How digital, data and artificial intelligence increase protection in a robust insurance sector

As the post-pandemic era emerges, and many of the conventional wisdom around our mortality and the ones of our loved ones have changed, there is evidence that customer perception around protection has changed.  Governments, policy makers, businesses and individuals have realized the real impacts of the gap in terms of businesses losses, healthcare costs and the lack of life insurance coverage. There is a generational opportunity and alignment to fundamentally change the trajectory with the application of digital, data and AI capabilities, which weren’t available even two or three years ago.
 

Bank Negara Malaysia (BNM) through the Financial Services Blueprint released in January 2022 and the recently released exposure draft for issuing Digital Insurance and Takaful Operator (DITO) licenses, has made it a policy priority to rapidly address the protection gap for Malaysians using digital technologies. This is line with observations such as that from the Life Insurance Association of Malaysia (LIAM), which is calling for the target penetration rate to be increased to 70-75%, an improvement from our long-standing threshold in the mid-50% range.
 

The objective is to evolve new business models to deliver inclusive insurance protection with a competitive and efficient eco-system to Malaysians. The DITO players are expected to develop new digital value propositions which will adopt new business models such as embedded insurance and emerging risk sharing models such as peer-to-peer and new B2B and B2B2C digital distribution models. Indeed, the BNM blueprint advocates the use of data analytics, telematics and other digital tools to provide improved risk assessment, underwriting, claims processes, and develop personalized products with stronger cybersecurity measures.

Before we examine the new models, let us briefly look into the issues the industry is facing which has led to the lack of progress, which we need to resolve collectively to move forward and achieve our objectives:

1. A fragmented business model which is reliant on traditional distribution models (agency and bancassurance)
2. Products and services which are based on actuarial assumptions with historical and demographical data as opposed to real-time and real-world behavioral data
3. Legacy technologies and operating infrastructure which are inflexible and expensive and inhibits creativity, innovation and agility
4. A deep-rooted culture and mindset which reward risk management rather than avoidance

The 7.8 million (number of underserved number Malaysians) ³-ringgit question is,” Can we achieve the Government and BNM’s stated objectives of delivering an inclusive, competitive and efficient insurance eco system?” 
 

The resounding answer is, “It depends”. It is not assured that the policy framework and intent alone will yield the results.  Here are some measures that can be taken: 

1. Potential applicants must be willing and able to define their customer segments and their value propositions. We have observed this through the success of US-based Haven Life where a Fortune 500 constituent, MassMutual established a digital-first challenger brand that sought to simplify and attract younger segments of the market in purchasing life insurance. By leveraging MassMutual’s data to underpin its automated underwriting modules and using clever marketing tactics such as lifestyle-oriented loyalty programs, Haven Life has positioned itself as one of the fastest growing direct-to-consumer life insurance companies in the market.
2. Adopting new business models which challenge orthodoxy to deliver meaningful protection to customers through the platforms of their choice. This is seen in PasarPolis, an insurtech in Indonesia which offers customized B2B2C products for its partnership network that includes Tokopedia, Gojek, IKEA Indonesia and Traveloka. Supported by 60,000 registered agents and 40 distribution partners, PasarPolis has issued over 1 billion policies between 2019 and 2021. This claim to success is underpinned by its full-stack integration capabilities and underwriting partnership with Tap Insurance Indonesia to offer highly differentiated products to customers and reach previously unserved segments of the market.⁵
   
3. Implement new digital and data technologies to drive real-time data-based decisioning, which encourage and reward good behavior. The UK-based firms, Insure The Box and Flood Flash, use telematics to offer personalized insurance. Insure the Box tracks driving habits, and Flood Flash tracks flood levels. Malaysian insurers, AXA's FlexiTruck and Etiqa's Drive Less Save More, are new initiatives that have emerged in the last few years to offer greater personalization for customers.
   

The regulators have a large part to play as well. With the innovation in product and business models, a progressive and fit-for-purpose regulatory environment which encourages the efficient use of risk-based capital and simplifies compliance and reporting will be an essential enabler.
 

In this post-pandemic world full of uncertainties and heightened risk perceptions, there is a significant opportunity for industry players as well as new entrants to fundamentally disrupt an industry which has remained largely the same since modern insurance evolved in the 17^th century. I am confident that with effective business strategies, disruptive technologies and a progressive regulatory environment, we shall be able to achieve our goal.