Perspectives interview with Michael Coles – Part I

Michael Coles is the managing director of Coles Advisory Partners. He discusses how the last few years have seen an unprecedented level of technological innovation in the insurance industry and what that might mean for the future of insurers, reinsurers and ILS funds.

Users who have registered (for free) can read part II of the interview here where Coles discusses data distribution and his outlook for the next five years.

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What has been going on over the last few years? Why has Silicon Valley suddenly taken an interest in insurance?

Financial technology was the start of where a lot of Silicon Valley people started to unbundle the financial world. Insurance is the next step in the progression. There aren't many industries that have a 35% acquisition ratio for the customer, so it's a huge opportunity. There are obviously many manual processes in there in a world that's full of technology, and that's where the industry is ripe for innovation.

How much has it taken off?

Quite a bit. Research suggests that, in 2015, about $2.5 billion was invested in insurtech. In total, the financial technology world has about $12 billion invested, so you can see it's a little over 10-15% of where financial technology was, and we'll see that accelerating over the next couple of years.

IBM had a great quote in one of their research reports that "the insurance industry doesn't have a problem with technology, but it does have a problem letting go of the industry's traditional monolithic value chain". So why are all these insurtech firms starting up? It's not because the insurance industry doesn't have the technology. It's because the insurance industry has an ingrained resistance to the change.

A lot of the systems that insurance companies are using were built in the 1990s or even the 1980s, so we haven't seen a lot of technology transformation within the last ten years. Legacy systems aren't necessarily themselves the problem; it's the connection between all the different legacy systems that is sometimes the hindrance. So now you've got a new system, but you've got to connect it to the old legacy system - that's the problem. So you've got the battle of inertia.

downloadDo you think that we are more likely to see disruptive innovation from start-ups or incumbents? Is it harder for insurers to innovate or start-ups to understand insurance?

The fact that some of the large incumbents are setting up separate corporate venture arms or innovation labs - that tells you what you need to know. They realise it needs to come from outside the walls of their existing corporate structure. However, the difficulty with insurance is that you don't understand the complexities of the processes without being in the industry, and that's what the start-ups don't have.

I believe collaboration will be the key to the success of the start-ups. Collaboration is key, and the ones that are going to be successful are the ones who are humbled by the carriers and really work with them and alongside them.

How do you expect the industry to innovate?

There are three main phases. In the short term, you're going to see these marginal shifts and improvements in innovation. In the medium term, you're going to see increased monitoring of customers using data and technology to apply better products and better price the risk. That is a hot topic of today's conversations on innovation in insurance.

For me, the most fascinating area is the ability to use telematics data for large accounts, such as the large property and workers compensation accounts. So far, the discussion in the media around the Internet of Things (IoT) has very much been in the personal lines space, and that's a huge industry, but for critical mass, you've got to sign up millions and millions of customers, whereas it only takes a handful of large commercial customers to start implementing better data and analytics for that to really become a significant factor and a monumental shift.

The third phase is out there, and at the moment, it's tough for people to wrap their heads around. Nobody has all the answers yet. But it's probably going to involve a shift of the liability. For instance, right now, you buy an auto insurance policy from your auto carrier, and in the future, Uber, Lyft and Tesla, etc., are going to be buying your policy for you without you even knowing about it. So the long-term innovation is this shift of liability as people own fewer assets and companies own more.

Users who have registered (for free) can read part II of the interview here.


Posted: Monday, August 15th, 2016