Underwriting challenges

Answer

Assignment 2: Strategies for Addressing OT plc Underwriting Challenges within the External Market

This paper discusses how OT plc can adapt to the developments within the external environment as a step towards growing its motor insurance portfolio. The paper accomplishes this goal by focusing on three areas. The first area of focus is significant underwriting challenges for OT plc emerging from the developments within the external environment. The second area covered in this paper is the analysis of how OT plc could adapt its underwriting in relation to the significant underwriting challenges experienced within the external market. The third area of focus is recommendations on how OT plc should grow its motor insurance portfolio.

Significant Underwriting Challenges for OT plc From the External Environment

Underwriting serves as a vital function in the evaluation and analysis of financial performance (Kalita, 2018; Gatzert & Osterrieder, 2020). Nonetheless, with the developments in the market such as introduction of self-driving or driverless vehicles, increase in the use and provision of shared ownership of vehicles, and evolution of digital technology, OT plc faces the threat of having to deal with these three primary challenges.

The Challenge of Underwriting Autonomous Vehicles

One of the primary challenge that the developments within the market presents to OT plc is the problem or challenge of underwriting autonomous or self-driving vehicles. The company is likely to experience several issues when it comes to insuring the autonomous vehicles. These problems are related to issues such as elimination of human error, disrupted model of business, redefinition of fault, and the necessity for granularity. When it comes to the problem of eliminating human error, it is vital to note that the emergence of autonomous vehicles in the market does not necessarily imply fewer accidents. According to Khayatt, Boilard, & Pletziger (2017), driverless vehicles are also vulnerable to create accidents as they respond to circumstances on the road in different ways from human drivers. For instance, different models of self-driving vehicles involved in tests have experienced crashes, most of which are attributed to the inability of the autonomous vehicles to anticipate that humans do not often follow traffic rules or respond or react logically when driving (Khayatt et al., 2017). On the other hand, human drivers do not precisely gauge what to anticipate or expect from driverless vehicles. For example, Khayatt et al. (2017) allude to an event where an autonomous vehicle, which was on road test, experienced a slow-motion crash with a bus, as its software programming was meant to anticipate the bus to recognize that the driverless car had the right side of the road. This insight into autonomy reveals that the advent of driverless vehicles in the market will affect underwriting, claims, and pricing different at various stages. Another issue that driverless vehicles will present to OT plc and other underwriting companies is associated with the definition of fault. The company will experience problems when it comes to determining the ownership of realtime data, whether it will be individuals, automakers, or auto-insurer (OT plc). Khayatt et al. (2017) assert that that the age of driverless vehicles and autonomous control functions makes it critical for insurers to determine the ownership of the novel real-time data, as they strive to redefine the fault concept. Furthermore, OT plc and other underwriters are likely to experience increased cases of litigation owing to the complication that accompanies the assigning of blame to the novel technology of autonomous car. Moreover, while the manufacturers of the autonomous cars and developers of software for such vehicles provide novel potential clients for insurance firms, limited data still exist in this area, as it is a new field.

Complexity Involved in Underwriting Shared Vehicles

Another key challenge that OT plc is likely to face owing to the development within the external market is associated with handling situations or claims associated with the provision, as well as use of shared vehicle ownership.  Since the advent of the first personal insurance policy for automobiles, the basic model of insurance has not witnessed significant changes. Policies are normally written on the basis of vehicle-by-vehicle, and are targeted at protecting the driver and owner in case the vehicle is involved in a crash or collision, damaged, or stolen (Matley et al., 2016). Whereas the existing insurance policy model is straightforward and employed as a standard practice for all insurance companies, it cannot effectively cover the vehicle-sharing model.  Even though shared mobility introduce novel stakeholders that will require protection of auto-insurance by insurers such as OT plc, this model of car ownership does not conform to the existing auto insurance model, particularly the conventional vehicle-centric policies. In traditional, vehicle-centric policies, car owners remain the primary stakeholders, insuring themselves and the vehicles against liability and loss. As such, the automaker continues to bear the liability for failure specific to the product.

The threat of Digital Technologies

OT plc also stands to face the threat or challenge of the evolution of digital technology, which possesses the potential to disrupt private motor insurance’s distribution. The challenge presented by digital technologies can arise from two sources including intense competition from digital technology platforms and shortcomings associated with IA. While technological disruption may present as novel business models and the replacement of old models of business, the role of technology in triggering these changes cannot be overlooked (Kalita, 2018; Boyle et al., 2019; Matley et al., 2016). Technological disruptions continue to impact the insurance sector in significant ways that threat the existence of private insurance. For instance, the advent of digital technologies such as smart phones has result in novel means of lodging claims and distributing insurance products.  Contrary to the past when policyholders were largely attracted to cheap policy options, the emergence of digital technologies has created a situation where policy holders are not racing to the cheapest policy, but perceive technology-based offerings and products as a differentiator (McFall & Moor, 2018). For instance, when it comes to underwriting, digital technologies ensure that policyholders or customers are granted more tailored or customized underwriting decisions that mirror the individual characteristics of a person (Boyle et al., 2019). Moreover, when it comes the processing of claims, technology-based approaches drive efficient claim resolution and reduce the general end-to-end cycle time along with the need for customers or policyholders to interact with the insurance company (Boyle et al., 2019). Therefore, digital technology evolution provides a higher customer satisfaction and reputation of such platform relative to traditional insurance models. As such, insurance firms such as OT plc, which are still employing manual-based underwriting procedures. Whereas such insurance firms may opt to implement or adopt novel technologies, they may encounter certain problems, particularly when it comes to the implementation of IT.

According to Boyle et al. (2019), AI is associated with three weaknesses when employed within the context of insurance. First, these systems are vulnerable to errors and bias in data. AT systems, particularly those designed to learn from the behavior of humans and historical data, may make biased and discriminatory decisions that contravene anti-discriminatory legislations, thereby subjecting insurers to litigation problems. Second, AI systems present the challenge of ownership of data and intellectual property rights. Boyle et al. (2019) assert that AI enables firms to derive enormous valuable data from substantial sets of data with the aim of improving decision-making, customer experience, and personalization. Nevertheless, when such data is resold, its value is greatly increased. As such, there is often tension between providers and customers in situations where providers desire to retain client data and customer desire to get back their data without being shared with third-parties.  Third, the deployment of robotic process automation (RPA) and AI solutions presents a range of issues around the consequence of service failures owing to higher task volume undertaken (Boyle et al., 2019). Any failures or incidents that arise have a likelihood of perpetuating and accelerating, thereby becoming catastrophic and significantly impacting an organization’s business.

How OT plc Could Adpt its Underwriting

OT plc can adjust to itself to effectively address the three primary challenges including the challenge of underwriting autonomous vehicles, complexity involved in underwriting shared vehicles, and the threat of digital technologies. The subsequent subheadings discuss robust measures and strategies that the company can adopt to accomplish this goal.

Redefining Fault to Address The Challenge of Underwriting Autonomous Vehicles

Since the inception of the 20^th century when vehicle insurance was first provided, insurers have always focused on the optimization of the process of claims for all forms of accidents, which in turn has enabled them to create an efficient system for limiting the expense associated with accidents for these firms and consumers (Khayatt et al. 2017). However, the presence of AI and autonomous cars in the market will change alter this process. With the transition to driverless vehicles, the market will have to shift to the coverage of software manufacturer and insuring car risk from individual coverage.  Even in situations where certain manufacturers of driverless cars and autonomous car features accept the obligation in the front end for their systems’ malfunctions, as demonstrated by Volvo in 2015, such an acknowledgement does not eliminate the risk when plaintiff lawyers are engaged (Khayatt et al. 2017).  As such, when it comes to fault redefining, OT plc should focus on working jointly with carmakers. The establishment of ties or connections with these stakeholders will benefit the company in terms of information sharing, which is critical to developing novel ways of growing the insurance portfolio. Cooperation with carmakers may also be essential for the company in situations where legislations begin to redefine the process of claims and fault concept to mirror the change in the market. In addition, the establishment of a tie with carmakers at a moment when the sector anticipates shifting to the coverage of self-driving car produces may serve as a source of competitive edge to the company.

The introduction of digital technologies such as autonomous vehicles, AI, and telematics into the market provides OT plc with an opportunity to leverage and employ AI chatbots in handling claims and use software and data to establish customer profiles for effective decision-making, as suggested by Kalita (2018). As such, OT plc can effectively adjust to the challenge presented by underwriting autonomous vehicles by adopting novel analytical and capabilities and processes that provide the flexibility needed to accommodate a range of scenarios.

Remodeling or Restructuring the Policy Cover to Meet the Challenge of Shared Vehicle Ownership

When it comes to the ridesharing model, two challenging patterns or scenarios may be witnessed by insurers such as OT plc. The first scenario is associated with the existence of three primary stakeholder models including auto-rental companies, ridesharing, and fleet (Hampshire & Gaites, 2011). In the ridesharing model, the owner serves as the frequent operator, whereas the fleet model includes limos and cabs. It is vital to note that for ridesharing and fleet models, the owners act as primary stakeholders or clients with policies covering business or commercial drivers. When it comes to the rental models, two stakeholders are involved including the vehicle’s owner, who in this case is the auto-rental firm, and a non-commercial driver (Shaheen & Cohen, 2013). The second scenario of shared vehicle ownership that may present a significant threat to OT plc involves the shared autonomous vehicles. In this situation, there exist many stakeholders including the mobility management providers, the operating system (OS) firm, and the vehicle’s manufacture. It is vital to not that the mobility management provider are the firms offering the service of ridesharing and vehicle’s owner.  These two circumstances may not be addressed by the traditional policy, as they call require two or more distinct policies to cover the operator and the owner, and other stakeholders involved.

OT plc can effectively adjust itself to address the challenge of shared vehicle ownership by providing a coverage policy specific to customers’ specific needs, as a means of addressing the challenge presented by the emergence of shared vehicle ownership model. With the emergence of shared ownership of vehicles, the future of mobility appears poised to upend the traditional, straightforward model of insurance policy and focus on transforming or changing issues related to customers, products needed by clients, and how to market such products (Matley et al., 2016). The increasing replacement of the traditional automotive transportation models by car-sharing or ridesharing establishes a need for insurance firms such as OT plc to rethink their role within the ecosystem of mobility and their relationship to vehicles, owners, and drivers (Matley et al., 2016). Therefore, to effectively adjust its underwriting process to suit the demands of shared vehicle ownership, OT plc’s management should focus on its policy on safer vehicles, novel designs of vehicles, and novel sources of liability and risk. Such an undertaking will result in a reduction in frequency and severity associated with loss events, changes in vehicle replacement and repair costs, new categories of customers, and the creation of novel insurance products.

For fully autonomous vehicles, vehicle owners (whether a private individual or a mobility management provider) may need comprehensive coverage, even though technological advancements may significantly decrease loss frequency in this category. For example, self-driving cars would be difficult or impossible to steal, and could be programmed to seek shelter in the event of a severe storm or rising floodwaters (Matley et al., 2016). OS providers may choose coverage more akin to product liability policies to insure against new sources of risk such as malfunctioning hardware or software, flawed algorithms, or security breaches. Those that self-insure may need stop-loss or other types of catastrophic coverage.

OT plc can also restructure its policy to address the threat presented by shared vehicle ownership by establishing novel measures for assigning these clients to limit their costs. For instance, the company can focus on providing insurance coverage for per-trip or subscription feed that can be passed along by the mobility management firm as an extra fee or charge to their passengers as suggested by Cawley (2014). Instead of offering a fixed-term blanket insurance coverage, OT plc can cover drivers based on a trip-by-trip basis. Examples of companies that employ this insurance model is Zipcar, which includes insurance within the trip cost (Lieber, 2011). In addition, OT plc can enhance its flexibility by partnering with mobility management organizations. The company could also focus on establishing new forms of policies that provide coverage to drivers across joint mobility service firms. There is also an opportunity to adjust the company’s insurance model to suit the need of ridesharing by providing additional supplemental policy coverage for drivers and vehicles shared across many or multiple drivers (Chen & Kockelman, 2016).   

Collaboration to Address the threat of Digital Technologies

According to Boyle et al. (2019), digital technologies provide an opportunity for insurance companies to expand or grow their portfolios by focusing on or adopting novel models of business. For instance, the enormous volumes of data generated and produced every day create opportunities for the establishment of better underwriting and novel products. Moreover, the significance of digital assets has opened opportunities for the inception of new products including cyber-insurance. However, the evolution of digital technologies has led to the emergence of insurtechs or startups focused on technology-based platforms within the insurance industry. Insurtechs are transforming insurance by creating novel pricing models and novel ways of generating and distributing, as well as servicing insurance policies (Braun & Schreiber, 2017) To match up to the competition presented by insurtechs, OT plc should consider other avenues such as investment and collaboration opportunities, as a response to this change. The rapid evolution of digital technology results in an innovation gap in that the rate of technological changes outstrips the ability of incumbents such as OT plc to innovate and match the changing market demands and consumer behaviors. From the operational and financial risk perspective, OT plc cannot manage to fill this gap on its own. Therefore, the firm can adjust by partnering with other parties in the industry. Furthermore, OT plc should focus on reaching our and across the insurance sector or market to work jointly with parties in other sectors including the motor vehicle sector that have been affected by the technological disruption of autonomous vehicles and reinvent novel measures for executing underwriting operations. Such changes will play a significant role in growth of the company’s insurance portfolio by providing for the accommodation of self-driving cars.

Recommendations

Recent developments within the external market present OT plc with an opportunity to grow its portfolio. The novel avenues for clients created by market changes include policyholders inclined towards digital platforms, autonomous vehicles, and clients associated shared vehicle ownerships. The company can manage to expand its motor insurance portfolio to cover these clients by embracing the strategic measures described in the subsequent subheadings:

Leveraging AI in Its Insurance Activities to Cover Policyholders Inclined towards Digital Technologies and Autonomous Vehicles

OT plc should focus on leveraging AI in its operations to extend its cover to policyholders, who are interested in digital insurance platforms. With the emergence of self-driving vehicles, increased use of AI, and increase in the number of insurance firms using telematics in monitoring behavior of drivers, the company should start thinking like technology firms and embark on implementing process that have the capability of accommodating novel scenarios and new facts. Such an undertaking is essential for enhancing the firm’s creativity and flexibility within the rapidly evolving market.  This goal can only be accomplished when OT plc’s management prioritize the integration of AI in their operations or system. Kalita (2018) emphasizes the need for insurance firms operating within the market characterized by the presence of autonomous vehicles to expand their analytical and data collection capabilities. Being among the insurance firms operating in the market disrupted by emergence of self-driving vehicles, OT plc cannot overlook the significance of adopting AI as a means of enhancing its data gathering and analytical capabilities.

According to Kalita (2018), AI plays a significant role in limiting overwriting challenges associated with increased customer expectations such as short waiting times and rise in unstructured data. The adoption of a bottom-up approach and evaluation of the entire or whole lifecycle through underwriters’ pain-points will enable the OT plc to harness the potential of AI and optimize its existing processes of underwriting. The integration of AI in its system will enable the company to revamp its legacy processes in line with the needs of the markets, particularly presence of autonomous vehicles, evolution of digital technology, and rise in the use and provision of shared vehicle ownership, as argued by Kalita (2018). By focusing on the automation of its underwriting process, OT plc will manage to eradicate the drawbacks or shortcoming of its traditional approach and enable the firm to focus on improving its key performance areas. 

Adoption of Digital Technologies and Partnering with insurtechs to fill the Technology Gap to Meet the Needs of Digital Policyholders

Innovation and development of novel solutions require adequate resources in terms of management focus, money, and time, all of which are limited. As such, partnering with insurtechs provides a viable strategy for addressing and filling the innovation gap (Boyle et al., 2019). Partnerships can be accomplished in three ways including investment in startups, collaboration, and joint ventures. Investment in startups can be direct or through a given arm of corporate venture capital (CVC). OT plc can establish specific CVC funds outside its primary corporate structure in a way that resembles the funds established by private equity investors or venture capital (VC) (Boyle et al., 2019). These funds can then be employed in growing the company’s insurance portfolio by investing in digital technology solutions. When it comes to the aspect of collaboration with startups, OT plc should be ready to contribute resources to the insurtechs considering that these startups are still their growth and development phase, as argued by Boyle et al. (2019). These resources can be target customer base, data, or expertise. Joint ventures involve investment combination by the incumbent, who in this case is the OT plc, and the insurtechs along with service arrangements.

Restructuring the Policy Cover to Autonomous and Shared Vehicles

OT plc should restructure its policy to allow the company to provide coverage tailored to the unique needs of clients having autonomous and shared vehicles. The needs of clients associated with shared and autonomous vehicles are different from those clients with private or individual vehicle ownership (Gatzert & Osterrieder, 2020; Matley et al., 2016). For instance, when it comes to shared vehicles, it can be noted that the rental car firm and driver possess different needs. When it comes to the autonomous vehicles, it can be noted that there exist clients or parties with different needs including the OS operating the vehicle, the software developer, and the vehicle company (Khayatt et al., 2017; Matley et al., 2016). As such, the conventional all-in-one, car-centric policy cannot manage to cover the unique needs of these parties.

In conclusion, this paper has effectively discussed how can successfully adapt to the advancements within the external environment and grow its motor insurance portfolio. The paper has accomplished this goal by explaining three key underwriting challenges facing OT plc within the external environment, explaining how the company can adapt its underwriting to match the developments within the external market, and recommending strategic measures that can be embraced by the organization to grow its motor insurance portfolio. Embracing the measures discussed in this paper will enable OT plc to adjust itself to address the changes within the external market and grow its insurance portfolio.