While the insurers have been nervously watching Sand Hill Road and the billions of dollars pouring into the InsurTech start-ups that are taking aim at the industry’s weaknesses in customer experience, a potentially more ominous development is taking place a little closer to home: the Quants are coming, and they’re targeting the industry’s ability to model risk.
Yesterday’s WSJ featured a profile of Two Sigma Investments and their joint venture with Hamilton and AIG to use predictive analytics to streamline both the buying experience and the underwriting of commercial risk.
According to the article:
Small and medium-size business insurance is a “gigantic market” and a “data science” problem, [Mr. Siegel] said.
“It’s not just about taking manual processes and automating them,” Mr. Siegel said. “By using our data science, we think we can do a better job of underwriting.”
The algorithms being used by the Two Sigma group’s venture, called Attune, will draw on detail that Two Sigma has obtained from vendors who collect public records and other sources that can tell AIG and Hamilton what they believe they need to know to understand the risk to be insured.
As our recent report on Understanding Insurance Industry Disrupters noted, there are three axes of disruption for insurers: Distribution, Cost Basis, and Product/Risk Analysis.
Most of the Silicon Valley-funded players are focusing on Distribution. While this creates noise and uncertainty, it does not strike at the heart of the industry’s core capability of underwriting risk.
But initiatives like this have the potential to change radically both the cost basis and effectiveness of underwriting risk. That strikes at the industry’s core value the same way that the capital markets’ moves into cat bonds are undermining reinsurance.
The Future is Already Here.
Back in 2011, we wrote about the Deloitte-Aviva pilot program that indicated that risk could be modeled entirely with third-party data, and advised the industry to plan for the days of zero-question underwriting. As far as we know, this Aviva project stayed in the lab and was never operationalized. But last summer, we highlighted MetLife’s Xcelerate program, which brought a similar approach to group auto insurance.
Now, the Two Sigma/Hamilton/AIG partnership is bringing it to commercial lines.
Meet Your New Competitors
Two Sigma’s founders, David Siegel and John Overdeck, cut their teeth at legendary Wall Street Quant shop D. E. Shaw & Co., the same firm that Jeff Bezos left to found Amazon. You know, the guy who says “Your margin is my opportunity.”
Insurers need to suit up. The future is coming at them fast.