Fourth Industrial Revolution in finance and insurance

The disruptive technology of the Fourth Industrial Revolution in finance and insurance only necessitates an increase in transparency, definition and affordable common sense

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The worlds of medical and life insurance, pension plans and retirement annuities have long been associated with reams of paper and fine print.

Complex conditions and prerequisites, esoteric legal terminology and insider jargon—such discourse has often meant the consumer has had to abjure personal responsibility and knowledge to brokers already initiated into the hieratic rites of underwriting, opaque pricing structures and actuarial formulations.

This edifice has cracked in recent decades. In recent years, investment managers have shown greater agility in product design and radical reduction in commission costs.

But, as Independent Financial Planner, Pierre Taljaard of Cape Town, explains, the revolution in transparency and personalised attention is by no means complete.

“The traditional practice saw insurance firms wrapping investment and life insurance into one product. In the last few decades, the dominance of life insurance businesses has been challenged as asset management businesses have entered both the retail and pensions investment market.

“These managers demonstrated the ability to change the pricing structure previously used to fund the commissions paid to sales teams—insurance has typically been sold, not bought.

“A similar transparency has worked its way into the insurance world but not quickly enough for some, including regulators. The Retail Distribution Review, currently being developed and implemented by the Financial Services Board, will hopefully continue the trend of placing the client at the centre of all product development and distribution.

“As it is, the insurance landscape still largely thrives on complexity and lack of transparency,” Taljaard says.

One thinks here of the often unadvertised Prescribed Minimum Benefits of all South African medical aid schemes, or the recurring confusion concerning pre-existing conditions and other types of exclusions.

“Reams of fine print, differences in claim event definitions, different premium pattern options and bonuses to disincentivise clients from cancelling policies all add further layers of complexity,” he adds.

For Taljaard, true disruption in the market is not simply more bonus and loyalty systems, or even apps or online portals.

“I believe the landscape is slowly being personalised, where the needs of the client are assessed independently and where these needs are met by products that are easy to understand, fairly priced, and can be trusted to do what they say they will do,” he says.

But technology will obviously still drive competitive practice on the supply side.

A digital transformation

Forbes recently listed the top five digital transformations within both the insurance and healthcare industries.

Self-service dashboards, digital claims systems, instant price comparisons and the insurance of items when in use, have all shaken up the offerings of industry players.

Thokozile Mahlangu, the Chief Executive Officer of the Insurance Institute of South Africa (IISA), writes of an oncoming digitisation of the insurance industry, in which artificial intelligence (AI), big data, the Internet of Things (IoT), and blockchain all form a dynamic nexus, which must still be utilised with the customer and the market front and centre.

Mahlangu notes that AI and big data could be used to reduce the time and energy spent on detecting fraudulent claims, and to analyse patterns, trends and behaviour in a bid to formulate specific and targeted policies.

Along with Forbes, Mahlangu notes that IoT may provide a truly futuristic digitalisation of service in which wearables and ‘smart’ homes become sources of data and treatment in real-time.

She is, however, perhaps most enthused by the cryptographic record-keeping that the blockchain may provide all insurers:

“The blockchain is probably the one element that will have the biggest impact on the industry.

“A much bigger use of blockchain is in the development of ‘smart contracts’, which embeds immutable contracts in a blockchain that can then automatically execute when the conditions of the contract are met. It is defined as a decentralised digital ledger in which cryptocurrency transactions are recorded chronologically, unchangeably and publicly.

“For the insurance industry, this has profound repercussions in averting a number of issues, while it also helps establish authenticated, reliable and accessible transactions,” she says.

However, Mahlangu warns that none of these digital boons are game-changing unless they are driven to serve the consumer.

“The industry also has to ask itself what their consumers struggle with most. After all, insurance is about assessing risk, developing policies, getting premiums and paying out legitimate claims. Digital solutions need to address these fundamentals.

“Most industries have started their trek into the digital space. One thing is certain, those who survive this space have to either be pioneers or have something special that sets them apart. The digitisation of the insurance industry locally will surely make a meaningful impact if and only if it uses digital elements to better understand the needs, behaviours and wants of local consumers. The trends are already out there—how we collect, dissect and use the data is what will set industry players apart,” she insists.

The cyber threat

Naturally, the digital revolution, like any opportunity, comes with risks and threats. Cybercrime and data theft, as well as information security, have now become a key aspect of the underlying health of financial service providers and individuals alike.

An Internet of Things creates a hackable network of personal information. In this regard, as institutions compete in the digital sphere, they will also need to collaborate as a kind of guild in order to educate consumers and assist law enforcement and each other in preventing or prosecuting criminal networks.

Already industry players are beginning to offer insurance against this threat—as data is not traditionally an asset and as such, does not automatically fall under existing policies. AIG, to use one example, now offers insurance against data breaches, data liability, cyber extortion and interruption of business networks.

Again, such service needs to be directed, and re-directed again, toward the person and their needs if it is to remain profitable in a world of mass information.

The ever-prevailing human factor

The recent Momentum affair demonstrated the above principle vividly.

The insurer initially refused the R2.4-million life insurance claim of the widow whose husband had been killed in a hijacking, saying the deceased had neglected to disclose his raised blood sugar levels.

The ombudsman would find in Momentum’s favour but after public outcry, the insurer returned the premiums paid and finally decided to pay out the policy in full.

Reputation trumped fine print, in other words.

This is a risk for the industry of personal finance and insurance, as well as an opportunity.

At the end of the day, people require the five basics of financial health. Medical insurance, retirement saving, life cover, disability cover and some other form of saving.

Companies that can harness the potential of technology, pooled risks and savings, and the effects of compound interest, can meet these customers’ needs—but only if they truly focus on these needs and the people they serve.

The world has grown too small to be a distant financial institution any longer.

Jack Bogle, the recently deceased founder of the Vanguard Group, perhaps pioneered this approach in the personal investment industry.

He was the father of index funds and, thus, the now financial truism that it is better to own the market rather than to try to beat the market by using highly paid fund managers. Despite managing assets of more than US$5 trillion, he never became a billionaire—because his relentless focus was on keeping costs down for his clients and building wealth for them. His legacy lives on.

Come what may in the world of insurance and financial planning—be it the technological leaps forward, the Fourth Industrial Revolution or the imminent government intervention in private healthcare via the National Health Insurance—the human concern will remain the ultimate factor in the true success of the life of any institution or person. 

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