The best insurers are embracing AI to increase their underwriting capability – which should also increase their share prices over time, say fund managers Nick Martin and Dominic Evans at Polar Capital.
Changes in technology and artificial intelligence (AI) are having a huge impact on multiple industries, to different degrees and in different ways. In the case of non-life insurance, there are already many examples of favourable use cases emerging. Insurance demand is driven by ever-rising risk and society’s increasing desire to avoid volatility.
As the world becomes ever risker and more complex, we expect to see the demand for insurance rising with it, and we believe the insurance industry is well positioned to capitalise on AI and machine learning innovation.
How AI will impact different insurers
How AI is going to impact an individual insurer is highly dependent on where that company is on the risk spectrum as an underwriter. For more underwriting risks, the impact of AI is likely to be seen through efficiency improvements as you already see in lines such as personal auto where underwriting margins can often be thin at an industry level. More of these simpler risks will undergo straight-through processing with pricing driven by algorithms and it will be only exceptions that need subjective judgements and are touched by a human underwriter.
In contrast, as soon as you start moving up the risk scale in commercial markets, particularly into the specialty markets, AI becomes an underwriter’s go-to copilot as it is already for a number of companies. AI will augment existing skills and help analyse risks that until now have been more difficult to assess, providing a better understanding and ability to price a policy. Insurers will also have a better understanding of risk aggregation which should reduce the potential volatility of underwriting profits. The impact of AI is not one-size-fits-all in terms of how it will impact each underwriter.
Deep pockets are more important when it comes to personal, auto and home insurance, as AI is likely to accelerate scale benefits. For commercial lines it is less about the absolute number of dollars available to spend on technology (in any case, many of these tools are relatively low cost) and more about having scale and expertise in a particular underwriting niche. It is about how you understand risk better than your competitors.
Backwards and forwards-looking data
For many companies, their claims data is likely to lead to a treasure trove of new insight. However, this data is inherently backward-looking and the world is changing, particularly on climate change and catastrophe risk. When you are underwriting the latter, supplementing insights from the past need to be combined with a forward-looking view. This requires an ability to supplement your own internal data with leading-edge new data sets from a range of sources.
Insurance is a cyclical industry but it has never been one where everything moves radically up or down together. Rather it is comprised of many little cycles with different lines of business moving in different ways. The best insurers anticipate these changes and are nimble enough to take advantage of them, something the larger conglomerates naturally struggle to do. More data and better analytics have helped reduce the amplitude of cycle volatility given an underperforming business is spotted much quicker today than it was in the past. This means corrective action can be taken sooner leading to more steady and less volatile earnings over time. This could be rewarded with higher valuations by equity markets in time.
Big Tech and AI are going to make significant changes to insurance underwriters – it will further augment underwriters’ toolkits and widen the already significant dispersion of quality across the sector. While other industries’ companies grapple with wholesale disruption in the face of AI, technology will set the stage for even more opportunity to sort the elite (re)insurance firms from the rest.
*Nick Martin is lead fund manager and Dominic Evans is a fund manager in the global insurance team at Polar Capital.
