Innovation and the provision of legal services
Ten or so years ago, insurers began slowly to ask their legal advisors about technology and innovation. In those early days, such matters were generally addressed as part of a legal services tender. The questions themselves, perhaps by today’s standards, could be said to have been naïve. They included, “tell us what you mean by innovation”, or “what guidance can you give to us about innovating for the future”.
Over the last five years or so, such questions have become more focused. Insurers’ expectations of their legal providers’ understanding of innovation have ramped up. Lawyers’ (at least stated) desire to be innovative is undoubtedly at an all-time high; which is no mean feat given the profession’s reputation for less than rapid evolution.
One lingering and significant mistake made by legal service firms is in thinking that innovation means improving their own internal processes to maintain margin. That is not what it means to those lawyers’ clients. Our view is that such an approach is creating operational efficiency (which is undoubtedly laudable), but not driving true innovation.
We believe that true innovation means the persistent outward-facing product development for the benefit of clients. For global insurers, that means seeking global solutions and relying on legal services providers who have the necessary multi- jurisdictional vision. It’s also important that any such innovation should be capable of becoming a commercial part of the legal service being provided and not simply a “value add”.
Technology of course is one of the most obvious ways for legal services firms to innovate for the benefit of their clients. Such technology can be deployed by lawyers to help insurers to sell underwriters’ product, to reduce the need to rely on lawyers at all, to improve their own indemnity spend ; and improve their own operating ratios.
Much has been spoken about technology within society and of course within the insurance and legal sectors. Many readers will be familiar with Moore’s Law, which is often deployed to support the argument that the processing power of the average PC will double every two years. Similarly, it is often said that the impact of AI is currently overestimated in our market, but that its importance will come to be hugely underestimated in years to come.
At the same time, insurers face difficult and expensive choices as consolidation in their market results in needing to work with multiple legacy systems at a time when fresh investment is required as a result rapidly advancing technology and their customers’’ expectations of it.
AI, API and blockchain
Technology, and in particular new approaches to coding and development may offer some of the answers. It is developments there that are beginning to offer the potential for transformation in both insurance and legal sectors. So looking forwards into 2018, what are the top three technologies to look out for?
First out of the box is artificial intelligence (AI) and, as we have suggested, this is likely to continue to be over-hyped in the short term. Many of the solutions in the market that offer genuine machine intelligence will continue to be narrow in scope. The solutions that claim to be generalised will in fact offer only limited intelligence, focusing instead on the use of Optical Character Recognition, a technology which has been around for many years, to machine read structured documents. Progress will be made with unstructured documents but perhaps not at the rate the hype suggests.
Related to AI, predictive analytics that combine text indexing with machine learning are also growing in maturity in the insurance space. The ability to provide insight into likely case outcomes based on details of the case is all well within reach of contemporary machine learning techniques.
System integrations and the use of Application Programming Interfaces (API) will be more common place. An API provides a machine readable interface for machines to speak to other machines. Nearly all contemporary online service providers will offer an API as a matter of course and by doing so services become like Lego bricks, creating the potential to add value incrementally and quickly. The days of massive investment in monolithic all-encompassing systems (that fall short of expectations by the time they are delivered), may well be over. By ‘wrapping’ API’s around legacy systems, insurers can avoid the substantial investment needed to replace legacy system and still leverage all the advantages of modern API driven web services.
Finally, blockchain is likely to continue to make an impact in the short term and perhaps has the biggest potential of all technologies to make an impact in the long term. Blockchain is essentially a distributed ledger. It stores static records and/or dynamic transaction data without central coordination by using a combination of game theory and cryptography to ensure the validity of all entries. The first real application of blockchain has been in the context of Bitcoin, the global cryptocurrency where blockchain solves the double spend problem. In traditional currency a bank is required to ensure money cannot be double spent. With Bitcoin, blockchain does away with the need for any central coordination at all.
All blockchains have a number of common features of:
- Redundancy: a copy of the blockchain is continuously replicated on all nodes within the network and as a result there is no single point of failure.
- Immutability: each block of data that is stored is linked to its previous block in the chain. Changing any one block breaks the entire chain.
- Consensus: before one can execute a transaction on a blockchain, there must be agreement between all relevant parties that the transaction is valid.
Insurers’ services and processes it has been argued have evolved to cover for the fact that insurance has traditionally lacked both trust and transparency. As a consequence, brokers emerged as important and necessary mediators, creating trust and bridging the gaps between insurers, reinsurers and consumers. But if blockchain implicitly solves the problem of trust then will insurers need such currently crucial mediators at consumer level? In fact, potentially insurers may not need human lawyers, loss adjusters, underwriters or claims handlers either since all such functions can, in principle at least, be managed by the blockchain.
Taken together, there is a potential for technology to go well beyond simply making existing practice more efficient; and to instead profoundly transform our industry.