Artificial intelligence and big data tipped to wreak havoc on traditional models

Digital disruption is on its way to change how we manage our finances.

Digital disruption is already part of my day-to-day life. I don't think twice when I book holiday accommodation through Airbnb or order a taxi with the Uber app.

The way we bank and invest our money has already been transformed by digital technologies, says Michael Naylor, senior lecturer in the school of economics and finance at Massey University. Computers have replaced face-to-face share transactions, for example, and the internet allows investors to place buy and sell orders without phoning a broker.

Although technology is disrupting financial services jobs, the organisations themselves face competition from external disrupters that aren't among their traditional competitors.

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It's conceivable that not far in the future we'll take out insurance with a provider unlike today's insurers or use our Trade Me account or Google Wallet to store money instead of putting it in the bank.

Google has huge processing power and knows an awful lot about us.

It can probably tell from your internet searches whether or not you'd be a good risk to lend to or insure against cancer and heart disease.

Even if Google doesn't want to be my bank and insurer, there are entrepreneurs around the world looking for disruptive ways to become the Uber of banking.

Regulation is one of the big inhibitors of the Uberisation of our personal finances.

It means that Google, or for that matter someone associated with a disgraced finance company, can't suddenly decide to create a bank and open up shop in New Zealand.

Banks, lenders, insurance companies and others offering financial services are mostly licensed by the Reserve Bank of New Zealand, must sign up to a dispute resolution service such as those provided by the Insurance & Financial Services Ombudsman or Banking Ombudsman, and meet other rules.

New technology, however, sometimes overtakes regulators and if we all started depositing our money with a Mumbai-based disrupter, the watchdogs could be left scrambling.

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Consumers rely on financial regulation.

Some enforcement of regulations is already too light. Without enforceable rules, we could find ourselves at the mercy of a fresh crop of Blue Chips, National Finances or any of the dozens of other companies Kiwis lost life savings to.

So-called "robo advice", in which human advisers are replaced by a computer algorithm, has been held back by regulation, although that looks set to change later this year.

Naylor, who is researching digital disruption, believes it's just a matter of time before the insurance industry will be stood on its head. Technologies are converging fast, he says, and will change the way we insure. In particular, big data and artificial intelligence will wreak havoc on traditional insurance models.

Technologies are converging fast, he says, and will change the way we insure.

Insurers will have the ability to tell how often we exercise, what food we buy, how much alcohol we buy on a Friday night and so on. That means they'll be able to predict individuals' risk with greater accuracy and tailor premiums for health-related cover, for example.

Privacy issues will arise, but those of us who are healthy and consider ourselves to be above average drivers may choose the company that offers to reduce our premiums in exchange for access to our data.

Tower already offers discounts on its motor-vehicle insurance based on usage measured by its SmartDriver app.

In the UK, says Naylor, where regulation is well ahead of ours, young drivers willing to have their driving monitored continuously are flocking to a new insurance company called Drive Like A Girl. Only drivers who agree to have a black box fitted to their vehicle and have their driving behaviour and mileage monitored are taken on as clients.

Insurance disruption goes a lot further. Electronic keys may refuse to start a vehicle if they detect alcohol, and many cars will be self-driving, resulting in an estimated 80 per cent fewer accidents. Those developments will reduce insurers' risks.

Car manufacturers with internet-enabled vehicles may become our insurers. "The world of the insurance company is about to be blown apart," says Naylor, who points out that motor vehicle insurance is 60 per cent of general insurers' cash flow.

If disrupters end up scooping a large proportion of that revenue, existing insurers are in for considerable pain, he says.

The general idea is that policy holders agree to support each other financially without needing the services of traditional insurance companies.

Peer to peer (P2P) insurance cover is another threat for the industry and potential boon for consumers. Actuary Chris Logan, who runs the website PeerCover.co.nz, has been investigating ways that consumers could club together to provide insurance to each other. PeerCover doesn't yet offer a product and is still at the conception stage.

The general idea is that policy holders agree to support each other financially without needing the services of traditional insurance companies.

One model Logan has looked at involves groups of individuals paying premiums into a pool. Claims would be paid from the pool of money, or refunded if there were no claims.

P2P lending is already being offered in New Zealand by Harmoney, Squirrel Money, LendMe and Lending Crowd. Investors make money available to borrowers via these online platforms. Their return is the rate at which the money is being lent minus the platform provider's cut.

Interest rates are weighted against the higher risk of the lending, and investors need to be prepared to lose the principal if the borrower defaults on the loan. It can take a lot of interest earnings to make up for lost capital.

Returns of 10 or 15 per cent a year might look good on paper, but the trade-off is the risk the investor runs of the borrower defaulting.

P2P platforms are privately held businesses that don't need to operate with the transparency of a bank or other stock exchange-listed company. Investors have no guarantee of the care with which their money is being placed.

The concept of P2P lending, in which investors' money is split between many loans, is safer than the lending by finance companies a decade ago to property developers involved in speculative projects that sometimes collapsed.

P2P loans are mainly going to individuals borrowing for cars, holidays, home improvements and debt consolidation, which is usually safer than development loans.

As with all disrupters and new-style investments, buyer beware.