Insurers will still be relevant in the future, even more than yesterday
8 January 2018
Connecting the dots through insurance
The insurance sector is now seeing the same dynamics already experienced in many other sectors, including financial services, with start-ups and other tech firms innovating one or more steps of the value chain traditionally belonging to financial institutions. Insurtech has seen extremely important investments in the last years, and the word “disruption” is coming out frequently on the insurance debates. But I consider it a joke for an industry conference to show a picture of a newborn and sell it as the last intermediary or the last client to have purchased an insurance policy.
Insurers were able to image and execute this exceptional innovation. For this reason, I’m positive about the future of the sector. I’m convinced insurance companies will still be relevant in the future, or will become even more relevant than they are now, but these companies will have to be insurtechs, or players who use technology as the main enablers for reaching their own strategic objectives.
Insurance IoT is one of the first insurtech trends to come to fruition. Sensors have become a ubiquitous part of everyday life, expanding our world to include people and businesses around the world even while they connect us ever more intimately with those nearby and even with ourselves, as well as with our homes, workplaces, possessions, and – increasingly – insurers. Today there is more than one connected device per person in the world, and by some analysts’ estimates there will 50 devices per a family of four by 2022. The insurance sector cannot stop this trend, it can only figure out how to deal with it.
“Connected insurance” is the name of this game: insurance solutions using sensors to collect data on the state of an insured risk, and telematics for remote transmission and management of that data. Auto-telematics is the most mature-use case but innovative initiatives are coming to the fore both on home and health insurance.
“I’m convinced insurance companies will still be relevant in the future, or will become even more relevant than they are now, but these companies will have to be insurtechs, or players who use technology as the main enablers for reaching their own strategic objectives”
Connected insurance is affecting the whole insurance value chain and generating real value for insurance profit and loss. The five main value-creation levers are:
1. Behaviour “steering” programmes, leading the client toward less-risky behaviours and so reducing their claims
2. Value-added services, developing client-tailored ancillary services that allow the insurer to deliver enlarged value propositions
3. Loss control, developing a broad approach to reduce claim costs:
- acting directly in real-time on the single situation to mitigate the risk before the damage happens and contain the damage
- anticipating claims management and improving reimbursement valuation
- improving the efficiency of the claims process
4. Risk selection, creating value proposition able to attract less risky clients, improving the quality of the underwriting process based on the sensors’ data, or increasing the efficiency of the underwriting process
5. Dynamic risk-based pricing, developing insurance policies with pricing linked to individual clients’ risks and behaviours. In this way premium leakages are reduced and low-risk individuals can be offered lower prices, increasing their retention and acquiring more of them.
The connected insurance paradigm is based on value sharing. In any business lines, insurers can, on one side, use the data from connected devices to generate a value on the insurance profit and loss and, on the other, build value propositions focused on sharing this value through incentives, services, and discounts. The value-creation equations will become more and more articulated with the diffusion of those approaches on the market, but that scenario will be characterised by relevant value sharing. You can figure out the level of positive externalities generated by an insurance sector able to change behaviours and prevent risks.
I created two insurance IoT think tanks – one dedicated to the North American market and one to the European one – consisting of more than 50 insurers, reinsurers and tech players, formed to discuss insurance IoT opportunities and promote a culture of innovation in the insurance sector. The discussions I have with them weekly lead me to believe that the concrete and actionable five levers mentioned above allow insurance carriers to exploit the value of the IoT data on their P&L. This approach represents a unique competitive advantage compared to any other players in the IoT arena. In this way, the insurance carriers will stay relevant or will become more relevant than ever. The benefits for the insurance sector in adopting this paradigm also include an increased frequency of interaction with the customer – a proven way to earn greater loyalty – and the unique opportunity to build knowledge about customers and their risks.
It is a pity to hear futurologists at insurtech conferences using AI within the connected home buying insurance via smart contracts when the fridge needs maintenance, or an AI within a wearable watch buying insurance via smart contracts if you are injured playing basketball, as examples of insurance IoT use. This is not insurance, as there is no risk transfer or randomness (accidental and unintentional loss).
Instead, the business model, and even the role of insurance companies, are not changed but enlarged by this technology evolution. The essence of the insurance sector since its origin in 1347 has always been assessing, managing and transferring risks, but the direct results of technology adoption are “superpowers” that enable the same things to be done much better.
Matteo Carbone is an Insurtech Thought Leader, Keynote speaker and writer on insurance innovation