Complexity in Insurance Contracts

by Dandolo Flumini @ Mitra-Solutions AG

Terms and conditions of insurance products are of Byzantine complexity, and it's all over the internet.

CHOICE, the Australian consumer organization notes that despite several attempts at fixing the issue,

.., the fine print continues to defy comprehension. see here

Travelweekly deems

Trip insurance terms too complex to comprehend.. see here

also, the Financial Times notes that

The head of one of the world's biggest life assurers has admitted his industry suffers from a credibility problem because it has sold over-complex products to savers.. see here

Of course, this list can be extended almost indefinitely.

The Price of Complexity

Unfortunately, complexity is not just a minor inconvenience but a significant driver of costs, inefficiencies and customer dissatisfaction in personal line insurance. To get an overview, we briefly organize the pain points regarding the affected actors, the customer, and the companies respectively.

The Customers Perspective

The customers are the apparent victims of overly complex insurance policies; they either have to put in the effort to cut the Gordian knot or otherwise blindly buy into products they don't understand. In particular, customers struggle with:

• Choosing the right product: It is nearly impossible to compare policies from different providers, many customers choose or keep policies with unfavorable conditions.
• Trust: Customers feel like they cannot rely on their insurance since there always seems to be that one exclusion precisely matching their claim at hand.
• Service: Having a claim settled can be a tedious exercise, more often than not there is no instant assessment of coverage; instead the customer faces extensive and sometimes frustrating interaction with the insurer.

The Insurers Perspective

While the complexity diminishes customer experience, the insurance companies suffer no less. Complexity in their products is one of the main cost drivers in operations, and it is a significant problem for digitization and automation:

• Cost: Coverage terms are not or only partially digitized, claims assessment is mostly manual, labor-intensive and depends on the ad-hoc interpretation of policies.
• Consistency: There is little to no guarantee that claims are handled consistent with the actual terms and directives, nor that different cases are handled uniformly.
• Innovation: It takes significant effort and long implementation cycles to put new product ideas into production, the time-intensive involvement of IT and training of claims staff is necessary.
• Insights The manual nature of the claims handling process hinders an effective collection of detailed data regarding (sub) perils, items of claim and final coverage information. Thus, new products and product renewal are not well quantitatively supported, slow and risky.

Simplifying is not Simple

Why not just try and get rid of complexity as much as possible? Some companies indeed work towards simplified or even “radically simplified” policies. Lemonade, for instance, has simplicity and transparency as an integral part of its philosophy. However, simplifying insurance products is no easy task. Given that every product needs to create a balance between “looking good on paper” with regard to coverage and price, and at the same time achieve a favorable loss-ratio, some degree of complexity, in the right places, is required. Thus, lowering complexity in the wrong places, and thereby limiting one's possibilities to fine-tune crucial parts of a product, will inevitably result in dysfunctional policies. Hence, “blind simplification” can be a severe impairment to product development.

Conclusion

Given that getting rid of complexity is possible only to a certain degree and is not an easy task at all, intelligent tools should be used to deal with it. We at Mitra believe that such tools should

• Deal with complexity where necessary: Digitally create, organize, automate and store insurance products of any complexity.
• Help to get rid of complexity where possible: Use data insights to make suggestions about where precisely complexity can be cut out and inform the user about the costs associated with the modifications.

The Role of Mitra

Creating such tools is what we do at Mitra; we have built a framework tailored to implement digital insurance contracts and GICs from scratch and without any restrictions. Our framework includes a user-friendly environment that allows digitalized development to be steered from the business (instead of the IT department). The main features and benefits of our system are as follows:

• Business-centric: Business department drives digitization. Automation is defined directly by the business department and not the result of time-consuming and expensive IT projects that rely on coders to interpret what the business needs.
• Single source of truth: All refer to the same “core” thus no media disruptions, improved consistency, and automatic synchronization.
• Views: Involved parties (product managers, claims department, pricing) all have their own customized “view” onto the core; everybody refers to the same dataset but only sees the information relevant to his workflow.
• Interaction: GIC's become interactive entities; they can be tested and statically analyzed like software, be used to run simulations (e.g., for pricing)and can be directly executed for claims automation, etc.
• Insights and de-complexification Handling claims with the Mitra system means that processed data automatically stored and available for future insights (e.g., product renewal). Moreover, the analytics toolset applies real claims data to guide the process of decomplexification, the exact costs associated with the atomic clauses (and their removal respectively) in a products GIC can be highlighted.

If you are interested in knowing more about how our system works, don't hesitate and contact mitra@mitra-solutions.com.