Modernizing Life Insurance

Photo: iStock.com/Eoneren

In business, change is not an option—it’s a necessity. Every enterprise strives to grow and innovate, from the mom-and-pop store to the Fortune 500 company. It’s the only way to survive. But the inertia of the insurance industry poses unique, though certainly not insurmountable, challenges to such change.

Our insurance industry is built on understanding risk, measuring it and then avoiding it or protecting ourselves from it. Actuarial principles are well-founded mathematical and statistical methods. As such, traditional actuaries are not fundamentally wired to turn something on its head and venture into the unknown. Nonetheless, exciting transformative change is happening all around us. It’s being driven by several forces, such as evolving customer expectations, new technology and the need to modernize to provide essential insurance to Canadians.

Ten years ago, buying an individual life insurance policy was antiquated, tedious, paper-based and an entirely face-to-face ordeal. A nurse likely came to your home for the invasive process of gathering your health history; your weight, height and blood pressure; and, to top it off, samples of urine and blood. Then you waited, often weeks, without any word, unaware if you would be accepted for insurance or how much it would cost you. The average policy took more than one month to place.

Now, a decade later, half of today’s policies are placed within 10 days. In an industry not typically known for its nimbleness, we can be proud of this achievement. However, with the current average placement time of 22 days for a policy, according to Munich Re’s 2022 Individual Insurance Survey, there is undeniable room for improvement.

COVID-19 has been a major driver of this change, most notably in the sale of insurance. In fact, the rapid transformation in the last two years alone arguably has outpaced the progress in all prior years. Proving the maxim “necessity is the mother of invention,” COVID-19 compelled the industry to adapt—and adapt it did.

• Because of the pandemic’s social distancing measures, advisers and insurers pivoted away from traditional in-person sales to digital means.
• As labs prioritized COVID-19 testing over insurance requests, and applicants were uncomfortable with strangers entering their homes, insurers reduced their reliance on nurse visits and blood and urine samples.
• With employees not going into the office, paper-based processes (finally) converted entirely to digital.

The pandemic super-charged transformation. The challenge now is to continue this trajectory and embrace change—without requiring a life-altering global event as a catalyst. It should be the norm.

Where can we go from here? Where do we want to go? We should ask ourselves these questions every day to ensure our industry continues to thrive and adapt to the needs of the customer and our environment. Then, we should push those questions even further: Will we reach a point where insurance is purchased in Amazon-style, one-click shopping? Can we underwrite an applicant with a selfie? How do we offer insurance products with coverages that ebb and flow with daily needs?

There are no easy answers, especially when you have a (virtual) pile of pricing models, valuation requests, experience studies and various actuarial activities vying for your time and attention. But we should still constantly ask ourselves how we can help drive change. Push the envelope with your curiosity and expertise—even if the ideas seem implausible. Most successful innovations start as quixotic pursuits.

Partner With Data Scientists

Data is an actuary’s best friend and typically is focused on decrement-related information—namely mortality, morbidity and lapse—with a splash of interest rates. With new technology, the pool of available data is growing by the zettabyte. For the uninitiated, a zettabyte is a trillion gigabytes or roughly 250 billion DVDs. Actuaries would be remiss to ignore the tremendous potential buried within the information around us.

Using scientific methods and techniques to collect valuable insights from data, data science has become an increasingly important area of expertise. And insurers are paying attention—at the time this article was written, LinkedIn had more than 800 job postings for “data scientist” in the insurance industry in Canada.

Data scientists’ contributions to the insurance industry cannot be underestimated. They use machine learning techniques to glean new insights into historical underwriting, in-force and claims data. They leverage new data sources that have not been commonly used in actuarial analyses, such as step count, quantity of sleep, resting heart rate and oral health. Data scientists can build analytics models that predict the likelihood a person will misrepresent their smoking status or build, two critical factors in determining one’s health. They also can use artificial intelligence (AI) techniques to identify fraudulent claims, which have ripple effects on experience studies, pricing and reserving. These are just a few examples of how data scientists can influence our industry—the list goes on.

However, data scientists should not work in a vacuum. While they are extremely adept at compiling and analyzing information, they do not always have the insurance expertise to know what exactly to search for and which actions to take. This is where actuaries, underwriters and claims managers come in, providing direction and guidance to get the best results possible.

As the world around us and, yes, the insurance industry, modernizes, actuaries must be open to the notion of change. As demonstrated, collaborating with data scientists shows savvy business acumen and introduces thought-provoking opportunities. But this is only the first step. If actuaries hope to break from the norm, they must communicate with other stakeholders—such as lawyers, technology vendors and cybersecurity experts—and capitalize on their expertise. It won’t always be easy, but the results will be well worth the effort.

Embrace Uncertainty

As actuaries, we are inherently risk averse. Ambiguity can unnerve us, and uncertainty is cause for skepticism. We’re most comfortable relying on assumptions that are well-founded in historical experience studies. We spent our exam years studying things like credibility theory and may even find ourselves in the occasional friendly debate on sample sizes. But what if we do not have historical data to rely on? What do actuaries do then? As noted, there are a plethora of emerging data sources, but their links to mortality, morbidity and lapse are not always clear. For example, we inherently understand that a person who exercises is healthier than one who does not, all else being equal, but how does that translate to insurance mortality?

The insurance industry always will have an ongoing debate between those who embody change and those who crave certainty. Understandably, and to no one’s surprise, actuaries generally prefer the side of certainty. But change is winning the debate, and it should because any company that doesn’t evolve will stagnate.

So, what do we do when faced with the edict to leap into the unknown, forgoing any semblance of stability? Embrace it with open arms.

That’s easy to say, but now we must put it into practice. Following the agile principles of the ever-evolving world of software development, the insurance industry is embracing the philosophy of “failing fast.” Simply put, this means experimenting while limiting the downside. Failing quickly allows you to try new approaches to business but cut your losses if they don’t work. Having the liberty to fail—without fear of penalty or ramifications—opens the door to change.

The concept of failing goes against the grain for nearly every actuary. We actively tried to avoid it during our many years of taking exams. But trying to avoid failure by only staying with what we know will lead to stagnation. This is not a recommendation to abandon the actuarial principles you’ve spent years cultivating. Rather, it’s a call to action to step outside of your comfort zone: Explore the unknown, ask the tough questions and examine alternative viewpoints. Don’t avoid failure. Learn from it.

Where Do We Go From Here?

Innovating in an insurance or reinsurance company often feels like trying to move a mountain. There are legacy systems to tackle, business plans to submit, layers of approval, risk management and compliance teams to convince. Once all that is completed, there’s the Herculean task of finding the budget and resources.

Fortunately, if the will is there, innovation in the insurance industry is unquestionably achievable. It requires a flexible organizational infrastructure, an enthusiastic and resilient workforce and supportive management.

Sometimes a company designates a team—an innovation team—charged with the somewhat ambiguous task of innovating. Reportedly, 50% of Canadian insurers have a dedicated innovation team in place. There are ostensibly more than 150 InsurTech startups in Canada, and more than $1 billion in funding has been generated thus far. These InsurTechs have the potential to revolutionize the industry. As actuaries, so do we.

“Innovation” is a ubiquitous business buzzword, but innovation itself isn’t the goal—it’s a means to an end. Always keep your ultimate vision in sight, whether it’s for your company, department or even just the task at hand. The path of change and growth is long and often labyrinthine, so while on that journey, celebrate your successes, learn from the failures and enjoy the ride.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2022 by the Society of Actuaries, Chicago, Illinois.