The coronavirus has transformed businesses in a very short time, but could also provide insurers with an opportunity to rethink their old ways of estimating risks.
“Never let a good crisis go to waste,” Winston Churchill is attributed to have said. The sentiment could not be more relevant than in the days of COVID-19. While the crisis rages on across the globe, companies are scrambling to rethink their models and to ensure they can thrive past the pandemic.
Insurers are no different. The industry has been particularly hard hit from the crisis, struggling to meet the demands of their policyholders and finding their traditional models obsolete. As FinTech Global has highlighted in the past, this has provided flexible and fast-moving InsurTech startups with an opportunity to potentially leverage the situation and show traditional insurers the need to update their systems with the solutions of these new ventures.
In a new blog, Swedish WealthTech company Kidbrooke provides a clear example of one aspect of their old models that insurers could look at. The venture was founded in 2011 and recently took home a spot on the coveted WealthTech100 list of the most innovative companies in the sector around the world.
In the new blog, Kidbrooke suggests that insurers and InsurTech companies should look closer at economic scenario generators (ESGs). In short, Kidbrooke explains that ESGs have been instrumental for a long time when it comes to asset liability management. Simply put, ESGs empower companies to estimate and predict risks.
However, what Kidbrooke suggests is that ESGs may not always go far enough as the world is tremendously more complex these days than the scope of what these tools have measured in the past. Global events like the coronavirus pandemic could affect financial markets in everything from regulations to asset risks. However, it is unlikely that they would’ve predicted the outbreak of COVID-19.
“ESGs are not crystal balls and would not, ceteris paribus, have provided any direct mitigation to these challenges,” Kidbrooke suggests. “However, as we prepare to make our first tentative steps into the ‘new normal’ we must surely re-evaluate the role that enhanced analytics can provide for asset allocators.”
The firm also notes that traditional use of ESGs can impose significant modelling reliance and potential bias in both upstream and downstream processes.
Kidbrooke suggests that wealth managers and insurers reconsider how ESGs are being used. “An ESG should not simply be a data dump of historical prices but offer enough customisation of that data to enable the client to take control,” Kidbrooke writes. “Features such as flexible model hierarchies, hybrid term structures and dynamic benchmark calibrations should be standard deliverables. In doing so ESG frameworks can re-vitalise their purpose in firms and permeate emerging mission critical workflows for asset allocators.”
The Swedish WealthTech firm predicts that by tweaking these tools, ESGs can become vital resources for firms as the empower insurers to better define new mission critical operational processes within the organisations which rely upon them.
“Modern ESG validation solutions are parsimonious by design and can be delivered as light-touch and hosted or as a fully managed service. Super-charging your ESG solution with a comprehensive, auditable and customisable validation overlay is now not an ‘if’ but a ‘how and when,’” Kidbrooke continued.
“The world has changed and actuaries and others involved in complex asset and liability management, will face unique and complex challenges in the coming months and years. However, they are no longer just equipped with pen and paper. Solutions abound in all the fundamental elements of insurance provision. ESGs have been and will surely become an increasingly critical part of that solution architecture.”
The global InsurTech space has gone from strength to strength over the past five years. In the US alone, the sector raised over $7.8bn across 418 transactions between 2015 and 2019, according to FinTech Global’s research. Moreover, it’s clear that the sector matured over that period with the average deal size increasing from $13.7m to $38.2m during that time.
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