Generative AI is Coming for Insurance (May 2023 Fintech Newsletter)


Generative AI is Coming for Insurance

Because underwriting, selling, and servicing rely so heavily on humans processing large quantities of written or verbal communication, existing tools have struggled to properly automate these services and materially impact loss ratios (losses on written premiums) and expense ratios (underwriting and servicing written premiums). Large language models (LLMs), with their ability to proficiently collect and distill large amounts of information, could change this as they’ll augment or fully replace the means of a human combing through large amounts of information. 

While current machine learning technology allows for improved decisioning on easy products like auto and residential insurance, more complex underwriting processes like industrial and life insurance remain difficult. This has less to do with the means of relevant data and more to do with the relevant data. While traditional ML models have helped dramatically improve more standardized underwriting processes like home and auto, LLMs could potentially help with the more complex group by gathering data to assist underwriters make higher decisions, especially in additional intricate cases like large industrial policies where more context and follow-up questions are required. For instance, most large industrial policies cover dozens or more locations, and every location has specific nuances (akin to electrical panels, fire doors, sprinkler density/effectiveness, management effectiveness, amount of flamable storage) that have to be gathered from the applicant, understood by the underwriter, and evaluated against underwriting guidelines. LLM-powered workflow software for underwriters could drive down underwriting time and price while increasing accuracy.

On the sales side, considered purchases, like life or disability insurance and annuities, are primarily sold offline through human agents and brokers because they’re complicated products that buyers often have questions on. (Consumers are quicker to purchase mandatory insurance products, like home or auto insurance, online.) LLMs trained on customer data or materials on what policies are appropriate for a certain customer situation could help answer complex questions for consumers about what policies they can purchase and the way that policy might impact their unique needs.

And at last, carriers and agencies employ large policy-servicing divisions to assist with changing policies, customer support, and claims, in addition to “internal wholesaler” teams to continuously monitor and repair the production of affiliated agencies or brokerages. Consider these as vertical-specific call centers where a representative must distill what a customer, agent, or broker actually needs during a conversational dialogue, and either respond with the reply or enter the suitable information right into a system. Allowing LLMs to administer a few of these conversations could dramatically improve efficiency and profitability. 

Opportunities & Risks with Third-Party Payment Links 

For the primary time in greater than a decade, Apple’s stronghold on app distribution and monetization could also be threatened, as a U.S. appeals court confirmed in April 2023 that Apple can now not prevent third-party payment links within the App Store. The case dates back to 2020, when Epic Games—whose founder Tim Sweeney was a vocal opponent of Apple’s 30% revenue cut on all App Store purchases—attempted to bypass Apple’s payment system with their game “Fortnite.” Apple subsequently blocked “Fortnite” from the App Store. 

Why is that this such a vital development? As we wrote in our piece on payments for high-risk industries, if developers gain the flexibility to embed third-party payment links of their apps, they may have the ability to directly see who their customers are and what their spending behaviors are like (something currently obfuscated by Apple). It will in turn allow developers to construct deeper relationships with their customers, cross-selling them products and driving them to specialized offers and discounts—ultimately driving greater profits. 

Moreover, if these third-party payment links allow developers to bypass Apple’s 30% take rate, developers could potentially deliver more value back to customers and drive greater loyalty. That said, it’s unclear today if Apple would budge on its take rate; in South Korea, for instance, Apple has been prohibited from banning third-party payment links, but in keeping with their very own documentation, they still require developers to pay a commission fee of 26%.

Nevertheless, there may be one critical detail that the majority are overlooking here: namely, that Apple’s App Store acts as a merchant of record for its customers; that’s, it accepts payments on behalf of apps available on the shop. Merchant-of-record platforms are authorized and held responsible for a given merchant’s transactions. These can include processing payments, managing all payment processor fees, coping with financial institutions, managing refunds and chargebacks, providing billing-related customer support, and ensuring businesses remain compliant with global tax regulations—which might develop into very complex when a product is sold in numerous states and countries. The merchant of record’s name is what a customer sees on their bank statement, because it holds the processed amount for a brief time period before it’s transferred to the business. Firms like Stripe, Adyen, and PayPal, for context, usually are not merchant-of-record platforms, but slightly payment service providers (PSPs). This implies they don’t fully abstract away global payment operations, nor do they tackle the liability of really remitting taxes even in the event that they help calculate the amounts owed.

We’re more likely to see an explosion of recent apps that sell the world over, especially as the arrival of generative AI drives down the price of running a minimal viable enterprise and each mobile phones and native digital payment methods proceed to penetrate latest businesses. Nevertheless, selling across the globe is becoming more complex given changing laws across the definition of where taxes are owed (i.e., the “tax nexus”) for digital products. For instance, the U.S. now considers any state wherein an organization sells a services or products a tax nexus, even in the event that they don’t have a physical presence in that state. Moreover, some countries don’t have any minimum threshold for owing and paying taxes (e.g., India). While latest software products can assist merchants calculate the quantity of taxes they owe in a given geography, they don’t actually help with the remittance of said payments—which is usually a massive undertaking to establish in-house.

If developers of those apps go within the direction of bypassing Apple’s payment infrastructure to achieve the advantages described above, they may have to think through the merchant of record trade-off:  whether or not they wish to move in-house all the functions and liabilities which can be required to sell globally, or in the event that they prefer to partner with a merchant-of-record platform that removes that complexity away from them. 

Visa+, Interoperability, and Creating Clearinghouses for Recent Payment Methods

Last month, Visa announced its Visa+ initiative to attach peer-to-peer (P2P) payment platforms. Launching later this yr, Visa+ will allow users of various P2P payment services to pay one another directly after they create a personalised “payname,” or handle, to attach their accounts. The service will even create an interoperable path for third parties to hook up with P2P customers through a single platform (e.g., allowing a merchant or platform to make disbursements via the P2P platforms). Visa+  will launch with Venmo and PayPal (despite the fact that, yes, PayPal owns Venmo, users can’t yet transfer money between the 2 services in real time…) and can add DailyPay, i2c, TabaPay, and Western Union as partners in 2024. 

Visa must get various things right here, but in the event that they succeed, there’s an interesting opportunity for them to develop into the clearinghouse for immediate P2P payments, much as they’re for card payments. More broadly, the introduction of Visa+ raises a matter across the proliferation of payment methods and whether we’ll see more centralized clearing or consolidation.

With Visa+, Visa simplifies how merchants can receive payments; as a substitute of getting to integrate with three or 4 P2P providers, they’ll now (potentially) just integrate with one. The identical applies for employers, who would favor to integrate with only one wallet provider, not five. Visa’s involvement and extra layer of authentication also provides participating P2P platforms with some amount of fraud detection and securityIt also allows the corporate to strategically sit  in the course of all P2P transactions. This scenario may also potentially extend to cross-border use cases; for instance, a user of a wallet that operates within the U.S. could send money to a Visa+ user in Kenya, even when the 2 wallets didn’t do cross-border payments.  

For Visa+ to achieve success, Visa must determine find out how to persuade consumers to create yet one more payname and use the service. A part of this effort shall be as much as marketing, but the corporate also must open up a latest use case for consumers, solve a standard friction point, or each (e.g., if Visa+ made it easier for gig staff to receive payment). Visa+ also must account for the absence of CashApp and Zelle, that are utilized by 30-40% of the U.S. population), in addition to major wallet providers like Google Pay and Apple Pay, from the service. Without these players, the advantage of participating in a meta layer is more limited. Visa, because it often does, can use marketing incentives to get these platforms to work with Visa+—though these advantages may not supersede the platforms’ desire to own their relationships with their customers (versus ceding it to a 3rd party like Visa). This is particularly true for EWS, the fintech company that owns Zelle and is itself co-owned by seven U.S. banks. Seeing as Visa was also originally controlled by a consortium of banks, EWS may not wish to undergo an analogous disruption.  

Payments products take time to adopt. ApplePay, NFC-based cards, and other successful examples all took greater than 10 years to achieve widespread adoption. So, even when Visa can pull off the execution of this, I wouldn’t expect broad consumer adoption of Visa+ immediately, nevertheless it’s one to observe and see. Interoperability can also be a theme that may emerge given the proliferation of consumer (and likewise B2B) payment options at checkout across wallets, BNPL, pay by bank, and more.

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