China In-Depth: Parametric future
In a sense, there is nothing new about scenario-based insurance, but the proliferation of sensors and internet-enabled devices has allowed products to be developed that were simply impossible to deliver before as there was a lack of relevant information or the ability to track data in a timely manner.
The availability of such tracking and recording technology has resulted in the proliferation of affordable internet of things (IoT) devices and increasing connectivity that will be further enhanced with the adoption of 5G mobile network.
The products that have been developed tend to be low cost, high-frequency products, often based around occasional usage, such as travel or on products that have shorter terms and lower premiums.
They also offer opportunities for longer term products that use real-time data to reward the insured for their behaviour, ie mitigating or reducing risk.
Technology: IoT use cases – the rise of the machines
There are a number of key trends that are accelerating the adoption of these products: the development and adoption of technology, data sharing, and the impact of InsurTech startups on the acceptance of these innovations.
Wearables, GPS data, and telematics are enabling the development of new products. Autonomous vehicles (AVs) were once a concept confined to science fiction, but are now set to revolutionise personal transport.
AI and machine learning control the AVs, telematics can monitor their progress, while digital payments systems make it possible to process payments for rides and on-demand insurance products.
While insurance companies do not anticipate any major impact on their businesses for the next decade, the impact of AVs will be seen much sooner.
The more AVs that operate in a city such as Shanghai, the fewer private vehicles will be sold.
These vehicles will require maintenance like any other, but electric drivetrains are expected to prove more reliable and could last for more than 500,000 miles.
This will reduce the cost of running fleets. However, batteries do not demonstrate the same longevity, and their efficiency is compromised by extreme temperatures and consistent rapid charging.
Fewer vehicles will be used more heavily, as is typical with any taxi fleet. Depreciation of AVs to scrap value will be much faster, say some commentators.
Telematics saves lives – and money
If the world was to switch to AVs overnight, the pricing and management of risk would be much simpler. AVs will have to share loadspace with the much less predictable human driver for some time. Without a dominant technology or single applied model, it is not known how this will work.
For instance, some AVs that carry advanced driver-awareness (ADAS) won’t benefit from reduced premiums, but will, in fact, be more expensive than many luxury marques to insure.
As AVs take over our streets, there will be a reduction in traffic accidents and therefore claims on auto insurance.
Research from the Israel Insurance Regulatory Commission showed that between 2009 and 2012, vehicles that had internet-connected equipment – black boxes for monitoring driving behaviour – reduced claim settlement by half.
This will pay dividends for the insurers in China, which registered auto insurance premiums of more than 700 billion yuan in 2017. Even if the fitting of ‘smart car’ systems led to a reduction of only between 10% and 20%, that would be a saving that equates to tens of billions of dollars.
As a result, Chinese insurer 路上智驾 (Driving On The Road) saw an opportunity.
It provided and paid for the ADAS equipment to a fleet that contains a vehicle intelligent control system that it developed. This system analyses the data derived from the operation of the vehicle.
This provided a full suite of data that covers a vehicle risk database that allowed the company to develop a pricing model, marketing plan and claims based liability loss data that the insurance company could use to reduce its overall costs.
Data sharing: public/private partnerships
Making data available to insurers and reinsurers is helping them to model risk and improve products and coverage, particularly in areas such as natural catastrophes, agricultural and parametric insurance programmes.
Partnerships and the sharing of data has greatly increased the potential for parametric insurance in poorer, remote areas of China.
These markets often had poor coverage and would experience delays in the funnelling of government aid following a natural catastrophe.
Parametric insurance does not indemnify the specific loss, but is an agreement to make payment when a defined trigger event occurs. This event would typically be a natural disaster such as an earthquake or extreme weather.
These principles are applied to agricultural crop insurance and other normal risks that are not attributed specifically to a natural disaster.
The answer is blowing in the wind
Parametric insurance came into its own during Typhoon Lekima in August 2019, by validating and expediting claims.
In one example, a farmer who had insured his 585 acres South American white prawn farm with the People’s Insurance Company of China (PICC) in June suffered a total loss on August 10.
PICC verified the effect of the weather on the farm via the local meteorological bureau at 1000, generated a report at 1102 and the first claims were closed the same day at 1213. The total value of the claims was 266,175 yuan and the first instalment was delivered by the Ningbo branch of PICC to the farmer in Xiangshan that very afternoon.
The same day, Ping An Insurance received 26,046 reports, consisting of 24,669 auto claims, 1,188 property claims and 189 accident claims.
One customer reported their auto claim being settled on the app within two minutes. The fastest property claim took considerably longer, but still only six minutes.
New world order
This could not have been achieved without the application of new technologies. Ping An Property & Casual had made use of technology to attempt to minimise losses by contacting customers via telephone, WeChat, email and SMS to warn them of the dangers on August 5.
This shows the potential benefits of parametric over traditional insurance. Delays and duplications are avoided and all those insured have a sense of security from the fact that support will be there when it is needed.
But for parametric insurance to be successful, more data and expertise in analysing it is required. There is also a need to balance the need to pay where it is due with compensation bias.
InsurTech startups are developing technology that chief risk officers are able to leverage to improve the efficiency of their risk processes.
Their disruption to traditional models is allowing new entrants and their customers to reap the benefits of more flexible and relevant products.
The pace of change will increase exponentially. Parametrics has already been seen to work effectively. It has achieved the goal of greater security for private property, but also increased social cohesion as individuals do not feel excluded from the insurance market, nor face a delay for reparations in the event of a catastrophe.
AVs may be the only way for economies to encourage individuals to give up the century-old status symbol of a private vehicle for one which is efficient, cheaper to run and demonstrably better for the environment.
Neither are the finished article, but they have passed beyond proofs of concept into real-world solutions. Those who fail to heed the lessons from these experiences will be consigning themselves to the annals of insurance history.