial equipment, and can even follow the position and behavior of workers at a high-risk site. Personal and commercial property insurance providers are using drones, satellite imagery, and low flying aircraft to capture images of the buildings and property they are covering. This helps determine roof age and existing damage, and to see if a property is being properly maintained or if garbage is accumulating. Information from these new sources helps insurers both price risk appropriately and work with policyholders to make repairs and adjustments before severe damage occurs.
The data now available to insurance companies from these sources can make it difficult for underwriters to keep up with changes and evaluate each piece of information. Artificial intelligence (AI) and machine learning (ML) technologies provide an answer. These solutions can review images and data across all sources and provide insights and help summarize streams of data into something a human being can utilize. The "roof age" factor is one example of AI/ML simplifying a huge set of data into one human-readable value.
By proactively determining potential risks and working with the policyholder to remove or reduce these concerns, the less likely a claim is filed later. It's true that new sources of data and smarter analytics may result in higher premiums for some policyholders if problems are discovered. But insurance pricing is not just about giving the lowest premiums, but, rather, the correct premiums based on risk. When insurance premiums are targeted appropriately, it gives policyholders incentive to spend money on preventative maintenance, creating a better outcome and lower premiums for everyone on average.
Agility in claims processing and technology systems
While new sources of data and AI/ML technologies can help lower insurance risks and build a proactive collaboration with customers to keep premiums down, they are not easy to implement. This is not a simple software upgrade. Consuming data from new sources and adding AI/ML into an insurer's workflow takes careful planning and training to ensure that the models are created correctly and data is cleaned and accessible in real time.
To support this, insurers need a core technology system that provides the agility and flexibility to intake new data and integrate with advanced analytics. Legacy insurance systems that take months (or years) to update or that only provide batch data files once a month prevent this investment. A modern core system vendor must provide configurability for rapid adjustment, open APIs that allow integration with emerging technology, and detailed, easily accessible data to enable the training and usage of AI/ML.
It's not necessarily the job of a core policy system to provide AI/ML insight, advanced analytics, or to manage modern data collection like IoT or drones. Instead, the job of the core system is to support an insurer's use of those technologies however they see fit.
AI/ML offer smarter (affordable) insurance options
In today's world, with inflation and cost-of-living increases, it is essential for insurers to partner with their customers to provide a high quality of service and solutions at a properly priced rate. The better job an insurer does in calculating appropriate risk and rates for each customer, the lower the rates are for everyone. This technology is just one of the tools in an underwriter's toolbox to determine the right risk for each policy.
With AI/ML solutions accompanied by agile core technology systems, insurers can combat rising costs of goods and services to offer their customers coverage that is fair, aimed at their needs, and proactive. As a result of this personalized service, policyholders will be better able to adopt a practical approach to managing and maintaining their businesses, and to repairing their homes, autos, and their health.
