Some say that the insurance industry is a long, quiet river on which stately steamships cruise. Others say it is a shark tank where only the strongest survive. Which is right?
The answer is both. The insurance market is clearly mature, with a limited scope of action for individual players. There is, however, no question that merciless predatory competition is taking place, probably precisely because of this saturation. It is the perfect recipe for a ruinous price war, even though this is something that insurers really cannot afford in the long term.
Right in the middle of this tension are actuaries. They have to model tariffs that are both attractive for the customer and profitable for the insurer. This has always been the case, but now the industry is accelerating.
Insurance products today have to be solid and fast. The internet, and particularly comparison sites, have brought total transparency to the market. This has fundamentally changed customer behaviour. Customers now look for the cheapest tariff, and this is driving prices down. It‘s a bit like buying petrol. If Shell’s petrol is three cents cheaper in the evening, Aral’s regular customers won't have to wait long for a reduction. This means that insurance companies are having to become increasingly agile in their pricing. Actuaries must be able to adjust tariffs rapidly, as well as develop new ones and convert them into products.
Agile product design, outdated processes
Unfortunately, actuarial systems have often grown organically over a long period. They rely on processes and structures developed over time to meet particular needs. Many are manual and involve system breaks. This results in a high risk of errors, and also means that an end-to-end run takes a long time and is not easily iterated.
What’s worse, as a rule, is that actuarial systems use standard modelling procedures for tariffs. They use the same data and variables year in and year out. This leads to huge challenges when real-time modelling is required. Tariffs are often still stored in programmed calculation kernels. Without IT support, no adjustments are possible. A tariff change or the implementation of a new tariff takes a very long time. This is the polar opposite of the fast, agile and flexible service that customers, the market and sales channels are demanding.As a rule, is that #actuarial systems use standard #modelling procedures for tariffs. They use the same data and variables year in and year out. This leads to huge challenges when real-time modelling is required. Click To Tweet
Is the answer artificial intelligence? You might think so if you listen to the hype and watch trends in the industry. Fukoko Mutual Life in Japan, for example, has already replaced many employees with AI. I don’t think anyone would go that far when it comes to actuaries. One thing is clear, however: Actuaries have to change from being tariff and model administrators to innovation drivers in insurance. Technology can and must help here, and AI and machine learning are ideal for this.
Modelling and machine learning: A dream couple
If you take a look at the entire process from collecting data to deploying tariffs, there are plenty of modernisation options for each step. It is possible to transform actuarial processes from end to end. For example, machine learning methods are available on both visual and programming interfaces, making them easily accessible and usable directly by actuaries. The combination of machine learning and modelling could easily become a key actuarial competence in the future.
Changing actuarial and insurance processes should not be an earthquake that leaves nothing untouched. There are numerous well-functioning processes in insurance companies. New solutions can easily be wrapped around them, ensuring that well-functioning elements can be integrated and actuarial excellence increased.
The fact remains that actuaries, with their experience, sense of proportion and creativity, will remain the backbone of any insurance company. They do, however, need new tools so they can act quickly and shorten the time to market. There is no danger of algorithms replacing actuaries; instead, they will use technology to enhance and extend their work.
AI and algorithms are only part of the solution. The best tariff is useless if it doesn't get to the customer quickly. You can find out how this works in my next blog post.