Risky Business – Insurance Broking in a Digital Age

The employment of technology in commercial practices is now ubiquitous. Digital innovation has permeated most markets, including that of insurance brokers. This is evidenced by the recent publication of a whitepaper outlining how London market intermediaries are recalibrating placement strategies to incorporate digital broking and algorithmic trading models. Such developments are predicted to affect all stages of placement; from client engagement to post-bind processing.

 The whitepaper report (‘the Report’) – Digital broking: A transformation playbook for wholesale intermediaries, is written by Artificial Labs, the London-based algorithmic underwriting and placement company, in tandem with London Market brokers.

Whilst there are undeniable benefits to this innovation, we would advise caution when adopting new technology at pace without consideration of the potential pitfalls; with new growth comes new risk. Once these tools integrate into daily workflows, they carry the danger of creating unique professional liability risks. The ability to produce output at an exponential rate will no doubt create the potential for volumes of aggregated claims if the ‘originating source or cause’ of a systemic error lies within an anomaly found in an automated process applied over thousands of transactions. In addition to this, new technologies are also likely to raise compliance and regulatory issues.

We consider below the merits and potential pitfalls of these developments from an insurance broker’s professional indemnity perspective as well as tips for risk management.

Merits

The Report states how “Brokers are recognising that working with technology partners… is central to achieving true interoperability, increasing automation and delivering stronger outcomes for their clients.”. Some of these benefits are considered below.

Increased efficiency and speed of production

• Digital programs can expedite quote generation, policy placement and renewals.
• Brokers can instantaneously compare the very latest insurer offerings.
• Immediate turnaround will be favoured by clients.

Financial benefits 

• Reduced operational costs will be achieved by replacing administrative manpower with digital methods. Brokers will be able to generate larger volumes of work without a proportionate increase in employee salaries. The Report states that a broker using the suggested technology has calculated an 80% reduction in the cost of business placement.
• Increased premiums and capturing those premiums previously leaked to competitors. Those who have already utilised digitalisation reported a 100% uplift in premium receipt.
• Algorithmic pricing uses real time data and predictive models to offer clients the best placement cost options.

Competitive Edge

Those employing new technologies are likely to attract more custom and draw business from competitors who advance their processes at a slower rate. According to the Lloyd’s Market Association, broker utilisation of digital and algorithmic processes is predicted to increase by 50% each year.

Risks

Although it cannot be disputed that there are numerous commercial benefits to digitalisation, any enthusiasm to advance at full throttle should be tempered with warnings that such exponential development may result in overlooking the potential risks involved.

Algorithmic and data errors

Errors generated by automated platforms can appear in various forms, including: the misinterpretation of information; incorrect application of codes; inadequate testing; or a simple system ‘glitch’. These can lead to inaccurate quotes, policy recommendations or coverage gaps and lead to unintended transactions. This in turn can trigger professional negligence claims. As mentioned above, if the underlying source of a systemic error is an anomaly within an automated process, the resulting breach could impact thousands of transactions, leading to the emergence of aggregated claims on an unprecedented scale.

Regulatory compliance, cybersecurity and data privacy

• Digital transformation introduces additional compliance requirements, relating to: licensing; data protection; disclosure; and adherence to fair marketing practices. Because regulatory frameworks frequently lag behind technological advancements, organisations may face an increased risk of non-compliance, which can result in fines and litigation.
• Digital platforms are prime targets for cyberattacks. Breaches can expose sensitive client data, which can in turn provoke regulatory penalties, claims from clients and reputational damage.
• Regulators closely examine concerns related to fairness, transparency and accountability in automated decision-making. Digital processes can also unintentionally discriminate or misprice policies if training data is biased, exposing brokers to ethical and legal risks. Monopolisation concerns may also emerge when digital-first startups, providing faster and cheaper services, pose a competitive challenge to traditional brokers who choose not to innovate as quickly. Such dynamics may diminish market share and profitability.
• Algorithms often operate as “black boxes,” meaning that their inputs and outputs can be monitored but the internal decision-making processes cannot easily be seen or understood. This makes it hard to maintain audit trails. Regulators demand transparency and strict record-keeping, therefore non-compliance can result in sanctions.

Risk Management and Mitigation Strategies

To those brokers who intend to embrace the digital revolution and implement it expeditiously, we would first advise considering some of the following strategies to mitigate the above risks:

• Employ robust cybersecurity frameworks – strong encryption and access controls are critical.
• Adopt risk management practices such as stress testing and explainability with full transparency.
• Maintain human oversight to prevent input/output error.
• Ensure the technology is auditable and compliant with legal, ethical and regulatory obligations.

Key Takeaways

Commercial digitalisation is a nascent force steadily pervading most market sectors, and insurance brokers are not immune. However, although the benefits in terms of speed, efficiency increased volume and cost reduction must be acknowledged, we urge brokers to be aware of the new risks that are evolving in tandem with this advancement. Steps should be taken to prevent potential exposure to volumes of aggregated claims if the cause can be attributed to an automation error. The potential for regulatory and statutory breaches must also be borne in mind.

The bottom line – fully understand the risks and take measures to mitigate them before blindly taking a leap of faith into this technological brave new world.

If you have any questions relating to the information discussed in this article or wish to understand how these apply to your business practices, please contact Joe Bryant.