Insurance companies are investing heavily in quantum technology but what does this mean for the end consumer? Simoney Kyriakou reports
The world of artificial intelligence (AI) and Big Data has moved on at breathtaking speed in the past few years.
Insurers – often criticised in the past for being slow to take up new technologies – have been at the forefront of recent developments in the world of quantum computing.
The benefits, according to specialists such as Sudhir Pai, chief technology and innovation officer for Capgemini’s Financial Services Global Business, are multiple, enabling insurers to improve risk modelling, create better products and services, and improve data security.
This is becoming ever-more important as insurers battle with global threats, especially that of climate change. A recent McKinsey study (Climate change and P&C insurance: The threat and opportunity) warned: “Insurers must be careful not to underestimate the true threat of climate change.
“Because its effects are systemic, climate risk is likely to stress local economies and—more grimly—cause market failures that affect both consumers and insurers.
“More frequent catastrophic events, in combination with the need to meet evolving regulatory requirements, can threaten company business models—and make insuring some risk unaffordable for customers or unfeasible for insurers.”
So how can quantum technology help insurers? Mr Pai says: “Quantum technologies offer exponential increase in computing power over classical systems in use today.
“Through ultra-precise measurements (quantum sensing), high-performance computing (quantum computing) and tap-proof communications (quantum communication), quantum technologies can solve complex business problems in the insurance industry around climate risk modelling, targeting, fraud detection and data security.”
Such technology is “superior”, he says, in finding patterns and classifications and could become a game changer in creating sophisticated risk models, better customer targeting and prediction modelling, especially when it comes to the impact climate change might have.
Sonia Shah, associate director at Grant Thornton, wrote last year: “Climate change poses a systemic risk to the insurance sector”.
This means insurers will need to assess environmental risk as it will affect underwriting, reserving, coverage and pricing - and as insurers seek to quantify these climate risks, quantum sensing will come into play.
Shaun Hicks, chief risk officer for Zurich UK, comments: “Modelling for climate risks, enables us to prioritise areas for investment. For example, supporting customers to adapt to threats such as flooding. It also ensures we’re setting the right premiums for insurance cover.”
It is big business too. Ms Shah wrote: “Safeguarding clients and the wider financial system is paramount, with insurance premiums $6.3trn and assets under management sitting at around $13trn across the globe.”
There is plenty for insurers to take on board. As the box-out shows, insurers’ climate change duties go beyond pledging to be carbon neutral by 2030 or divesting in fossil fuels across their portfolios.
Helping insurers better assess environmental risk will therefore improve insurers’ risk models. Mr Pai says: “Quantum sensing can also be applied to reap real-time benefits from risk modelling, leveraging ultra-precise, accurate and real-time data.
For example, using sensing technology such as quantum gravimeters, insurers can better survey the environment to monitor natural disasters.
According to the University of Glasgow, which has a team dedicated to the subject, gravimeters measure “small density variations underground” using gravity.
For example, these are being used by engineers and mining corporations to assess potential mineral deposits or whether there are underground caverns.
A microelectromechanical system gravimeter is being developed at the Institute for Gravitational Research, in collaboration with the James Watt Nanofabrication Centre - and the gravimeter, called ‘Wee-g’ is no bigger than a toddler’s hand.
Dr Richard Middlemiss, one of the device’s developers, says: “Gravity surveys for geophysical exploration could be carried out with drones instead of planes; and networks of MEMS gravimeters could be placed around volcanoes to monitor the intrusion of magma that occurs before an eruption – acting as an early warning system."
When it comes to insurance, therefore, using quantum sensing can help insurers make better risk assessments.
Capgemini’s report also cited insurers getting first mover advantages in the race to collate, curate and keep data secure.
The report says quantum communications offers secure and tamper-proof data transmission for insurers, such as using quantum cryptography or quantum key distribution.
According to the report: “For insurers looking to accelerate real-time data-driven decision making, including leveraging complementary technologies such as AI and ML, quantum technologies promise huge potential.
“With technology advancements in the long run, data security will become a strategic focus area where post-quantum cryptology will become extremely relevant.”
Insurance companies are not the only ones to be testing the waters.
Research published in April this year by the Capgemini Research Institute revealed that 23% of global companies were working (or planning to work) on leveraging quantum technologies, while 20% were expecting to increase investments in the technology in the next year.
But, according to Mr Pai, insurers are steaming ahead: “In the short-term, we will see more and more insurers testing the waters with technology like leveraging Monte Carlo simulations for risk modelling and targeting.”
Hicks agrees this will only become more prevalent. He adds: “The impacts of climate change will continue to unfold, across a vast range of geographies and industries.
“Historical trend modelling has value, but is no longer sufficient for pricing and understanding where to focus resources. This is why we constantly review and expand our scope and sophistication in this area and strive to improve data quality.”
What insurers need to consider
- Benchmarking climate strategy against peers in terms of commitments and performance.
- Reshaping portfolios to consider climate risk from counterparties, the volume of green activities, and changing the products offered in line with the risk appetite.
- Pricing, exposure management, reserve adequacy and uninsurable risks.
- Impact on underwriting to factor climate risk into product design.
- Reinsurance to transfer the risk of natural catastrophes.
- Working closely with the public sector to understand natural catastrophe planning and expectations.
- Use of probabilistic models to analyse scenarios and embed climate risk management processes.
Source: Grant Thornton
Simoney Kyriakou is senior editor of FTAdviser