On this episode of the “AI Wisdom – Talking Innovation in Insurance” podcast, host Ron Glozman speaks with with Dr. Michel Leonard, Senior Economist & Vice President, Insurance Information Institute, also known as Triple-I, about the immediate and long term impact of COVID-19 on the global insurance industry. Click the play button to listen or read the full transcript below.
Ron Glozman: Hello and welcome to “AI Wisdom - Talking Innovation in Insurance. On this podcast, we talk to business and InsurTech leaders about how artificial intelligence is transforming the way we buy and sell insurance. I’m your host Ron Glozman, Founder and CEO of Chisel AI and a strong believer in the power of AI to help people work smart and enrich their lives. So, let’s get into it.
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Ron: As the world conforms to social distancing and work-from-home becomes the new norm for many to combat COVID-19, what will be the impact on the global insurance industry? Will some segments of the industry be impacted more severely than others? What is the economic outlook for the industry as a whole? I’m very pleased to have with me Dr. Michel Leonard, Senior Economist and Vice President, Insurance Information Institute. Join me today as we discuss the macro impact of COVID-19 on the global insurance industry. Dr. Leonard, it’s a pleasure to have you. Do you mind introducing yourself?
Dr. Leonard: Of course, Ron. Thank you very much for the opportunity to join you and speak with your listeners today, it’s great. I’m originally from Canada and live in New York now. And I’ve spent a lot of time in the UK and that seems to be, kind of, the folks that you reach so it’s going to be great today to chat together.
I’m the Senior Economist at the Insurance Information Institute where we’re, kind of, the Brookings of the insurance world here in the U.S., we’re based in New York and D.C.. We’re a nonprofit, research, and education organization, we don’t lobby, and we’re one of the sister organizations of the trade associations for the insurance industry. Our members are mostly P&C, we have about 90% of premium written represented by our members, and a little bit of health and life, of course, as well.
My own background is as an Economist and Data Scientist for 20 years. I was Chief Economist at Aon, at Desjardins, and at Alliance. I also teach AI and economics at Columbia and at New York University. And currently I’m here in New York and just looking forward to this conversation.
Ron: That is quite an impressive resume, thank you so much for taking the time. I’m curious to get your thoughts. Right off the bat, I think everybody, you know, one of the main topics that everybody hears about on the news, and it’s a little hard to run away from is, obviously, the coronavirus outbreak. I’m curious to get your thoughts. Obviously, people are working from home and feeling the strain of social isolation. Do you have research on the topic, both short and long term and where you think it’s going to go?
Dr. Leonard: I think it’s hard for anyone right now, if you’re in research, to say that you wouldn’t have any research in that topic. But let me focus a bit on how we approach this issue and what, hopefully, your listeners will find useful from our perspective. So, obviously, we look at it from an economics and an insurance standpoint. I’m glad this is a global audience because a lot of our global outlook, actually, it looks at what’s happening into the U.S., and the UK, and elsewhere around the world. And for COVID-19, what we’ve done is, we’ve structured it as follows. First, we’ve come up with a discussion, forecast, and assessment of how the virus and the pandemic are impacting global macroeconomics, policy and so forth, and then we’re translating this from the macro, the economic, to the industry, into the insurance, and then bringing it down to different lines.
So, let me start by talking a bit, if that’s okay, on the economic side. You know, we’ve been going through this in the United States since February and March, we went into lockdown in March. It’s debatable how much the extent to which we’ve exited that, but, certainly, it’s at the state level as you all know. Since the beginning, we were somewhat more conservative than the, I would say, than the IMF (International Monetary Fund), and OECDs (The Organisation for Economic Co-operation and Development) of the world, and the central banks in terms of our expectation of the economic impact of COVID-19. We weren’t as dire as the investment banks, the financial markets and since then, I think we both have come a bit more to where we are in the median. So that’s made us very happy in that regard. So, we currently have been getting more negative, more pessimistic about the extent of the impact. Frankly, I think all of us who follow this either as professionals or just as citizens of the countries impacted, we’ve all seen that we didn’t have a break this summer. We all expected to have a summer break and maybe or maybe not have a second wave. Now, we’re simply ongoing in that regard. Certainly, that’s more true in the United States than it is elsewhere. In Canada, now you have some issues in Quebec and so forth coming back, in the UK as well, France, the continent has been a bit better off.
But, certainly, right now we’re looking at growth for next year. And I prefer to do a range here because we are in uncharted territory and I could give you a 3.9 versus 3.98. But I don’t think any of that makes sense right now. What we have to look at right now is ranges when it comes to GDP and our understanding is that we’re going to see anywhere from -4% to -8% if we have to be much more specific, -5% to -7%. A little better in Europe, in Canada, and a little worse in the U.S., specifically with regards to COVID.
And that puts us in line, frankly, with the stress tests that have come out from the IMF and the OECD in the last few weeks. Their official baseline scenarios are very optimistic, -2%, -2.5%. That’s just unrealistic, frankly. But if you look a bit more under the hood, is what I would say, at the stress test and the more refined numbers they’re putting out or the more granular numbers they’re putting out, they’re getting to that lineup for, that’s for 2020. And that’s a big swing from last year. We were around, I think, 3-point something last year or 2.9% depending on who was making the forecasts or the assessment. So, it’s a swing of, wherever we end up, it’s going to be a swing of 5% or 6%. And you don’t swing back, that’s just historically unique. You don’t swing back from that to +2% or +3% which is what a lot of folks are discussing when it comes to forecasting when it comes to next year. So, we’re also a bit more in the negative for next year. So, we’re seeing, you know, -2%, -3%, -4% for next year. And you know, normally, I’m much more specific in my forecast, but I think this is a time when this is important for economists to show humility and to say, "Hey, this is all uncharted territory." And stress test or not, there has to be uncertainty and it’s going to be negative, and it’s going to be more than usual, but there’s as a great deal of uncertainty.
Ron: And just to clarify, I assume that it’s going to be compounding. Like, it’s a compounding...
Dr. Leonard: You do have your degree as you said. Well, it’s year over year on the basis of current numbers as of Q3 and it would be nominal. And it’s always compounded when it comes down to it.
Ron: I’m curious, and maybe, you know, do you and the IMF align? Like, will the different sectors be impacted differently between, let’s say, like, commercial insurance, and L&A, or P&C versus other industries?
Dr. Leonard: Oh, absolutely. Absolutely. Well, you know, the IMF has China as part of its membership, and the Chinese numbers are quite – how would I say? – I’ll just leave it at that. And also, as a result of it, there needs to get consensus when they come up with their programs. The same thing with the CDC that we saw, a lot of multilateral and supranational organizations have the same challenges. So, if we take out the numbers from China in the context of the IMF and we look at their baseline, they are very optimistic, they’re at -2%, -3%. I mean, China right now, I think the latest numbers, they’re actually not even in the positive now but they’re in the 5%. I’ve seen that last week. Very difficult to process these numbers from an economic and a structural standpoint. But putting that aside, the IMF baseline can be seen as very political, consensus oriented. That’s normal, nothing wrong with that. But if any one of you wants to go deeper into this, look at their stress tests that they’ve come up with, one is a baseline with ending basically this year and then there was a second scenario that’s continuing into next year. That’s the most likely by now. I think everyone would agree on that. So that’s where are we are. We are glad that the stress test from the IMF have gotten closer to our earlier, more pessimistic estimates than theirs, at the same time, their baseline is still overly optimistic. So that’s that.
Now, the second question is, of course, it’s going to be different depending on the industries. Of course, it’s going to be different just focusing on insurance depending on the lines, and it’s also going to be different depending on the country. So, let’s just start with property and residential and commercial property and take out the casualty part of that. The impact there is actually somewhat positive in terms of claims. We expect the numbers are starting to come in but it’s still too early. I mean, the benchmark there is the OECD publishes a report every year and the previous year, and sometimes it’s the previous, previous year. But it’s a great report, it’s published in January or February. And it’s the best one out there if you want to look at the data behind all of this for the OECD for the countries that your listeners are from. But the expectation which has been confirmed from early data is that, because of more utilization of commercial real-estate factories and so forth, we’re going to have fewer claims, it’s just common sense. And then on the residential side, because folks are at home, they are better able to monitor leaks and other things. Water leaks represent 60% or so on average of property claims on the consumer side. So, folks are at home, they can measure it better. So that’s good news overall on that regard.
Now, of course, it’s not COVID-19 but we have to look at what’s happening in the United States and around the world. It’s been a very active hurricane season, it’s been, as we know, a very active wildfire season, and there’s also been extreme weather events throughout the world, in Japan, Southeast Asia and so forth someone has to take into account. So, certainly, any improvements, let’s call it that way, due to lower claims on the side of property will probably be nullified by increases due to a higher unexpected, extreme weather, hurricane season, so forth. That’s for that.
Now, there are some lines that are, and that’s across the western world. It’s a bit different in Europe because Europe had less closures in terms of business interruption, in terms of time. The U.S. is going back, Canada, it depends, and so forth. The UK, we also know there’s debate there, so we’ll see. Now, moving to, a big issue like business interruption, Workers’ Comp.
The business interruption is still a dominant issue. I’m sure your listeners are familiar with this, whether BI policies, business interruption insurance policies aim to cover something due to a non-material virus and there’s been a great deal of debate around that. A little difference, frankly, between how things are playing out in Europe and they’re playing out here in the United States. Early on in United States, there was an acknowledgment even in insured groups that wanted to get better coverage, extend the coverage, that the sanctity of contracts had to be respected, and there was almost no discussion about rewriting retroactively, contracts.
In Europe, and there’s some decisions right now in the UK, there’s been some decisions in France, the FCA is coming out as it was in court last week and I think its end of September, there’s a decision coming up in Ireland, France had some decisions last summer, Canada, I don’t think there has been yet but I might be ignorant on that one. But the difference there, what’s important to keep in mind is that both the FCA in the UK, and the Bank of Ireland, and some court cases in France have indicated that "unclear" policy wording should be interpreted in the most favorable way to the insured. And that’s a bit different than what’s been done in the U.S. where it’s not a question of how favorable it is to one side or the other, it’s been a question of, what does the contract say and so forth. So, if it’s not covered if it’s not in the contract.
Ron: So, I’m curious, I just want to dive into that. We had Dr. Robert Hartwig who is an Associate Professor of Finance and Co-Director of the Center for Risk and Uncertainty Management. And he shared a statistic with us, and I don’t want to misquote it, so I’ll preface it by saying... If somebody wants to double check this, they should look at Episode 11 of the podcast to hear the quote straight from him. I believe he said, ‘The entire insurance industry is like $800 billion a year and if we were to pay this out, it would be something like $400 billion." And in the United States, specifically, he was talking about. And it would be such a burden on the insurance companies that he, I believe the statement was, "The insurance industry would be bankrupt within six months."
Dr. Leonard: Well, I’m pretty well familiar with Bob’s comment there so I’m glad to respond. Those are our numbers. Bob has been involved with us in the past. He’s a good friend of the firm as they say. So, yeah, they were a few scenarios there in the United States. There were two, kind of, retroactive scenarios, one was to expand business interruption to anyone who had business interruption insurance but had an exclusion for pandemics would retroactively receive coverage. The second retroactive was that anyone who had a policy, property policy of sort, a commercial small business policy of sort, would get business interruption coverage regardless of whether or not they had bought it. The numbers range up to, yes, $800 billion and so forth, depending on the scenario, the retroactive scenario, and depending as well, on the number of weeks and months that would be given. In the case of France, for example, different here, but the court said you’ll get insured, carriers will have to pay but it will be two weeks. In many cases, we know the business closures and the stay-at-home orders have been longer than that, of course, many months in many instances. So, all of that was, indeed, high with the scenario and the duration, these were big amounts. And we produced, on behalf of the industry, some of those estimates. And they, indeed, were debilitating to the financial stability of the industry. And the parallel that I think many folks have taken is that of September 11th, in that, what we have with a pandemic is that it’s a September 11 happening in every city in a country or in multiple countries at the time, and therefore, really, only governments can step in, and live up to that, and provide that kind of social good.
The private sector can’t in an economically viable way, provide that kind of widespread coverage. It doesn’t mean that the private sector cannot provide under very specific circumstances, customized manuscripted policy language. Some of these policies, Wimbledon was a good example of that, they have some coverage, and paid, and so forth. But these are manuscripts, they’re very specific, and they’re expensive, of course, as policies go.
But so far, we’ve avoided any sort of debilitating threat to the financial stability of the industry whether in the United States, Canada, and Europe and that seems to be something that’s passed in that regard. And the industry, at the time we actually were mentioning, "Just imagine if we have COVID and we have a terrible-hurricane season, and so forth." And, you know, that has come together. The message there is that there was a moment where the numbers were concerning, they’re still concerning.
But I think the discussion around retroactive on that scale or court decisions that look at policy wording in a more favorable way but that also require payment for multiple months, I don’t think that’s on the table anymore. It doesn’t seem to be whether here in the United States, or in the UK, France the continent, and Canada.
Ron: I’m curious, in your opinion, are there things or steps that carriers and brokers can be doing today to minimize the risk on the impact of their business, their gross written premiums, and maybe even staff morale?
Dr. Leonard: Well, a few things there I’m just going to go back to. As you move through this, I want to make sure I hit some of the other lines. You know, another line has been very different is Workers’ Comp, and that’s been a big impact in the United States. Not as big as we expected, and that’s because of how employers have actually looked at the definition of working-from-home requirement for Workers’ Comp, but for, given this is a multi-country and international audience, you all can think of Workers’ Comp, the financial burden that COVID-19 may end up having imposed on Workers’ Comp, carriers, carriers offering Workers’ Comp, the United States is going to be higher than those in Canada, the UK, or the continent, simply because of the nature of social nets in those respective countries. It’s the same thing with life and is the same thing with health. Also, in Italy, France, the UK, Canada, given the one-payer system, you have, the social net is wider in terms of healthcare, and therefore, the additional burden of COVID is going to be comparatively lower on those carriers in Canada than they are in the United States.
I just wanted to mention briefly, life insurance is actually an area where we didn’t think, and that actually segues, Ron, into your point there if you bear with me. Thank you for that. But it segues into life insurance as an area where we didn’t think, initially, back in February and March they would have such an impact. But what’s happened there is that we’ve had significant increases in life, and it has been in deaths. And it has been impacting at the micro level within a certain age point 60, to 70, to 80, especially the older part of that subgroup. And that’s led some U.S. carriers, the most recent study was on the U.S., I haven’t seen if that’s the case in Europe. But, certainly, in the U.S., some carriers have stopped issuing policies on individuals aged 70 and over, life policies, others have actually stopped issuing 30-year policies. And what that is about is not only the impact of COVID-19 on that age group but also what I would refer to as the new structurally low interest rate environment. And when you talk there about, what does this mean in terms of changes and so forth? Well, carriers have learned to operate over the last decade in structurally low interest rate environments, but two things have changed. Now, a bull market is no longer a certainty, and also the Fed, a couple of weeks ago, announced that it was changing its focus on the balance and the focus of its monetary policy in favor of maximizing employment more than it has in the past versus maximizing price stability.
And as a result of that, a lot of carriers, and actually we were surprised of that, about, I think it was 30%, have said that they have already changed their long-term investment strategy, and about 50% said they were about to do so. And that’s going to be a big difference in the life sector. And it’s not just due to COVID-19 but it’s a conjunction of different structural events here that are taking place.
Ron: Thank you for that. I think that was good insight on the background as well. I’m curious to take it in a slightly different direction. I believe a lot of people view the industry as being there to exist to help people and to help businesses face the unknown. You talked a little bit about comparing it to 9-11 and how, at a scale of, maybe, that magnitude, it’s the government’s role to step in. How well do you think the insurance companies themselves are doing, and do you expect in the future that, like the Wimbledon, for example, policy, instead of being manuscript, it becomes more standard, or it’s not something that’s on the table at all?
Dr. Leonard: Well, I think there is something to our industry and I think it’s more than wishful thinking that, we have, in the United States, for example, there’s a mutual tradition, the mutual companies and so forth, starting with Benjamin Franklin and certainly in Europe, about business folks coming together at Lloyds and taking care of sharing the risk. So, there is a way that the insurance industry likes to be, likes to see itself, and continue to be seen as a partner, the local level and we’re there to support communities. And banks, of course, and others as well, but we like to think it’s in our blood. And, you know, the way the industry does that, and continues to do that, is by making sure it has the financial wherewithal to pay claims, and to do so in a reliable manner. You know, we are economic first responders. I’m sure you’ve heard the term. Whether it’s for health or rebuilding after a hurricane, or wildfires, sometimes the first or the second call you make is to your carrier. And knowing that your carrier will be there is important, not only economically, but a lot of carriers, both here in the United States and abroad, have realized, especially in the case of wildfires and natural disasters, that we’re also there to provide mental-health support. I had a tornado here hit my house in the mountains, and it’s in upstate New York, we shouldn’t have tornadoes here so that’s a good example of global extreme weather events. But I got on the phone with my appraiser and my insurance carrier, and they sent someone, and they were there, and they helped me through the process. You know, that’s how we are there in terms of serving our communities.
Okay. Now, we do that by being financially stable, by making sure that we live up to our obligations, but it also means that we need to look at whether the products we offer keep up with changing risks. Risks do change, economic activity evolves, the way we live evolves. And I’m just going to take cyber risk as an example.
So cyber risk was one of the fastest-growing lines in the last five years by premium growth, and it’s accelerated during the beginning of the pandemic. And that’s because, when you work remotely or when you have a significant part of your workforce working remotely, it increases a variety of vulnerabilities to cyber risk. But we still have policies right now that are written in certain ways, that don’t necessarily see working from home and working remotely with less integrity in terms of protection of your IT infrastructure just by virtue of being in different geographies. That may not be fully captured yet by how those policies are written. So, we as an industry, as a good neighbor, as a good partner, want to work with regulators, and we want to anticipate these challenges.
And that’s just an example there. But I think, on the issue of BI and other areas, that’s what you were specifically asking about, the same should happen, and the same will happen, and the same is happening. You know, every time we learn something, we can be more clear in the language. You know, we at the Insurance Information Institute are about communication and education. We play a role for that where the members support an organization. And, you know, we started different campaigns with regards to this to help folks’ consumers, businesses, small businesses, better understand bigger companies. I was at Aon and Desjardins as I mentioned, and we dealt Fortune 100, 500, 1,000, and with risk managers, folks who understand, and legal departments, and so forth. But especially on the consumer side, policies can be fairly complex. So as the needs of insureds, as the needs of the risk change, evolve, we need to make sure that the policies keep up with it, and we also want to make sure that we work with stakeholders to educate and communicate what’s covered and what’s not.
Ron: I know this is a great time to take a quick 20-second break to tell you where you can find more information and insights about insurance innovation. We’ll be right back.
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We’re back with our featured guest Dr. Leonard. Let’s jump right into the next question. In the global macro outlook that you published September of this year 2020, you stated, "The world’s 10 largest insurance markets are cumulatively expected to see their GDP decrease by nearly 7% in 2020 due to COVID-19." Given this prediction, do you think a global recession or depression is upon us, and for how long?
Dr. Leonard: You can keep this pause in the editing because it’s purposeful. There is a recession, I think nearly every country in the world is in a recession right now. There are some good political lines from the Reagan era about the difference between a recovery, a recession, and depression but you can go check it out online on YouTube, it’s a good one.
But we are, the world is in a recession. I think the hesitation to use the term depression in the classical way of referring to it is that, there was indeed an immediate, historically unique, unprecedented trigger that shifted a growing economy and that halted the gears. There was an element of destruction overnight across the world that took place.
Now, I was mentioning earlier that investment banks and financial market analysts have a perception that things can recover very rapidly. I think as an economist, my view, which is probably consensus in that way, is that it’s very rare that a GDP can shift 7% in six months. And, certainly, if it happens, it’s probably easier or more likely to happen on the downside because of unprecedented events like we just saw, than on the upside, it takes less time to shut down a factory than to reopen it. That’s a good parallel. And that’s where the world economy is in many ways.
So, of course, we’re in a recession. It will continue in 2021. I think anyone who expects that we’ll have positive growth, i.e., the technical definition for the recession being over in 2021 is overly optimistic. Certainly, it will be, we hope, less negative than this year, but, certainly, will continue to 2021.
Term, depression, is probably one that is just an issue of severity of it and, you know, I don’t think it’s as useful as looking at the depth of the correction, and also how the correction is impacting, you know, different populations. We have to think about, you know, looking at this resilience, of course, is also one of the key changes here that, maybe, we get to in the next question. But, you know, you’re asking about what can the industry do and what’s changing? It’s not just where we’re working, whether we’re working more from home or not, it’s also whether we espouse ways to be more resilient. And until now, resilience, in the last few years, was really about extreme weather events, about global warming, and some of these considerations, but now we have to add pandemic to that. And, frankly, there’s a fantastic TED Talk by Bill Gates about this one. It was a few years ago, he did another one about Ebola and the next pandemic. And COVID-19 is the next pandemic, but we have to consider that they may be here to stay in some sort or another, and that we need to be more resilient to that in that regard. And that may be much more the way we think about things now than about depression, or recession, or something else.
Ron: That’s a great insight. Looking at it at a very macro level, and you touched on this in this sort of last bit. But at a very macro level, you talked about how in 2021, we should we still shouldn’t expect growth. Do you have other predictions, even if not economic-wise, regarding what you think the industry is going to do as a reaction to everything that’s going to happen?
Dr. Leonard: Well, you know, economists, right now, like to talk about Nowcasting which is kind of funny as a term. But I think we can simply look at what’s happening already. There are key trends. Certainly, looking at premium growth.
Premium growth is going to be challenging. Premium growth is normally directly related to economic activity, economic activity has been shrinking, that’s what a recession is, therefore, premium growth may not contract. That rarely happens, but, certainly, premium growth will slow down. And that’s what our report indicated.
Now, what are the other things changing? Well, the next one is that we’re going to have to look at rates for next year. You know, UK, France, the United States, Canada, etc., certainly in United States, there is a high degree of regulatory involvement in rate setting and the rate-setting process, there will be COVID-19 losses directly related, there will be COVID-19 losses that aren’t officially COVID-19 on the health side and so forth that probably are related to it. And then there’s going to be hurricane losses this year and wildfire losses on a much higher than average level. And all of that will mean there’ll be some negotiation going on, and we’ll probably have a hardening, rates will probably significantly increase. And if your listeners can take a look at the report, it’s on iii.org, The Global Outlook, they’ll see that that’s what we’re forecasting there, what we’re expecting there. So, these will be happening.
Now, against this backdrop, I think what we really need to think about, and that’s not a result of COVID-19 but it’s been accelerated by COVID-19, is that there’s this shift in central bank policy that has started with the Fed but that is here to stay. And that will, as things go with the Fed, other central banks around the world will probably follow the Fed’s lead on this. But the new emphasis on maximizing employment, the Fed has traditionally been much more concerned about inflation than maximizing employment. It has a dual mandate, but it has been more focused on inflation. The ECB (European Central Bank), as a sole mandate, has been solely focused on inflation not maximizing employment. The IMF, in its last two decades, has been mostly focused on financial stability without, one would argue, a consideration for any sort of employment goals or metrics.
So the fact that we now have a world where interest rates will be structurally lower, not just a cycle, but that the cycles themselves will be within a lower range, means that we need to think differently about how we invest. And premium and the way we manage claims, the amount of claims, the way we manage claims, and premium growth is how we make money in the industry besides return on investments, and return on investments are going be challenging in that regard.
Remember, in the last 10 years, we had a lower interest rate environment, but insurance carriers around the world had increasingly allocated shifted funds into equities as opposed to fixed-income instruments. That stopped about three years ago but we still had a "bull market" and increases in equity prices. But now you’re going to be in a situation where you have low-interest rates structurally, and uncertainty, and potentially a decrease in equity prices but, certainly, not the same trend on the equity side. And that’s going to also exert significant negative pressure on carriers and all carriers, reinsurance and so forth, ability to generate returns on investments. And that’s going to be a, I hate the term new normal, but it is somewhat of a new normal, and maybe it’s a good place to use the term here. And that’s going to be a big change as well.
Ron: It sounds like there’s a lot of change coming for the industry.
Dr. Leonard: You know, Ron, at the same time, it’s a continuity. The trend about low interest rates, it’s been there, we probably just didn’t... There was a hope that interest rates would revert back to their 30-year historical average, but we’ve done well with it, so we know how to do it. Now it’s just a question that we need to be even better at it, and we’ve demonstrated that we can be better at it. You know, the trend about cyber having a product that’s new, and it’s novel, that adapts, it’s been happening for many years, now, it’s just going to be more important to do it. Business interruption, even more important to get clarity about that. The fact that folks are working from home, you know, we’ve been innovating for many years, for many decades, for many centuries, you know, going back to Lloyd’s 300 years ago. So, these are changes, but we know how to deal with change and that’s something that we need to remember. And on the resilience side, we know how to deal with resilience as well. You know, I learned that this year, but we’ve all seen the pictures of the cars being crashed, to demonstrate how durable the cars are. Well, that institute is a creation of the insurance industry, it’s in Virginia here in the United States. We have the same thing with IBHS (Insurance Institute for Business and Home Safety) on getting better material and building more resilient homes, hardening of homes and so forth.
Now, we have been at the forefront of developing new technologies, of supporting innovation and insurtech is booming. So I think we’re in a very good place to continue to play our role as an industry with differences across lines, with differences across countries, and better understanding of how we can continue to be there for our insureds.
Ron: So, I want to touch on that as we wrap up and this relates back to your intro. You mentioned, you know, you’re a Professor at Columbia, in AI, and I want to hear your thoughts on the opportunity for AI and other technologies in this industry as it relates to some of these problems.
Dr. Leonard: Well, I think insurtech, to be more specific, but artificial intelligence as a whole, but let’s just call it insurtech and technology. In the context of resilience, the emergence of smart home and smart car technology will make incredible differences for us.
I mentioned earlier that 60% of home claims, residential-homeowner policies, comes from water leaks. And that’s a small water leak like a toilet leaking or a fridge leaking, you know, a fridge with water. So, you can have an automatic sensor now that will shut down your valve, your main valve in your house. There’s actually a company that’s based in Canada that participated in one of our insurtech contests that actually pioneered that technology.
You know, so in terms of managing our returns on investment, in terms of managing our claims management, and so as an industry, technology is going to really provide opportunities to minimize losses and to work with our insureds to do that.
So that would be, really, where I see it. I mean, there’s been a lot of talk about much more complex things such as blockchain and so forth. I see it in a very practical way. I see a lot of potential in blockchain but it’s more of a back-office function. But the technology, the smart homes, and the challenge there for the carriers, is actually to approach this from a partnership standpoint. You know, my mom is in Montreal, still there, and she got a phone call the other day when she was renewing her insurance policy. And they said, "We want to install this sensor." And she was like, "Well, Michel, what, should I do it?" I said, "Oh, that’s fantastic, Mom, you definitely should do that," but they were asking a big price tag. You know, and that’s the insured assuming the cost of preemptive-risk mitigation without any benefits, on the coverage side or the cost. We can think of when we started using central alarms and there’s a small rebate discount associated with that.
So, these are ways that we will have to look in ways to better align cost incentives in the adoption of AI, IoT-driven technologies that will enable insured and carriers to better to reduce losses over time. And that’s going to have to be a partnership as we’ve done in the past.
So that would be, really, where I would say, you know, in a few minutes here, and where I see the most immediate element. And as you have extreme-weather events, these technologies and they don’t have to be AI-driven. The other day we showcased on one of our webinars, we showcased women in minority-owned businesses in Texas that actually has a tarp. It’s a military-grade tarp, and you drive your car on it, and it’s made so that one person can wrap up their own car. So, a hurricane coming, you can save the car, you can put things into it, and also you can exit so if you need to get to your car afterwards, your car hasn’t been destroyed. So, you can think, that being used for residential purposes, but you can also think of that being used for car dealerships, for different companies, for fleet management. So, simple, nothing AI about this technology, but it’s definitely a cutting-edge technology that’s being made available. And that’s the way we want to move forward.
Ron: And that’s a great example of insurtech. And like you said, insurtech that doesn’t even have to have technology, at least electronic technology.
Dr. Leonard: You know, on the other end, Ron, you have, you know, more advanced forms of underwriting, you have different sorts of trigger-driven insurance coverage and software in all of those. Now, I come from the political, and country, and credit-risk world when it comes to insurance, so, you know, a parametric coverages and so forth, that’s what we had to a large extent in that so it makes a lot of sense. And those will happen, but the same thing will, in terms of cars, being, getting coverage by the minute, by the mile you’re using.
So those are going to be, and we need to embrace those changes because they’re coming anyhow. But, again, when you think of technology, and that’s the main case there, you ask me, what do I have to say about this whole technology thing? It’s AI, but it’s also sensors, it’s also IoT, it’s also being able to do claims and so forth right away. So, it’s both the nuts-and-bolts driven and the computer-chip driven technology.
Ron: That’s a great way to put it. And so as we wrap up, if there was one piece of wisdom that you could share with the listeners, and it doesn’t have to be about business, or insurance, or economics just a piece of advice, or life advice, or any type of advice for 60 seconds, what would it be?
Dr. Leonard: Oh, I’ve never gotten that question. Insurance is a great career to be in, it’s growing. Actually, I never wanted to go into insurance, and I started as a trader, and then I did central bank watch and that kind of stuff. And I see myself as an economist but it’s a great industry, we care about the people we work with, and it’s growing, and it’s getting more and more diverse. So, when my students, for example, right now ask me, "Where should I go, what kind of job should I have?" And I say, "Well, think about insurance." Also, when there are downturns, we don’t fire everyone and it’s not like the bank, not as cyclical, so more long-term business, and we pay very well. So we have a lot of information on iii.org, actually, for younger folks who want to go and look at what a career in insurance would look like.
Ron: I echo that. And as a relatively young person, 100%, you know, I can speak from experience that I know people think that the insurance industry can be boring, but it’s definitely not. And so, I want to thank you so much for your time, Michel. Where can people find you and find out more about Insurance Information Institute?
Dr. Leonard: iii.org. We’ve been around for 60 years so when the internet came along, we were able to get those Is in a row and just put a .org afterwards.
Ron: That domain is probably worth a pretty penny. Thank you so much for your time. And as always, if you want to find out more, you can check out www.chisel.ai. And I hope everybody out there stays safe.
Dr. Leonard: Wonderful. Such a pleasure. Take care everyone.
Ron: That’s a wrap for this episode of “AI Wisdom” hosted by Chisel AI and me, Ron Glozman. Thanks for listening.
Join us next time for more expert insights and straight talk on how AI and insurtech innovations are transforming the insurance value chain. See you on the next episode!