Look Back to Look Ahead

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As artificial intelligence (AI) continues to establish a foothold in insurance, it’s important to remember two things: (1) AI can be invaluable in automating routine tasks to reduce the need for manual intervention. (2) The predictive value of AI lies in hindsight; that is, its ability to analyze data, to identify patterns, and to predict outcomes is retrospective.

Predictive AI combines machine learning, AI, and statistical models to identify relationships between variables and to make predictions. To cite a few examples, AI can:

  • Assess and manage risk more effectively by analyzing data from various sources, including social media, credit reports, and medical records.
  • Predict the likelihood of claims, enabling insurers to offer more accurate risk assessments and personalized premiums.
  • Automate claims processing, reducing the time and effort required to settle claims and improving accuracy.
  • Predict customer churn: By analyzing customer behavior and demographics, AI can identify patterns that indicate whether a customer is likely to switch to a competitor, allowing insurers to target them retention efforts.
  • Forecast sales: AI can analyze historical sales data, seasonality, and market trends to allow insurers to prioritize the sales or products or lines accordingly.
  • Detect anomalies: AI can identify unusual patterns in data, such as unusual policyholder behavior or rating abnormalities, to allow for swift detection and resolution.
  • Optimize processes: AI can analyze process data to identify bottlenecks and inefficiencies, enabling insurers to optimize workflows, reduce costs, and increase productivity.

Generative AI, on the other hand, creates new content, such as images, text, and other media, by learning from, aggregating, and adapting existing data patterns. While generative AI is valuable in creative fields and novel problem-solving, its predictive value is limited to generating new content rather than making predictions about future outcomes.

What’s In It For Insurance?

AI is flexing its muscles in the insurance industry, by improving capabilities like customer service, claims processing, underwriting, and fraud detection. Its ability to analyze large datasets and to process information in specifically programmed ways enables insurance companies to enhance customer service by providing personalized policies and improving communication. AI-powered chatbots and virtual assistants can provide 24/7 customer support, answer common questions, and help customers with policy-related inquiries. AI can streamline or eliminate manual, time-consuming tasks; improve the accuracy of rating and underwriting; and bind policies faster. It can aid in policy comparisons, ensuring policyholders get the most suitable products for their needs. And it can help detect and prevent fraud by analyzing patterns and identifying suspicious behavior.

As AI continues to evolve, we can expect it to contribute more significantly to improvements in the insurance industry. Since it relies on data (past) to enable its predictive capabilities (future), it will always look back to look ahead.

In an industry that measures its success retrospectively (based on claims experience), that’s not a bad way to go.

Follow the Money

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Because we’re as modest as we are, we don’t like to brag. (But we will if we have to. 😉) We bring that up here because we were doing some research on the percentage of annual revenue some companies put back into their products. What we found suggested that in industries with long innovation cycles — and in which products are more standardized — companies may allocate five percent or less of their annual revenue for their products. Along with not bragging, we’re not inclined to say we’re the most innovative company on the planet. But we invest 22 percent of our annual revenue into our product.

Some of that may be attributable to the fact that we’re dedicated to serving U.S.-based property/casualty insurance companies only, which spares us some expenses other companies might incur. As examples:

  • We don’t have to produce materials or product versions that are multi-lingual or multi-currency.
  • We don’t have to build interfaces for foreign, third-party data sources.
  • We don’t have to address varying cultural nuances and business practices.
  • We can focus our efforts, allocate resources, and tailor our marketing, sales, and product-development efforts to one market.
  • We can simplify our compliance with laws, regulations, and even data formats.
  • We can establish and maintain deeper relationships with other U.S.-based companies, industry associations, and government agencies.
  • We can provide customer support tailored to U.S. time zones and business hours.
  • We can better target marketing messages and campaigns to U.S. businesses.
  • We can prioritize the product features and enhancements we develop to ensure they’re most relevant to the U.S. market.
  • We can enjoy relative economic stability as opposed to being exposed to the economic volatility of other global regions.
Money Isn’t Everything

That statement is certainly true. But money can be very influential. In our case, being able to put almost a quarter of our annual revenue back into our product-development efforts gives us discernible value over some of our competitors. And the corollary is that we’re investing that revenue for the benefit of our customers, who can be sure our software is as good as it can be, for the market we choose to serve, year after year.

No. Money isn’t everything. But if you follow it, you can learn some pretty interesting things.

The Psychology of Insurance

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Given the fact that we’re in the business of the mechanics of insurance (processing software), it had never occurred to us to wonder about its psychology … until it did. When we started to indulge our curiosity, one of the first things we found was an article from the December 2019/January 2020 edition of The Actuary called, aptly enough, “Insurance Psychology 101”. The article says this, in part:

It is unlikely the psychologists Dr. Edward Deci and Dr. Richard Ryan were thinking of digital technologies when they introduced their Self-Determination Theory in 1985, prescribing the human need for autonomy, competence and connectedness to sustain a sense of well-being and to flourish … Media psychology is essential to appeasing and understanding the insurance needs of future consumers whose native language is digital and a medium for human connectedness technology.

Well, there’s a mouthful, as well as a mind-full. But what, we wondered, is media psychology?

A Closer Look

Like so many things in actuarial science and psychology, some things are less complex than they appear. According to Dr. Pamela Rutledge, media psychology:

studies the interaction among individuals, groups, society, and technology to help consumers, developers, communicators, and society at large make good decisions … the advent of the Internet and social media has brought it to the fore … The advent of social media has made the landscape more interrelated and complex.

Granting we’re neither actuaries nor psychologists, what we derive from that definition is the apparent fact that consumers, developers, communicators, and society at large expect the Internet and social media to make things easier. What a coincidence. So, do we. That’s why we built the Finys Suite to be flexibly configurable and capable of adapting to emerging insurtech developments.

As for the psychology of insurance, a cynic might say people buy insurance because they’re paranoid. We tend to take more magnanimous view and believe people buy insurance to protect themselves from financial risk. That, too, seems sensibly simple.

Flip a Coin

In the end, it doesn’t really matter why people buy insurance or what media psychology is. What matters is that people do buy insurance, and we support the companies that sell it to them.

If nothing else, it gives us a greater appreciation for the industry we serve.

What’s the Difference? (Part Two)

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In our previous post, we wrote about the risks associated with system implementations including the project investment, lost productivity, re-implementation costs, consulting and legal fees, and reputational damage. That’s why we reduce our customers’ risk and exposure by employing a guaranteed-cost model (or guaranteed-cost contract). Using that model, our customers pay a fixed, predetermined price for a completed implementation. If cost overruns or unexpected expenses occur during the course of the project, we absorb them.

Here are some of the other benefits of a guaranteed-cost model include:

  1. Budget certainty: A guaranteed-cost model gives the customer budget certainty. It’s not if this, then that. Since the total cost of the project is predetermined and fixed, the customer can budget accordingly without worrying about cost overruns.
  2. Risk transfer: Since we assume the rise of cost overruns or delays, our customers have the comfort of knowing they won’t be on the hook for anything beyond the contract price.
  3. Motivated efficiency: Since we don’t expect to be compensated for any cost overruns — and along with the fact we’re committed to the satisfaction of our customers — the guaranteed-cost model is our incentive to complete the project on time and on budget. The increased efficiency and productivity benefits both parties.
  4. Simplified project management: Since the cost is fixed in advance, project management becomes more straightforward. Contractors can focus on delivering the project according to the agreed-upon specifications without constantly monitoring costs or negotiating change orders.
  5. Enhanced collaboration: By assuming the risk, we foster collaborative relationships with our customers because they understand we’re putting skin in the game.
  6. Fewer disputes: With a fixed price and greater collaboration, our working relationships stay positive and our implementation projects transpire more smoothly.

Will we try to convince you our guaranteed-cost model is perfect? No. But our track record might suggest it. We have more than 40 successful implementations to date. We humbly suggest you don’t earn a track record like that by doing it wrong.

Talk to us to learn more about how we get implementations right.

What’s the Difference?

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Depending on the studies you cite or the reports you favor, the average cost of a failed system implementation in the insurance industry can vary significantly depending on the size of the company, the complexity of the system being implemented, the amount of money spent on the system, the number of people involved in and the time spent on the implementation project, the extent or nature of the failure, and other factors. But no matter what studies you cite or what reports you favor, the costs can range from hundreds of thousands to millions of dollars. Ouch.

Some factors that contribute to the cost of a failed system implementation include:

  1. Project Investment: This includes the cost of purchasing the software or system, the implementation fees, and the cost of any customization or integration expenses.
  2. Lost Productivity: When a system implementation fails, the employees appointed to support the implementation lose all the time and productivity they’d otherwise have committed to doing their regular jobs.
  3. Re-Implementation Costs: If a system implementation fails, the company may need to start over with a new system or make significant modifications to salvage the project, leading to additional expenses.
  4. Consulting and Legal Fees: Companies may need to hire consultants or legal experts to help navigate the fallout from a failed implementation, adding to the overall time, financial, and opportunity costs.
  5. Reputational Damage: A failed system implementation can create internal and external repetitional damage: Internally, the reputation of the decision-making team and the players involved in the failure will be tarnished. Externally, announcing the failure to agents and others in the value chain will ding the company’s credibility and reliability, leading to lost customers and revenue in the long term.

While it’s difficult to provide an exact average cost due to the variability of factors involved, we can say this with a fair degree of confidence: Failed system implementations can have significant financial consequences for insurance companies. This underscores the importance of thorough planning, testing, and risk management throughout the implementation process.

Saddle Up

At risk of sounding self-serving, the best thing you can do to optimize your system implementations and minimize your exposure to risk and cost is to work with a vendor who’s been to the rodeo before. With more than 40 successful implementations under our saddle, we’ve been there, done that, earned our saddle sores, and learned from every one of them. That’s why we let you know what needs to be done upfront. And it’s why we developed our PREP methodology.

Experience. That’s the difference.

The Art in Artificial Intelligence

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In the December edition of Best’s Review, we came across an article titled, “Underwriting AI: Is It Aligned With Insurance Industry’s Best Interests?” It’s fair to say it left us feeling a little queasy, especially this part:

The rapid advancement of artificial intelligence is eliciting a wide range of predictions for its impact, from solutions to our most pressing problems like cancer and climate change to the availability of omniscient personal assistants to widespread misinformation and the disempowerment of humanity. These predictions are on the minds of casualty underwriters as they review a growing number of submissions from businesses claiming to be powered by AI. Perhaps no plaintiffs will be around to collect damages, but no one wants to have underwritten the AI application responsible for the disempowerment of humanity. While the artificial general intelligence that could precipitate an AI apocalypse is likely years away, it’s reasonable to be concerned about the harm that AI systems can cause today.

Well, now. There’s nothing like a good dystopian nightmare to keep us from getting too infatuated with technology, we alway say.

What’s Possible

Relying on AI for casualty underwriting reminds us of some articles we’ve read recently about using AI to detect plagiarism. One from semrush.com says:

Created in response to growing cases of plagiarism in the academic world, plagiarism-checking tools compare text against large databases of existing web content, as well as research papers, magazines, journals, and publications, to see if there are any matches between them.

Another from from copyleaks.com says you can:

Check for plagiarism using advanced AI to detect the slightest variations within the text, including hidden and manipulated characters, paraphrasing, and AI-generated content.

Yet another, this one from plagium.com says:

Plagium Originality AI Detector is a GPT-based plagiarism detection tool designed specifically to identify AI-generated text that has been copied or paraphrased from other sources … The detector is multilingual and can identify plagiarism in text written in various languages.

We get all that. But the same questions apply to AI for casualty underwriting as apply to all those plagiarism checkers.

What’s Necessary

Before we fall unconditionally in love with AI, let’s at least tap the breaks and use our slightly slower pace to ask these question, regardless of whether we’re talking about plagiarism-detection or casualty underwriting:

  • What’s “the truth”?
  • Who gets to define it?
  • What are the sources?
  • How current are the sources?
  • Who maintains them?
  • Who programmed the application?
  • Most important, the industry notwithstanding, what’s in your company’s best interest?

Do those questions mean we’re skeptical? We hope so. Do we believe in the potential of AI to be a constructive tool for the insurance industry and beyond? Yes. But putting AI to work in any capacity — like choosing a software vendor or checking out your daughter’s boyfriend — requires diligent vetting. If AI — like your software vendor or your daughter’s boyfriend — doesn’t seem like it’s going to behave the way you want it to, you’re better off knowing that before it’s too late. As the saying goes, it’s better to be safe than sorry.

AI may be a science. But making sure it does what you expect it to do is an art.

That’s Shocking: Part Two

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In the first installment in this series, we wrote:

We’re not necessarily in a hurry to return to horses and buggies. But we have to admit, those were certainly more simple times with more obvious risks and fewer technologies to master. On the other hand, more of us live better lives than ever before … We imagine requiring insurance to keep up is a small price to pay to pay for progress.

Well … we may have to re-think that a bit.

The October edition of Best’s Review contained two articles — “When It Comes to Insuring Electric Vehicles [EVs], It’s All About the Battery” and “Surge of Catalytic Converter Thefts Tied to Soaring Prices of Precious Metals” — that connected some dots and gave us pause.

About insuring EVs, the first article said this:

A Hyundai EV … bottomed out, damaging its battery’s protective skid plate and blowing out a tire … the only way to replace a skid plate is to buy a new battery for $37,000 … That’s an example of some of the hard  decisions insurers have to make about whether to total a car … The price of a battery fluctuates depending on the make and model of an electric vehicle … Most batteries appear to fall into a range of $10,500 to $22,500 … raw materials such as lithium used in the batteries increased the average cost of a vehicle to nearly $66,000 last year.

About the theft of catalytic converters and the rising prices (and the scarcity) of precious metals, the second article said this:

Catalytic converters … contain the precious metals rhodium, platinum and palladium, the most valuable of which is rhodium, whose value averaged $2,052 an ounce in 2018 and by 2021 had shot to $18,074 an ounce … catalytic converter replacements by policyholders jumped 1,155% nationally between 2019 and 2022 and by 6,400% or more in Oregon, Washington, Pennsylvania and Connecticut. In 2022, there were more than 64,000 catalytic converter thefts nationally … Insurance claims as a result of these thefts jumped to 64,701 last year, from 16,660 in 2020. Replacing stolen catalytic converters can cost between $1,000 and $3,500 or more, depending on the type of vehicle.

What do EV batteries and catalytic converters have in common? Precious metals, minerals, and rare earth elements.

Chicken or Egg?

We don’t know who’s getting the worst of it in this situation: The car owners who pay so much for EVs? The insurers who pay so much for battery and catalytic converter losses? Or the car owners who pay so much for EVs and the insurance to cover them? No matter how it all shakes out, it’s enough to make you think the Yugo wasn’t such a bad idea after all.

And it makes you wonder what the Doobie Brothers and Sammy Hagar would do if they were writing this song and this song today.

Turn it up.

The Wisdom of Wonder

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We heard someone say a long time ago, “You become what you count.” The comment was made in the context of a business discussion. It was offered in response to an inquiry that went something like this: “You’re a very successful, highly profitable company. But I don’t see any of that on your website or in your external communications. All I see is stuff about your people. Why is that?” Now you understand the wisdom of the comment.

We were thinking about that comment in reflecting on the upcoming Holiday Season. We’re not ones to count our losses. But we couldn’t help wondering what might be the most significant loss of which we’re aware. In looking at the state of the world at the moment, we realized it has to be our sense of wonder. So few of us find wonder in the world anymore. We’ve lost the ability (or the determination?) to see the world as children do.

The pursuit of truth and beauty is a sphere of activity in which we are permitted to remain children all our lives. (Albert Einstein)

Why is that? Can we get that ability (or that determination) back? We can’t think of a better time to try.

Perception is a Choice

Finding the negative in things is like counting our losses. It’s a refusal to see the positive, to recognize what we have and what we’ve gained. If we think about what we don’t have, we can have. We’re less likely to believe we’re able to get what we want, to follow our dreams, to make plans, to strive, and to prosper. Why do we do that? What’s the wisdom in it?

The invariable mark of wisdom is to see the miraculous in the common. (Ralph Waldo Emerson)

So, at this time of year, especially, we hope you’ll join us in celebrating what we have, in having the wisdom to wonder, in making a concerted effort to see the world the way we saw it as children, and to recognize the kinship with others we share and celebrate.

I have always thought of Christmas time, when it has come round … as a good time; a kind, forgiving, charitable, pleasant time; the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys. (Charles Dickens, A Christmas Carol)

From all of us at Finys to all of you who read this post, please watch this brief video. And please accept our most sincere wishes for a joyous and peaceful Holiday Season.

Got Me Under Pressure

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No. We’re not talking about the ZZ Top song. We’re talking about the pressure insurers are feeling from a very difficult reinsurance market.

According to an article in beinsure.com, “Global Reinsurance Market 2023: Challenging Renewals & Realignment“:

Mounting pressures in the reinsurance market … were exacerbated significantly by Hurricane Ian … reinforcing one of the hardest reinsurance markets in living memory. Demand-side pressures coincided with a severe capacity crunch, as capital providers pulled back whilst others were only willing to maintain allocations … driven by a significant impairment of dedicated reinsurance capital, which fell sharply as investment grade securities experienced their worst performance in over 40 years … Reinsurers must now navigate an environment of rising inflation expectations and higher interest rates, which has driven assets lower on a mark-to-market basis … Capital erosion of 15.7% to USD 355  billion at YE22 … together with significantly higher premiums, sent the sector’s solvency margin ratio …. to below 100 … [leaving] certain reinsurers more exposed to liquidity and credit risks at a time of heightened claims uncertainty.

Balance

Amidst that bad reinsurance news, there’s better news for non-life insurers, according to Deloitte. In its “2024 global insurance outlook“, the consulting firm writes:

Premiums are forecast to improve in both 2023 and 2024 to 1.4% and 1.8% year over year, respectively, mostly due to rate hardening in personal and some commercial lines … profitability is expected to improve through 2024 as higher interest rates strengthen investment returns, premium rate hardening continues, and expectations for slowing inflation lowers claims severity … Even in this environment, where risks are increasingly becoming financially unsupportable, there may be opportunities available for proactive non-life insurers to generate long-term profitable growth.

So, Then What?

We recognize this is easy for us to say. But insurance, by its nature, is a long game. Economies run in cycles. Markets run in cycles. Profits and losses run in cycles. That’s why insurance is, also by nature, conservative. Financial success is determined by informed risk selection, adequate pricing, effective expense management, operational efficiency, and claims experience which is, by degrees, capricious and unpredictable.

And we recognize this is self-serving, but we also suggest using a core-processing suite that’s flexible and configurable enough to scale with your growth and to operate efficiently and cost-effectively enough to not break the bank when things get lean.

As it turns out, if you’re considering such a suite, we know some guys.

No. Not the guys in ZZ Top.

Weathering Storms

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The September edition of Best’s Review ran an article called, “Slow and Steady”, about the resilience of mutual insurance companies. While the article covered life and health companies, too, it had this to say, in part, about property/casualty insurers:

In 2022, property/casualty mutuals posted a net loss while stock carriers had a profit … With net premiums written of $246.32 billion in 2022, property/casualty mutuals make up a significant portion of the overall U.S. property/casualty sector’s $782.31 billion in net premiums written. Stock companies had net premiums written of $446.2 billion … Mutual insurers have generally plotted a steady course with financial stability as a key goal. Indeed, between 2016 and 2021 only one mutual company became impaired … compared with 55 stock companies … While property/casualty mutuals had a challenging year in 2022, mutuals have a long history of weathering storms.

The April 2023 Best Special Report titled, 2021 US Property/Casualty Impairment Update, says this:

AM Best defines impairments as situations in which a company has been placed, via court order, into conservation, rehabilitation or insolvent liquidation.

As we wondered why mutual insurers are so successful at weathering storms, we couldn’t help thinking about how many of them rely on the Finys Suite to process their business. Then we remembered what we have in common with them.

There Are No Accidents

The more we thought about it, the more we realized how and why we’re so well aligned with mutuals. And a number of parallels occurred to us. Like mutual insurance companies:

  1. We build strong cultures. We’re as aligned with our mutual-insurance customers as we are with our people. That makes for good fits solid understandings.
  2. We value long-term relationships. Just as mutual insurers’ policyholders are their owners, we empower our people to act like owners. We give them decision-making authority to fulfill their responsibilities.
  3. Because #2 is true, we’re built to last. We keep our morale high, our turnover low, and our commitment to our people consistent, just as mutuals do with their policyholders.
  4. We’re financially responsible. We carry no debt because we owe it to our people and our customers to be financially stable and fiscally accountable.

That means, in effect, we’re building in our own protections from market and economic storms.

Not All Umbrellas Are Meant for Rain

There are four definitions of umbrella in the Merriam-Webster Dictionary. These are two of them:

  • something which covers or embraces a broad range of elements or factors
  • something which provides protection

Those seem to sum things up pretty well, don’t they?

Strong cultures. Personal and corporate alignment. Long-term relationships. Longevity built on treating people right. And financial accountability, resilience, and stability.

We don’t know if that’s necessarily a recipe for success. But we do know it’s working for us and for the mutual insurance companies we work with.