By Kataneh Emami and Vahid Mansoori
In its core, insurance serves to the most basic need of a society: being protected; one for all and all for one. Protection and caring for one another is essential to the survival of any society, for which three elements are fundamental:
- Risks should be identified, and their likelihood and impact should be determined,
- Right to be protected should be earned (or purchased) by any individual in that community who expects to be looked after,
- Trust in the community is essential to ensure protection, should risks materialize,
In fact, these elements are the main (and only) values that insurance companies add to the society. They identify and assess risks, determine the cost of protection based on each individual’s exposure, collect and preserve the capital, and use it to cover the insured when the risk happens. However, over many decades and centuries, processes and operations have become so complicated that the very basic purpose of the industry is sometimes being overlooked and not adequately or efficiently served in a timely manner.
Pace of change is faster than anytime in the past, which poses new threats on the humankind. New technologies might at any point expose people to unprecedented unpredictable risks, which are not yet identified, and for many which are identified, the extend of damage is not known accurately. Also in a globalized and connected world with many parties involved, the one(s) responsible for the damage can not be clearly singled out. The very obvious examples are driverless vehicles; nobody is sure about potential risks, who might be affected, and who is responsible if risk materializes. Another example is climate change, which (regardless of root causes) is happening. Impacts are not fully determined, and there is not adequate knowledge of who is exposed to what losses, when and how.
In one sense, insurance is a form of crowdfunding; the larger the pool of contributors is, the more efficient and effective the protection will be. However, there are still gaps in the industry. First of all, insurers have not reached all who are exposed to risks. In fact most of the people are uninsured or underinsured. Second, individuals’ right to protection is (usually) collected over time, and as they contribute to the pool, but individual’s exposure to risk (or future cost of protection) changes over time. In fact, individuals may use safety measures or develop behaviors to reduce their risks and vice versa. In other words and in an ideal world, full efficiency materializes when regardless of where people live, all who share the risk contribute to the same pool to collect the right of being protected by the community. This should be based on the dynamic and accurate measurement of their current risk, therefore dynamic pricing, and their current amount of collected right to the pool.
Trust is central and crucial to the concept of insurance. In fact, that is the main reason why this industry is highly regulated. There should be assurance that capital will be available whenever required. Also, mistrust is a reason for underinsurance; individuals are not sure whether they will be covered when the unpredictable happens. Complicated processes, long policies, full of legal jargons and fine prints, and commission-based sales teams add to the reasons for mistrust.
Ideally and in a perfect world, insurance would excel when risks are identified in real-time and defined transparently, with accurate measurement of their likelihood and impact on all individuals. Then all people who are exposed to the same risk are notified and gathered in one (virtual) community, with timely assessment of each individual’s required contribution for their desired level of protection, in an environment which is safeguarded from fraud, and provides tools and timely feedback to reduce individual’s exposure.
New technologies, including artificial intelligence, blockchain, big data and the internet of things, in a connected world will eventually be leveraged to eliminate inefficiencies and take insurance back to its origins and very core. This means that the future of the insurance would be a highly advanced end to end solution that disrupts the industry, and is extremely efficient, simple and intuitive to the end user. Path to excellence will not be fast and easy, but will happen eventually.
After all, just like Steve Jobs said “Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”