4 March 2015
Good Morning
It's a pleasure to be here. In case any of you are confused by a short, dark Welshman speaking with an English accent, I should point out it is a lesser known requirement of the ABI Director General to confuse the audience with a mismatch of name and accent. My predecessor, Otto Thoresen had the look and name of a Norwegian but a soft Aberdeenshire accent which frequently caused a double take when he met people for the first time.
My Welsh roots hail in part from Merthyr Tydfil in the South Wales Valleys which is best known as one of the epicentres of activity during the Industrial Revolution. And just as the production of iron and coal transformed the previously small rural communities of South Wales in the 18th and 19th centuries, so today we often hear that data is driving a modern industrial revolution which we are living through.
That makes it a genuinely fascinating time to be considering the challenges and opportunities facing the insurance sector in its use of data, which I will consider in my remarks alongside an assessment of the political and regulatory environment which is shaping the world in which the revolution is occurring. I aim to speak for a maximum of 15-20 minutes to allow some time for questions and discussion.
Why revolution?
'Revolution' is one of those over-used words in our language but it is more than justified when we consider how wide-ranging the changes driving the availability, usage and analysis of data are and how rapidly they are occurring:
- Data generation is now happening at a rate it is hard to comprehend with more data generated and stored in the last two years than in the whole of human history to 2012.
- Driving much of this generation is the sophistication of the devices we now routinely have access to - and which we get used to so quickly. The iphone was only launched in 2007 and yet smartphone usage now unites vast swathes of the human race across continents, ages and demographics that are otherwise have nothing in common. To say nothing of laptops, home computers and TV set top boxes.
- Add to these processing capabilities, with Moore's law of exponential growth telling us that by 2025 - just 10 years away - we will have computing capacities 64 times greater than that available today to drive both use of data by consumers and the ability of data analysts to assess it. (Although in the rural corner of North Essex in which I live, reliable broadband would be a plus).
So I think it is impossible to consider the combined effects of data generation, device development and widespread utilisation and the spectacular and inexorable growth of processing capacities as anything other than revolutionary.
And although both General Insurance and Long-term saving underwriting has become increasingly driven by the data processing capacities now available, I don't think as an industry we have begun to work through some of the issues this raises. That is why I am pleased to take part today and have committed the ABI to significantly increase its focus on the use of data in the future as one of my early priorities as the new Director General.
Wider Context
But the data revolution is just one of the defining characteristics of our fast-changing world, not the only one.
So, equally, are the unpredictability of our political and regulatory environments, both of which are relevant to how the insurance industry's ultimate use of data works through our legal and regulatory frameworks.
Political
We are living through a time of considerable uncertainty in both the UK, the EU and the wider western world as long-standing political allegiances and certainties fracture from the pressures caused by the speed and scale of globalisation, the ongoing economic and social consequences of the financial crash and the challenges of inter-generational fairness to name but a few.
These pressures manifest themselves through the rise of anti-establishment political movements such as UKIP here, Podemos in Spain or the Tea Party in the US. They are reflected in the way in which issues such as MP expenses create waves of rapid, deeply-felt bitter public anger and in how concepts which were unthinkable for generations, such as the break-up of the UK, have become quickly normalised and part of mainstream political discourse. And they make governing much, much more difficult as politicians face an almost perfect storm of spending cuts, tax rises and impossibly hard choices in return for less loyalty from voters than their parties have ever known. The paradox for us in the UK, of course, is that such pressures make it more difficult for our voting system to deliver the stable, strong government it is designed for. Instead, we face a highly likely prospect after the election, whatever the final shakedown of seats, of a weaker government based on a broader coalition of interests with a smaller majority than we have been used to for a long time.
What does this mean for us?
Weaker governments are less able to be brave and take long-term decisions; they tend to survive from issue to issue, navigating the choppy seas as best they can.
This makes it much more difficult to partner with them and to engage on difficult, but necessary, issues such as flood risk and legal reform, and makes it much more possible that industries like insurance that are viewed as having deep pockets will be tapped up to pay for priorities, just as we have been paying for the insurance fraud police since 2011.
Regulatory
Our regulators - although unelected - also have uncertain times ahead of them. In both the UK and EU, we have relatively new institutions post-crisis which are still finding their feet in different ways and prone to mis-steps, budget cuts and capacity challenges. We should expect this to continue and adjust our minds to think of regulation as an inevitably iterative process for the foreseeable future, far more so than in the recent past. And the challenges they face are driven by the same forces I have just described, making it more difficult for them to co-ordinate and make decisions with real impact.
Also regulators themselves are focusing on the effects of the data revolution as they attempt to fashion a post-crisis agenda. With so much more information - but not necessarily wisdom - at our fingertips, the understanding of behavioural science is increasingly important for both product providers and regulators.
And if data analysis offers opportunities to providers, as I will discuss shortly, it also offers regulators the chance to tackle the data gap which has afflicted them for so long between the regulated and the regulators. Duncan Minty pointed out in recent thinkpiece for the CII how the FCA's use of data analysis in cracking down on payday lenders marked a new way of approaching a set of regulatory choices, something Martin Wheatley has referred to as 'the technological empowerment of regulators'.
Consumers
The common thread between regulators, politicians and insurers of course are customers. Not just the digital natives we hear so much about but those older customers whose use of digital technology is increasingly converging with the habits of their more data fluent younger family members, friends and colleagues. And just as we see consumer attitudes being both shaped by data possibilities and determining how data is used, so broader consumer trends will also shape the external environment as we see greater personalisation and rapidly changing purchasing habits that affect everything from shopping to banking to buying a cup of coffee. If we fail to get this right - and I see you have several sessions today touching on it - we will get more of the risks than opportunities.
So what are they?
Opportunities:
1. Better risk management.
If insurance is the business of managing and pricing risk, the opportunity to get this analysis better and more accurate has to be more of an opportunity than a threat. The customer – commercial or domestic - in a 'flood risk post code' who lives on the top of a hill or the annuity purchaser whose enhanced annuity can offer the best possible rate by focusing on the data specific to that person's health condition will be better served in the future. The same considerations apply to health underwriting in travel insurance. There are no gold medals to be had in this; it is what customers will - and already do - expect. But the chance to do our jobs better and more accurately is overwhelmingly a positive, notwithstanding the challenges that arise when more accurate risk assessment means higher premiums for some.
2. Quicker claims processes and assessment
Similarly, if the claims process can be optimised by faster and quicker data, the opportunity to improve the industry's reputation at what is always a moment of truth is greater. The easier it is to use digital technology to assess a claim swiftly, share and verify key information and do the necessary anti-fraud checks before paying the claim, the better it will be in a way that can only help speed up claims and de-complicate a process which can often feel time-consuming and nerve-wracking for customers at a traumatic time in their lives.
3. Fraud
I believe countering fraud is also more of an opportunity than a risk. I appreciate there are different views on this but I am on the positive side; we have more cars today than ever before which leads to greater road fatalities than 30 years ago, but the overall benefit is still a net positive.
The more the industry can utilise the rapid processing capabilities and data comparison tools I flagged earlier, the better it can get at isolating suspicious claims early and tackling them effectively. This means premiums not inflated by hefty fraud costs and speedier service for the vast majority of honest customers.
4. New Products
Finally, we have the opportunity to develop new products such as those to meet the needs of the so-called 'sharing economy' and cyber risk respectively. I had the pleasure last year of working with entrepreneurs in the 'sharing economy' who help utilise data to provide modern ways of operating collectively. AirBnB is the most famous but there are plenty more, big and small, which will be a growing part of our economy and increasingly need insurance solutions that work for them.
Cyber risk is more well-known in the sector but is still a market in its relative infancy. However analyst expectations are that it will triple by 2017 as underwriting experience develops, and demand grows.
And if we look more widely afield at the long-term savings market and the impact of the Government reforms being implemented in April, we can see the opportunities for new products which more sophisticated availability of data can bring as well as the marketing of life and protection insurance based around the data provided by a wristband fitness tracker.
So what of the risks - or challenges, as I prefer to call them?
Challenges:
1. Data Use
As more data gets used, so we need to be prepared to engage fully in the debate about the permissions required to make the most of it. We have already lost the ability to offer cheaper car insurance to women than men, even though they are safer drivers.
But this could be just the beginning of the closing down of opportunities to use data even if customers are comfortable with giving their permission - as they were with gender pricing. To earn this permission, we will need to demonstrate not just the technical arguments but the values which drive them; the wish to offer fair premiums and mutualise insurance risk fairly in risk pools that can be justified and are a social good. And the standards we set have to be capable of working across national boundaries in different markets with different customer segments.
2. Reputation
This takes me to our second challenge - which is not directly a data issue at all. Reputation. If insurers continue to lag somewhere behind estate agents and politicians in the public's estimation, we will simply lack the credibility to win the arguments we need to prevail.
From my conversations with insurance CEOs, this is something I know they get but it is something everyone in the wider industry has to engage with too; brokers, price comparison websites and commercial partners to name but a few. That is why the ABI’s members have been at the forefront of tackling issues such as unaffordable flood cover, age-sensitive insurance and renewal pricing and why it will be essential, not an optional extra, for momentum to be maintained on issues like these which touch so directly customers’ views of our sector.
3. Transparency
This takes me to transparency. In our modern, information-rich world, operating in a transparent and open way is a crucial hygiene factor with customers and an important way into conversations about permission levels for use of data. We have to get better – a lot better – at explaining what risk factors we use and why they matter.
We have done this recently as part of our young drivers campaign, emphasising the compelling data that illustrates the safety risk to himself, passengers and other road users posed by a newly qualified 17-year old male driver – but also how quickly this risk diminishes as they gain experience of driving in a variety of conditions, especially with fewer passengers. Similarly with the rapid growth of telematics technology, the ‘black box’ shorthand language could not be more inappropriate; customers need to know what is in the box, not just the outputs which affect their premiums. Only in this way can we earn the permission we need to grow and make markets as competitive as possible, which can only be good for customers.
Conclusion
So, I see data as a fascinating subject in its own right and I am sure you are in for a stimulating day as you explore the different components of the challenge. But it is also inextricably linked with some of the other major changing forces of our world, a world that fascinates me in its possibilities, good and bad.
But the future is also in our hands as an industry. We need to have the courage and honesty to fix our own reputational challenges, the stomach for standing up for uses of data that benefit customers and the cohesion to do this together as one industry, not revelling in the discomfort which individual firms may be tempted to feel at another’s reputational media storm.
Most of all, we have to do what this market and this city does best – innovate. Just over 100 years ago, vehicle insurance meant insuring a horse and aeroplanes seemed as fantastical as some of the devices we are now told to expect in the ‘internet of things’.
The UK insurance industry, and in particular, our market here in London, has risen to every feat of modern engineering with products to match and I know it can do the same to meet the challenges of our ever-changing, ever- fascinating world.
Thank you.