Insurance industry learning to embrace the risks and rewards of insurtech
The financial services industry is not known for its willingness to take risks, but a number of Canadian insurers have opened innovation labs around the world and partnered with insurtechs – hoping to be winners – but preparing to fail if necessary.
Rino D’Onofrio, president and CEO of RBC Life Insurance, told a LIMRA LOMA conference in May that the Canadian industry has invested billions of dollars in insurtechs. The small companies, usually start-ups, develop so-called disruptor technology, building new industries and creating breakthroughs in areas such as artificial intelligence (AI).
“Are all of those going to be winners? Absolutely not,” said D’Onofrio, who is also chair of LIMRA LOMA. “But some will succeed.”
For its part, RBC has innovation labs in a number of cities around the world, including Toronto, Orlando and San Francisco. Last fall, Manulife opened a new lab in Singapore, adding to its innovation centres in Boston and Toronto.
“A lot of companies are really focused on innovation and you are going to see more of it,” he said.
These centres are reaching out to other companies, universities and institutes to come up with new technology, especially in areas that deal with consumer protection like cybersecurity and contingency planning, he said.
An industry like insurance has always found it difficult when a project fails, but D’Onofrio said many companies are learning to move on and try something else as part of a major learning process.
“The challenge here, traditionally I believe in the financial services-insurance space [is that] we always think that something has to work all the time – it’s that culture that’s pervasive – but they don’t have to work all the time. … Failure is an option.”
Like many areas of insurance and financial services in general, there has been an increasing push to incorporate AI, said Pavel Abdur-Rahman, an associate partner at IBM Cognitive (AI) Consulting Practice in Toronto.
AI started with digital, including social media and mobile, moving people from an organization-centred economy to a personalized economy – and bringing with it products such as mobile wallets and social media apps as well and enabling consumers to pay with their cell phones, said Abdur-Rahman.
While some may be hesitant about how pervasive AI can become, Abdur-Rahman said it can empower users by removing mundane or unwanted tasks.
For example, IBM Canada is working with mining company Goldcorp at its Red Lake mine in northwestern Ontario. Goldcorp is using IBM’s data-analysis system to sift through 60 years’ worth of data to help geologists decide what areas might hold valuable gold and even to let them to know if there are unsafe situations at the mine.
“IBM has gone through a significant analytics journey over the past 10 years,” said Abdur-Rahman. “We have generated $1 billion of business value ourselves sharing how we apply analytics across the organization.”
He said IBM is involved with many Canadian players to use AI in the asset management, advisor and client space.
He gave the example of how AI can work with a property and casualty company by alerting customers to, say, a major impending hailstorm. The company can text clients telling them to move their cars indoors. In the end, clients feel the insurance company is looking out for them, and at the same time, the insurer will avoid a large claim.
As well, Desjardins has been advertising that it will contact owners if there is a leak detected in their home.
On the life side, some insurers such as Manulife with its Vitality program are interacting with clients about their health and their choices in lifestyle and incorporating those with the pricing of insurance.
“There is still a lot of change management that has to occur – there’s inertia. But we’re trying our best to drive the option of technology. Insurance clients, I would say, are not the fastest movers.”
But like banks that worried clever fintechs would take a piece of their pie, insurance companies are clicking into the idea that AI and insurtechs can work together.
D’Onofrio also predicted that when it comes to regulation, insurance companies and advisors are in for more of it on all fronts – international, federal and provincial. He said regulators are making “serious and far-reaching” changes in everything from cybersecurity to reserves for insurance companies.
Even closer for advisors will be new CRM3 rules. CRM2 regulations, which outline more transparent fees and commissions paid to securities and mutual fund dealers, came into effect in mid-2013 and were phased in over a few years. CRM3 would extend those disclosure requirements to the full MERs of investment funds. Groups like the Investment Funds Institute of Canada said earlier this year that it is ready to have a meeting on CRM3 with the Canadian Securities Administrators, the Mutual Fund Dealers Association of Canada and the Investment Industry Regulatory Organization of Canada.
The insurance industry will undoubtedly have to follow suit, said D’Onofrio. “As part of its ongoing efforts to provide investors with more transparency, Canadian regulators are requiring greater transparency in the disclosure of segregated funds.”
Taxes on insurance premiums
Also on the way, predicted D’Onofrio, could be sales taxes on insurance premiums across the country. Changes to Saskatchewan’s provincial sales tax were announced in the province’s latest budget, increasing the tax from 5 per cent to 6 per cent as of July 1, 2017, and charging the tax on premium payments for life, accident and health insurance policies, which includes most insurance premiums for group plans. D’Onofrio wondered aloud whether other provinces will now follow suit.
D’Onofrio said managing the price of prescription drugs remains a major issue for insurance companies. The pan-Canadian Pharmaceutical Alliance negotiates the price of drugs and has worked well in holding down the price of generic drugs as well as some biologics, he said, but the negotiated rates do not apply to patented drugs. He said the Canadian Life and Health Insurance Association has been very focused on trying to ensure that these drugs are financially available for more people.