Learning to harness big-data to their benefit is essential for insurers and reinsurers looking to maintain and increase their market shares and profitability, according to Fitch Ratings.
The rating agency explains in a new report that those failing to keep pace with technological change and innovation, such as how to leverage big-data in a manner that proves profitable, “risk being marginalised or coming under pressure to consolidate.”
Many areas of the insurance and reinsurance market will be transformed, Fitch says, including such core area of the business as distribution, risk selection, pricing and claims management.
While the insurance and reinsurance industry has always leveraged large amounts of data, for insight, modelling and pricing, as a sector it has been slow to adapt to the emergence of new ways to store, retrieve, manage and analyse this data and so is missing out on what could be key insights.
“The gap is starting to close now that insurers have realised the potential of modern big data, but it has helped leave the door ajar for outside technology disruptors, which we believe will play a meaningful role as either direct competitors or technology partners to the major insurers,” Fitch warns.
This is important, as Insurtech upstarts are snapping at the heels of both insurers and reinsurers, recognising the opportunity to come into the market with business models that leverage the latest in technology and user experience, threatening to disrupt incumbents.
While there are clear advantages to embracing big-data and the technology required to utilise it, such as have been seen in motor insurance with telematics, life insurance with health data and P&C insurance with analytics and predictive risk models, there are also risks, Fitch warns.
Privacy is one issue and Fitch feels regulators are lagging behind technological advances. Pricing could raise other issues, such as discriminatory pricing practices, Fitch says, cautioning re/insurers to be aware of this when using big-data to make pricing decisions on specific customers.
Overall though, Fitch expects those who adopt big-data early on will benefit and find an advantage from it, “with the reward on technology investment increased by scale and network benefits.”
“Those who reach critical mass first can pick the best risks and achieve operational cost efficiencies compared to the laggards,” Fitch forecasts.
Those who invest less in technology, including smaller companies, are most at risk, the rating agency explains, also adding that those who benefit from technology driven scale may also become acquirers, as it could stimulate more M&A activity.