for a less risky futureDuncan Sutherland
The value of any investment can fall as well as rise and investors may not get back the amount invested.
The insurance industry is being transformed by technological change – from drones to driverless cars. Duncan Sutherland considers how this will shape the future.
Insuring the Future
At first thought the insurance industry might not spring to mind when someone mentions technological change. However, ever since the first fire and accident insurers were set up in the UK in the 1700s, insurance has been a key enabler of every industrial revolution, transferring risk and helping business confidence in the process. While the dry-as-a-desert text of an insurance contract may not elicit the same excitement as the new ideas coming out of Silicon Valley, insurance continues to play its quiet role in the background and is itself wide open to technological change.
Don’t fall asleep at the wheel
Despite the relative dullness in the industry, insurers must also adapt their business models to the fourth industrial revolution – technology – and align themselves for the future. Those that can successfully do that will be great income investments for the long term.
Take one of the largest segments in the sector, car insurance: if autonomous vehicles become the norm, will there still be the same need for car insurance? If there is an accident, who would be to blame? The ‘lead’ passenger in the vehicle? The car company that provides the software? The street sensor provider whose equipment monitors the traffic on the road? These are not questions that can be answered now but they are the questions that insurers are starting to consider as they assess how the sector could develop.
Even if not all future insurance offerings might face the same tectonic shifts as suggested above, technology is likely to have a significant impact on the sector. Let’s look at three further examples of how insurance is already changing as technology develops.
Come rain or shine
One area where technology is likely to be crucial for insurers is the innovation needed to navigate the perils of climate change. The wildfires of recent years are one such example; in the last decade they have led to approximately $55bn of insurance losses, compared to approximately $14bn over the previous 30 years. With wildfires unfortunately likely to continue, insurers need to develop ways of minimising the risks, while still offering insurance to policyholders. Increased use of drones is one method being used, with insurers able to highlight preventative measures that can be taken, such as the removal of the vegetation surrounding their property.
While drone technology helps insurers with the practicalities of the physical world, the enormous amounts of data that are being created provide opportunities for insurers to improve their risk assessment which should allow for better price policies. Hiscox, an insurer whose bonds we bought for some of our funds, has been forward-thinking in its use of data analysis to discover that small businesses with PO box addresses are much likelier to claim substantially higher insurance losses. As more data becomes available and the capability to analyse it increases, the potential advancement in Hiscox’s risk assessments could be significant.
Blockchain on the sea
Blockchain is making headlines thanks to the rise of cryptocurrencies. Yet blockchain also offers significant utility to insurers, especially when it comes to improving efficiency in a field renowned for its bureaucracy. Is it any surprise that Franz Kafka, the author of memorable depictions of nightmarish complexity, worked for an insurer?
If we turn to the insurance intensive maritime sector, the use of blockchain allowed the Danish container shipping company Maersk to make a step change towards greater efficiency. Traditionally, Maersk could end up processing 100 documents from several intermediaries for the insurance of just one vessel. Through working with insurers, elements of Maersk’s insurance are now implemented with blockchain, not only providing Maersk with an improved service but also allowing insurers to reduce their costs. While it is still early days, blockchain usage will likely grow in importance, and those insurers developing it are likely to benefit materially. Indeed, further afield ZhongAn, a Chinese insurer and recent investment for our clients, is making blockchain a focus for the future of its business and could lead the sector in this area in the years to come. This progressive company’s bonds yield a healthy 3.5 per cent, with the potential for rating upgrades as the business scales in size.
Through this trio of examples, we have only scratched the surface of the changes that are likely in the years ahead, painting a picture of why insurers need to adapt. Cutting-edge data technologies have a huge role to play in refining the pricing of risk and cutting down red tape. As investors, we are continuously adapting our understanding of evolving business models, because technology changes are affecting even the apparently more mundane sectors, such as insurance. Ultimately, we believe this will help us pick great companies positioned for opportunities of the future and deliver sustainable income for our clients.
look to the future.
Not the past.
The views expressed are those of the Income strategy teams and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
Any stock examples and images used are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
This page contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
Past performance is not a guide to future returns.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK clients. Both are authorised and regulated by the Financial Conduct Authority.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions ('FinIA'). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
La presente oferta se acoge a la Norma de Carácter General N° 336 de la Comisión para el Mercado Financiero (CMF) de Chile. La presente oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro deValores Extranjeros que lleva la Comisión para el Mercado Financiero, por lo que los valores sobre los cuales ésta versa, no están sujetos a su fiscalización. Que por tratarse de valores no inscritos, no existe la obligación por parte del emisor de entregar en Chile información pública respect de estos valores. Estos valores no podrán ser objeto de oferta pública mientras no sean inscritos en el Registro de Valores correspondiente.
The securities have not been, and will not be, registered with the Colombian National Registry of Securities and Issuers (Registro Nacional de Valores y Emisores) or traded on the Colombian Stock Exchange (Bolsa de Valores de Colombia). Unless so registered, the securities may not be publicly offered in Colombia or traded on the Colombian Stock Exchange. This presentation is for the sole and exclusive use of the addressee and it shall not be interpreted as being addressed to any third party in Colombia or for the use of any third party in Colombia, including any shareholders, managers or employees of the addressee. The investor acknowledges that certain Colombian laws and regulations (including but not limited to foreign exchange and tax regulations) may apply in connection with the investment in the securities and represents that is the sole liable party for full compliance therewith.
The shares have not been registered before the Superintendencia del Mercado de Valores (SVM) and are being placed by means of a private offer. SVM has not reviewed the information provided to the investor. This document is not for public distribution.
The interests in the following securities have not and will not be registered in the National Registry of Securities maintained by the National Banking and Securities Commission, and therefore may not be offered or sold publicly in Mexico. The interests in the following securities may be offered or sold to qualified and institutional investors in Mexico, pursuant to the private placement exemption set forth under Article 8 of the Securities Market Law as part of a private offer.
Information on the relevant LATAM funds is available on request. Please contact [email protected]
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used are for illustrative purposes only.
YOU MAY ALSO LIKEInsights.Visit Baillie Gifford's Insights page.The Great Divergence Between East and West.China has defied recession in 2020, but where to now? Investment manager Roderick Snell anticipates big things ahead.The Indian economy’s ‘missing’ female workers.Women dropping out of employment should weigh on investors’ minds.US Equity Growth Webinar: The Long View.Join Investment Managers Tom Slater, Gary Robinson, Kirsty Gibson and Dave Bujnowski as they share their thoughts on the investment environment, explain why they believe there is scope for upside from here, and discuss their search for transformational growth companies.