Much is written these days about “disruption in insurance” – a welcome notion, indeed, in an industry that has stayed largely the same over the last 200 years (at least according to Michael Costonis).
Insurance is definitely ripe for change; it’s still essentially about capital placed against risk, and much of the pricing of insurance is still done based on historic data, which makes it challenging to provide pricing models for completely new products (e.g. cybersecurity) or services. To ensure continued success, carriers need to plan now for the disruptive forces that will shape the industry of tomorrow.
It is scary to read recent Accenture research that shows that 93% of Chief Strategy Officers (regardless of industry) agreed that they will likely be disrupted within 5 years – but only 20% (!) feel highly prepared to deal with it. So, with an eye to the P&C industry, let’s focus on what types of disruption we can expect:
– New Insurance Providers (e.g. Lemonade, Huddle, or Amazon)
– New Insurance Models (e.g. peer-to-peer and usage-based)
– New Insurance Processes & Delivery Models (e.g. use of drones and adoption of SaaS)
– New Insurance Products (e.g. cybersecurity and self-driving car coverage)
– New Insurance Pricing (e.g. pay-as-you-go pricing)
New Insurance Providers
New entrants can be a threat to the establishment in any market; in our industry, insurtech firms are leveraging advanced technologies to start up in a matter of months. These companies are more agile and cost-effective compared to many incumbent organizations still struggling with legacy systems that are as flexible as reinforced concrete, and operating costs best classified as millstones.
On the other end of the new provider spectrum are large, established, and successful companies like Amazon entering the market. These companies have the money, brand recognition, and track record to deliver cutting-edge, highly-personalized services to customers, critical now more than ever as customers expect their insurance company to provide similar experiences to the ones they’ve come to expect from any other online business.
New Insurance Models
Customers want simpler interactions with the companies they do business with, and offerings tailored to their needs and wants. They also expect that their insurers already offer the right solution to meet their needs, even prior to them realizing what those needs really are. There is also a growing expectation among insureds that these solutions should be available anytime, anywhere. The response of several newer entrants to the industry has been to introduce new ways of considering how insurance should work in the first place. Peer-to-peer insurance networks, for example, now allow individuals to pool their money for coverage of select items, effectively becoming a collective of investors in the safety of the group and their belongings.
Furthermore, customers increasingly require complete solutions that blur the lines between insurance and other commercial ecosystems. This can be both an opportunity and a threat. On one hand, the expanding ecosystem of firms partnering with carriers to deliver these solutions is expected to account for 30% of global insurance revenue (some $60 trillion) by 2025. A good example is that of usage-based auto insurance, which relies on sensor and transmitter manufacturers as well as data analytics firms to inform carriers’ risk and pricing models. While developments like these sound exciting, we also see other players entering the insurance market as potential threats, such as manufacturers of electric and autonomous vehicles providing insurance on their own.
New Processes & Delivery Models
Traditional insurance processes have been centered on the basic functional steps that need to be performed for a quote: client interaction, underwriting, pricing, etc. This has traditionally resulted in long turnaround times for applications and quotes, with delays typically creeping in between each step. However, advanced technologies now make it possible for these processes to be combined and centered on the customer: instant response is the new normal, and it should be a repeatable process that is available 24×7. Streamlining processes further and leveraging new technologies such as chatbots and AI will drive this phenomenon mainstream very soon. Carriers that don’t plan for a more customer-centric future now will find themselves in a position of real disadvantage.
Today’s technology lets insurers obtain information faster, more easily, and less expensively than ever. Drones have proven their worth not just in claims assessment during bushfires or floods, but also for underwriting large structures. The enormous amount of available data available from the of Internet of Things provides tremendous opportunity. Furthermore, the use of core systems delivered in a software as a service (SaaS) model drives down costs and makes insurers more efficient. These are all considered new practices in the industry, but it won’t be long before all carriers will need to invest in these technologies to stay relevant and solvent.
New Insurance Products
New products such as cybersecurity and self-driving car policies provide risk modeling challenges, as there is limited or no historic data from which to build. With such new risks, the very concepts of loss and impact can be hard to specify, quantify, and rate. These threats to the old way of thinking will force established carriers to completely rethink their product development strategies to stay relevant. Meanwhile, other companies now focus on specific niches, such as one-off or single item coverage (e.g. www.insurance4that.com.au). Rather than issuing policies like traditional homeowners or renters coverage that tend to apply to all of one’s belongings, these providers allow insureds to secure coverage one item at a time. This can be very appealing to those who want to cover only their highest-value items while saving money overall by skipping out on a broader policy.
New Insurance Pricing
With the advancement of the Internet of Things, one can also expect to see advancement in pay-as-you-go insurance (e.g. automatic overseas travel coverage kicking in when your phone detects that you are leaving the country). Another very real possibility is the application of telematics on a real-time basis, whereby, for example, driving events and behaviors provide data that allows carriers to make instant, constantly updating adjustments to insureds’ premiums. Finally, advanced rating solutions could provide insureds with options to determine how they set the price of their coverage, such as:
· Do It Yourself: Customers would build pricing from the ground up, choosing each individual policy component a la carte.
· Simple Packages: As health insurance is now doing with Bronze, Silver, or Gold coverage, some types of P&C insurance could be based on a limited set of variables and “packaged” to offer fast and simple purchases
· Set Your Price: Customers would specify what they want to pay for insurance, and are presented with proposed coverage. Key coverage missing at any given price point would be highlighted, and customers could add this to their policies if they wish.
· Me-Too Pricing: Customers would highlight key personal characteristics (e.g. age, family status, job, etc.) or commercial characteristics (type of business, location, size of business, etc.) and get quotes that represent the coverage most commonly selected by the customer’s peers.
These factors, and many more, stand to shake things up in significant ways in this historically slow-moving industry. The one thing that is certain is that the carriers that will make the most of the rapidly transforming P&C industry and succeed in an uncertain future are those that make plans and investments now – ones that enable them to quickly respond to a world defined not by stasis but by rapid, exciting change.