The Evolving Role of AI in Insurance

The Evolving Role of AI in Insurance

Multiple June 06, 2019 Posted in: Blog Posts, Pricing & Product Management

Co-authored by Mike Kelch, Adam Ramos, and Sam Heil.

The process of calculating the costs of risk transfer has been around for centuries. The first suggested non-life insurance contract dates back to the 14th century, when a farmer insured his wheat shipment on “all risks from act of God, or of man, and from perils of the sea.” Since then, pricing risk transfer has developed quite dramatically. This is due in part to advances in actuarial science as well as technology. To demonstrate the vast changes in calculating power, we can fast forward to the early 20th century. 

The introduction of mandatory workers compensation in the early 1900’s brought with it a detailed rating plan by state, business class and employment activity, but also computational challenges. Gustav F. Michelbacher said, “In the United States, the 1920 revision to workers' compensation rates took over two months of around-the-clock work by day and night teams of actuaries.”

An actuary in that era could complete similar calculations to today’s actuaries, but required much more time. With access to more computing power, the actuary’s role has shifted from tedious computations to more complex analyses and models that go into even greater depth. Some rating plans have hundreds of variables, which is something that could never have been done in the past. The increasing technological advancements throughout this time has largely changed actuaries’ job functions and continue to shape insurance. AI (Artificial Intelligence) is the latest technological development in trying to improve insurance operations by automating processes.

Today, insurance is more competitive and more accurately priced because of better data, computing power, customization and emerging technology. Lytx (formerly DriveCam) records 30 seconds before and after a crash. These recordings can be used to prove innocence or guilt in most cases, saving insurance companies millions in litigation costs. The insurtech boom caught many insurance companies off guard. When they did not adapt quickly enough, they lost a significant portion of their competitive position. New approaches to claims adjusting, premium pricing and underwriting will continue to arise. The best chance insurance companies have to remain relevant is to develop unique technologies and rating variables to outprice the competition.

One important industry change is the use of more personalized data in pricing decisions. In the past, companies have mostly used categorical data, like age or gender. However, due to the growing capabilities of technology, insurance companies are implementing the use of more individualized data. This expanding technology is present in usage-based insurance products, such as Progressive’s Snapshot, where sensors evaluate an individual’s driving behavior. Other new technologies, like wearables that can monitor health and “smart” home appliances that can detect dangers, are boosting safety and therefore improving the frequency of claims for insurance companies. These are also ways that insurance companies can demonstrate value to their customers, over and above offering them a lower price.

There are many areas where AI will impact the future of insurance. One such area is automated claim support. When a computerized system receives claims, it eliminates human error, is instantaneous and can run algorithms to prevent fraud. AI will also help evaluate the severity of an accident through image recognition software. Predicting customer behavior will become much easier through AI, e.g., customer surveys and facial recognition software.

Many startup companies lead these innovations. Sentiance is a data science company that uses AI and machine-learning algorithms to analyze human behavior. Insurdata uses technology providing high-quality exposure data that would have been impossible to capture in the past. This refined exposure data can be used to provide further insight on expected losses. Galaxy.AI specializes in improving the claims process by using user-submitted images to thoroughly examine the extent of a loss when an accident occurs. uses unsupervised deep learning to scale processes across a spectrum of autonomy. Slice is a pay-per-use insurance platform where consumers purchase their desired insurance contracts, which in turn increases efficiency.

These innovative startups may indicate that insurance operations are becoming automated. This would lower costs as well as quicken claims handling. We can see a fundamental shift from solely reacting when a loss occurs to a more proactive process.

Studies, such as “The Future of Employment: How Susceptible Are Jobs to Computerization?” by Carl Frey and Michael Osborne, suggest some of the more manual-intensive insurance jobs are already being eliminated by technology. Claims handlers, underwriters and insurance investigators are at relatively high likelihoods of being replaced, or partially replaced, by software and computer programming. Or, this may mean that employees will need to develop new skills in order to perform effectively. To what extent will these insurance occupations be eliminated? The current wave of insurtech companies is revolutionizing the insurance process and may give us a better understanding of how close we are to artificial technology improving insurance in a dramatic way.

Mike Kelch is an Actuarial Analyst with Pinnacle Actuarial Resources, Inc. in the Chicago, Illinois office. He holds Bachelor of Business Administration degrees in Actuarial Science and Risk Management Insurance from the University of Wisconsin - Madison. He has experience in assignments involving Enterprise Risk Captives, Loss Reserving, and Predictive Analytics. Mike is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.

Adam Ramos is an Actuarial Analyst with Pinnacle Actuarial Resources, Inc. in the firm’s Atlanta, Georgia office. He holds a Bachelor of Science in Actuarial Science from Florida State University. Adam has experience in assignments involving loss cost projections and loss reserving. He is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.

Sam Heil is pursuing a Bachelor of Science degree in Actuarial Science from Illinois State University with expected graduation in May 2020. Sam collaborated with Adam and Mike to research and present on Artificial Intelligence within Insurance as a part of the 2019 Pinnacle University event. 

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