This article was originally commissioned for the November 2016 edition of the Actuarial Post.
There has been a huge increase in the personal use of technology from just a decade ago, driven by the miniturisation of powerful ICT components, which has made it possible for people to carry personal systems with computing power vastly beyond that which was employed in the moon-landing programme. This has transformed the day-to-day life of consumers and, inevitably, altered their perception of what service levels are acceptable from companies.
Cellular communications allow us to connect with people and businesses wherever and whenever we choose. Self-driving cars are in trial stage in many locations globally. Automated service machines, such as robotic waiters and call-centre responders, are improving services throughout the planet. Automation is impacting every aspect of our lives, allowing us to interact more efficiently with the world around us, and reducing the cost of providing these high levels of service.
Some parts of the financial services sector have been changing rapidly with the rest of society. Automated share trading is incredibly common among large fund managers who use it to ensure that trades are made in good time in either falling or rising markets when trigger points are reached. The general insurance industry is also using technology in a big way, with many general insurers using in-car devices to monitor driving quality and thereby adjust insurance premiums and home insurance providers are becoming more efficient and assessing and processing insurance claims, e.g. Travellers in the US are using drones to help assess roof-top damage after the recent Hurricane Matthew, thereby reducing the number of assessors required, speeding up the claims process for claimants, validating claims more quickly and reducing costs, thereby allowing premiums to fall.
Thus far, the life and pensions sector has not been so affected by automation. Perhaps this is because the frequency of interaction between customers and the life companies is relatively low. But given the importance of the sector in providing for the financial security of individuals, we should ask why this interaction is so low. Is it because there is no perceived need for it or is it because the cost of interaction is so high and the process so cumbersome?
Financial products are by their nature very complex and attempts to simplify them have generally foundered on the point that simple products fail to provide sufficient flexibility to suit everyone. People’s personal circumstances vary too wildly and all generic products have been a classic case of one-size-fits-all aspiration generally degrading into one-size-fits-no-one. The result is that life and pension products have remained quite complex and as a result, financial advice remains one of the key drivers of sales in the sector.
The problem is that advice is extremely expensive to deliver, as it is currently delivered on a one-to-one, face-to-face basis. If the cost could be lowered enough to enable everyone to take financial advice, it would enable everyone to maximise their financial security and thereby reduce the need for state financial support.
One bright side of the increasing stringency of regulation in the advice area is that it has resulted in rules that are easily codified. Advisers operate strictly within the parameters of these regulations for fear of being sued by consumers in the event of the product not delivering the expected benefits. As a result, an individual receives the same advice whichever adviser he or she is talking to. This is a classic scenario for automation, as automation delivers the same result consistently.
One of the major objections to automated advice, or Robo-advice as it’s frequently called, is feeling that only humans really understand other humans and are capable of understanding what they are really saying, not just the words coming out of their mouths.
The computer industry is responding rapidly here. RBS is trialing a new software assistant with empathy, called Luvo. RBS claims that the assistant is capable of a greater understanding of human conversation and can learn from each conversation and build up their knowledge of customers. Similarly, Mastercard has also announced it is introducing a virtual sales assistant, which uses artificial intelligence to learn from its experiences. As these automated advice systems grow in knowledge, they can build a greater awareness of customer interaction and can apply this in a consistent manner across all of a company’s customers, ensuring a higher degree of compliance with regulatory rules.
The life and pensions sector needs to look at investing in this area as quickly as the banks as it has a greater need for artificial intelligence than the rest of the financial sector. Personal financial advice is a luxury that the majority of people cannot afford and yet these are the very people who cannot afford not to get it, as making the most of their limited means is crucial to both them and the state who will have to support them if they can’t support themselves. Automation, or robo-advisers if you prefer, provides the solution to ensuring that financial advice can be for everyone – it’s up to the life and pension’s industry to get behind it and make it work.