As a young reinsurance broker at the dawn of the catastrophe bond era, I was blithely told by an investment banker: “You’re all buggy whip salesmen.”
The “you” was a reference to reinsurance brokers, a group he saw as hopelessly, and uselessly, outmoded as the buggy whip. The “buggy” was a horse-drawn carriage. Although a number of suppliers to the carriage trade successfully made the transition to the automobile industry, the buggy whip was a distinct accessory of the horse and buggy era, which became entirely obsolete in the emerging, and soon to be pervasive, automotive age. A Harvard Business School professor, Theodore Leavitt, famously coined the analogy in a 1960 article — Marketing Myopia — in reference to short-sighted enterprises that failed to transition to a new era because they saw themselves primarily as a focused product supplier, rather than as an adaptable business serving customer needs. In Levitt’s view, those types of companies fail to adapt, and will perish.
However, not all buggy manufacturers or their suppliers became extinct. Some, like Studebaker and Fisher, successfully made the transition to the auto industry. Nor did the reinsurance broker go the way of the buggy whip salesman. Indeed, the success of the insurance-linked securities (ILS) market is largely attributable to the efforts of reinsurance brokers. Like the carriage makers who successfully switched over to the auto business, the forward-looking reinsurance brokers sought to meet client needs; therefore they adapted, and thrived.
I am reminded of those parallels when talk turns to Artificial Intelligence (AI) replacing the role of underwriters.
A report by the Center for Business and Economic Research, cited by Carrier Management does just that. Underwriting is fourth on the top ten list of occupations that can be automated. The article headline for the report is: “Insurance Underwriter Among Most Vulnerable to Automation: Study” Surely, they jest.
The talk of AI replacing humans in many areas of industry and finance is not new. Will it make certain job categories obsolete? Undoubtedly. Will algorithms be able to provide rating for complex commercial industrial risks in nanoseconds? Certainly. Will these same rating algorithms be coupled with sophisticated trading algorithms to allow insurance carriers to provide near instantaneous quotes back to brokers? More than likely. Will this make the role of the underwriter obsolete? Hardly, and here’s why.
The underwriter’s role is to quantify and price risk at an acceptable level for both the customer and the carrier. In the early days of the insurance industry, certain perils were not covered: lightning, earthquake, hurricane, flood. Those were considered “acts of God” and could not possibly be quantified for insurance. Now, we have reams of data (petabytes!), centuries of recorded experience, and well accepted models. Clearly, such events and their associated risks are routinely assessed and covered today.
Despite the advent of massive datasets and technology to help with risk evaluation, experienced underwriters will continue to add value to insurance operations. Cyber risk was barely contemplated at the dawn of the new millennium; now, it is one of the fastest growing lines of business, requiring a deft touch to determine exposures and coverages. Before Hurricane Andrew, agents and brokers did not bother with capturing street addresses and postal codes in the U.S.; now it is standard. Learning to use new tools is one thing, but more important is having the combination of skill and foresight to understand emerging risk; including how to conscientiously and profitably, manage and transfer that risk.
The object lesson here is that underwriters are not buggy whip salesmen. Instead, the smart and progressive practitioners typically welcome and leverage intelligent technology — including AI, robotic process automation and cognitive systems — as a strategic tool to enhance both the art and science of timely, precise risk assessment.
And by the way, there are plenty of resources and services to help underwriters excel at their jobs. Xceedance is one of those resources, especially considering the intense business and insurance focus our experts deliver to enhance the underwriting and insurance operations of global clients.
Contact me to learn more.
George Freimarck is vice president, business development – Americas at Xceedance.