Is the insurance market ready for digitization?

The fact that the insurance and reinsurance markets have somewhat of a slow-adopter reputation with regards to digitization is well-known, but is it still accurate? In this blog we introduce some of the counterintuitive results from our recently completed survey of insurance market professionals and unpack how digitization and automation is making inroads into the insurance market today.
June 13, 2023
Is the insurance market ready for digitization?
Is the insurance market ready for digitization?

Lack of standardization

One of the most commonly cited explanations for the comparatively slow adoption rate of digital and automation tools within (re)insurance is that insurance liabilities, unlike say equities, are inherently specific, and as such each book will always require a bespoke solution. This seems natural, given both the fact that insurance risks come in a vast variety of shapes and sizes and the reinsurance structures fitted to them also vary. This inherent difficulty with providing standardized reinsurance solutions has slowed the pace at which digital innovation can progress, and kept the focus centred on the long-term relationships that still tend to drive deal flow in this market.

One facet of this is the central role taken by brokers and brokerages, who remain as central to getting reinsurance deals done today as they were a hundred years ago. The range and quantity of clients that brokers service means they stand to gain a huge amount through any increase in standardization of contracts or automation of back-office processes. Ground-up solutions remain preferable to building on top of legacy systems, and this has created the space where brokers and other participants in the reinsurance market can work in concert with innovative new entrants on digital solutions. This theme was developed in detail in a conference presentation by Vesttoo’s Jonathan Yaari, VP of Data Science, and Minas Kalachian, Head of Structuring. Follow this link to hear their insights on this topic.

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This centrality of brokers in the value chain is as true for traditional reinsurance as it is for alternative solutions such as insurance-linked securities (ILS). However, the need for more capacity to enter the market is increasingly compelling all participants to seek out efficiencies wherever they can find them, and this is reinforcing a new openness to digital solutions.  

Today, more and more standardization is starting to appear right across the value chain. From how risk is sourced, modelled, and analyzed, right through to how it is structured, securitized, priced and placed with investors, standardization is necessary to accelerate these processes. Fortunately, advances in technology, especially around how AI and machine learning can augment risk modelling techniques, are now available which are assisting this push towards more standardization, and ultimately towards more efficient ILS solutions.

Vesttoo’s vision for a digital risk transfer marketplace for insurance risk

The logical end-point of the convergence of better technology, the need for more capacity, and the ability of digital tools to bring standardization to overwhelmingly manual and labour-intensive workflows is the creation of a digital marketplace for insurance risk. This would allow cedents, on the one hand, and investors on the other to enter into the market and match risk to capital in a manner that is fast and efficient, whilst simultaneously lowering their costs.

Whilst the challenges to be overcome in making this a reality remain substantial, the benefits that could accrue to all participants from this mean it may be closer today than ever before. Given their pivotal role in making deals happen, perhaps it is unsurprising that brokers are often the quickest to see the value in digital marketplaces.

As can be seen in the graphic below, 90% of brokers surveyed have either used, considered using, or are open to using digital marketplaces. This presents a striking contrast to a segment we term ‘experienced insurers’ given that they tend to have over 20 years of experience in the market, for whom the figure is just 60%.

Attitudes Towards Digital Marketplaces
Source: Survey of insurance market participants commissioned by Vesttoo, carried out by The Value Engineers

However, the fact that the total openness result even for experienced insurers was still over 50% represents a significant finding, and suggests that openness to digital solutions is permeating through all segments of the insurance market.

Our survey, carried out by The Value Engineers, included quantitative data gathered from 239 insurance professionals clustered into the segments above, and this data was augmented by a series of qualitative deep-dive interviews where selected respondents were quizzed further on their views.

This blog marks the first in a short series in which we will present some of the results of our survey. The aim was to ‘take the pulse’ of the insurance market on key issues such as attitudes to digital marketplaces, and in so doing to introduce as wide an audience as possible Vesttoo’s vision for a liquid, regulated and digital risk transfer marketplace. We invite you to stay tuned for more insights from our research shortly.

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