Data is critical for any insurer. But while valuable, its true power can only be unlocked through algorithms that lead to meaningful actions that improve the customer experience, says JC Oberholzer, chief system architect for Rubix Digital Solutions, subsidiary of SilverBridge Holdings.
This is resulting in what Gartner defines as the ‘algorithmic business’ – the industrialised use of complex mathematical algorithms pivotal to driving improved business decisions or process automation for competitive differentiation.
“In a world where consumers require better customisation from their insurance products, these algorithms become an important stepping-stone to success. Data analysis provides the insurer with better insight into where its product development priorities should be.”
While algorithms can help in this regard, the real value of the algorithmic business is in the space of interpreting and acting on the streams of data. These are typically generated by several sources and will enable the insurer to provide personalised service and offerings to clients.
“In the insurance industry, such personalisation relies on understanding individual risk profile and underwriting this profile. Data analytics, coupled with social media data and streams of data from the Internet of Things, will enable the insurer to understand this risk in detail and adjust the offering as the risk increases or decreases. The sheer volume of data, and the need to act on this data in real-time, will require algorithms to interpret and act on.”
While not new, the way algorithms are used in today’s digital world are significantly different from the past. For one, data scientists can customise algorithms to such an extent that previously untapped information is extracted from the extensive data warehouses at their disposal.
This means more nuanced solutions can be developed that target specific segments of the market. It also allows insurers to more accurately predict industry trends and the associated opportunities and challenges that those bring about.
“While the likes of artificial intelligence and machine-learning have received lots of exposure, these are built on algorithms that can understand customer behaviour. Additionally, these can be adapted by learning from environmental conditions and potential have an insurance product that is targeted to a specific individual.”
If data is the oil of the digital age then algorithms are the pipelines that bring them to full value.
“Effective business intelligence and real-time data analytics stem from the algorithms that extract the information required from the raw data. You can have the most sophisticated intelligence and analysis solutions available, if the underpinning algorithmic structure is not in place, it will not be able to operate to its full potential.”
One industry that has shown the benefits of this algorithmic business is that of streaming services. The likes of Netflix, Simfy, Hulu, Amazon, and so on use algorithms to tell people what movies and programmes to watch, what music to listen to, and what products to buy.
These are based on a keen understanding of the likes and dislikes of subscribers. So, why should insurance be any different?
“To a certain extent, insurance is battling against a traditionalist approach. For many, certain products need to be offered in certain ways. Granted, much of this used to be driven by regulation, the environment is quite different today. While still tightly monitored, insurers have a degree of freedom to utilise data in customising products and services better.”
The drive towards digital transformation will impact the industry and enable disruptive product as well as service offerings. The future lies not in how all-encompassing and complex an offering the insurer can offer the client, but in how easy it is for the client to understand his product, and how easy it is for the client to fully utilise this product.
“A key ingredient for the insurer is that it needs to be able to do this at scale to be competitive. It is still a long process to follow, but the signs are there. Insurers need to utilise all assets at their disposal. The battle for customers could very well be built around the algorithms companies use.”