Digital innovation and its impact on the planet, systems, people and technology- building resilience with insurance

Trevor Maynard, Head of Innovation, Lloyd’s

Lloyd’s is the world’s leading insurance and reinsurance marketplace, protecting assets, businesses and communities, promoting growth and ultimately sharing risk to create a braver world. Digital innovation will be vital in the coming years to build resilience and Lloyd’s has just published its “Future at Lloyd’s Blueprint 2” [https://futureat.lloyds.com/] which illustrates how our market will become the world’s most technologically advanced insurance marketplace.

To be resilient it is vital to have awareness of global megatrends because these will be the backdrop to the economy in the 21st century. Lloyd’s horizon scanning has highlighted four major trends leading to changes in the: Planet, Systems, People and Technology.

Under changing Planet we see climate change, urbanisation, resource exploitation and
population growth. Systems are changing due to hyper connectivity, increasing
interconnectedness and social ownership. Demographics, mass movements and social
media are affecting People. And, Technology, driven by automation and digitisation is
leading to rapid disruption. Our recent publication “Cities at Risk”
[https://www.lloyds.com/news-and-risk-insight/risk-reports/library/understanding-risk/cities-at-risk] highlights that cities are systems-of-systems with energy, transport, governance, water, sanitation all hyper-linked together.

Disasters can therefore have a larger effect by impacting multiple systems simultaneously and making it harder to re-boot. By taking a systems-thinking approach these fragilities can be highlighted and mitigated. The findings from our report revealed that municipalities mostly self-insure their risks but could protect themselves by transferring some of these risks off their balance sheets.

Food security is an important example of a systemic threat. Lloyd’s published a
hypothetical scenario [https://www.lloyds.com/news-and -risk-insight/risk-reports/library/society-and-security/food-system-shock] which explored the impact of a major El-Niño leading to flooding, drought and food epidemics globally. This could lead to reductions in yields in the world’s major staple foods: maize, soy, wheat and rice leading to significant price rises and potentially major political and security impacts. Supply chains are also likely to be affected by such events and this has been explored by Lloyd’s and AIR in a study [https://www.lloyds.com/news-and-risk-insight/risk-reports/library/understanding-risk/hidden-vulnerabilities]. Tier 2 suppliers (and beyond) are often hidden from view and the full supply chain can wrap around the globe meaning disasters in one region can affect businesses in another. By modelling these risks the financial costs can be highlighted and protection strategies developed.

Product innovation is crucial in such changing times and Lloyd’s has responded by
creating the Product Innovation Facility. This is a group of 27 managing agents who come together to fill insurance gaps through collaboration. Climate change was presented as a huge megatrend which will require insurers to help stimulate the necessary decarbonisation by insuring renewable energy.

A recent publication by Lloyd’s [https://www.lloyds.com/news-and-risk-insight/risk-reports/library/understanding-risk/renew able-energy-risk-and-reward] highlights how renewables have received significant investment and are now competing with fossil fuels on price without subsidy. This shows that decarbonisation can occur at pace and insurers can help stimulate this by protecting the new technologies from transferable risks.

Insurance innovation is and will be further, fuelled by digital developments including virtual and augmented reality, robots, artificial intelligence and the internet of things. We have seen how these technologies are being brought together to create the sharing economy which has required insurance innovation of its own to meet the bespoke needs of the platforms, customers and providers of services. The Innovation team at Lloyd’s have worked with a diverse range of partners to opine on these technologies.

For example, the Internet of Things (IoT) is explored in a paper entitled “networked world” [https://www.lloyds.com/news-and-risk-insight/risk reports/library/technology/networked-world]. The IoT will bring billions more “eyes” on the world via networked sensors. Coupled with ever increasing computing power via Moore’s law, cheap vast data storage and new algorithms we can interpret and understand the world around us better than ever before. Everyday devices will soon be the majority of the world’s data producers. This will enable insurers to track asset locations, trigger insurance claims automatically, take remote corrective action and even avoid disasters, making the world a safer place.

To stimulate the uptake of these technologies Lloyd’s Lab, our accelerator was launched in 2018. The Lab sets themes and then invites external firms ranging in size, from insurtechs and startups to major companies, to propose solutions/ services. A competitive process leads to around 10 teams being invited into a 10-week fast paced programme. Mentors from the Lloyd’s market work with these companies to help them develop their technologies and commercialise their service. For example, FloodFlash took part in the Lab in 2019 has developed an IoT sensor which triggers when floodwaters rise above a certain pre-agreed threshold.

They can then pay claims immediately, just when commercial organisations need an
injection of liquidity after a disaster. The concept of smart and parametric contracts was explored in a recent Lloyd’s risk report [https://www.lloyds.com/news-and-risk-insight/risk-reports/library/technology/triggering-innovation] and we can expect more innovation using these technologies in the coming years.

To build resilience we need awareness of megatrends in order to be prepared for systemic scenarios which can be modelled and understood better using a variety of new techniques. These megatrends will provide an opportunity for insurers to transfer new risks and help society be brave. Technology is advancing rapidly, and this will lead to new ways to offer insurance reaching a broader community and providing faster protection. Engaging in partnerships and applying an experimental approach to trial the new methods will transform the insurance industry of the future and it is our ambition that Lloyd’s will be at the heart of this change.