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Following in the footsteps of the digital-first giants, the insurance industry has finally joined the era of the customer. As the collision of technology and insurance continues apace, it is arguably having the greatest impact on the industry since the computer revolution of the 20th century.
The use of technologies that collect, record and transmit live data has proliferated exponentially, and for a data-reliant industry like insurance, the impact looks set to be profound.
From the rise in wearables to the growth in smart devices, these effects are already being realized in some cases.
In the near-term, carriers expect that smarter cars, homes and workplaces will become safer which will impact on the volume of claims, and the more accurate data there is about an accident, the less likely it is that a claim will be inflated.
That said, as the technology evolves and new business cases are explored, it is almost impossible to predict the future direction.
To provide a comprehensive overview of the progress and prospects of Connected Insurance, Insurance Nexus have produced the Connected Insurance Report, an in-depth study of the progress of digital insurance globally, today, and in the future.
The Connected Insurance Report is based partly on a survey of over 500 people working in insurance and related industries, as well as the exclusive insights of 20 renowned thought-leaders, including Matteo Carbone (Founder and Director of the IoT Insurance Observatory), Cecilia Sevillano (Head Smart Homes Solutions, Swiss Re), Boris Collignon (Vice President Strategy, Innovation and Strategic Partnerships, Desjardins General Insurance Group) and more.
This article will explore the central findings of the Connected Insurance Report, including:
Where Technology is Impacting the Insurance Business Most
Taking Responsibility for Technological Transformation
The Insurance Tech Stack
In the greater context, traditional business models across almost every B2C industry have altered drastically in recent years; companies such as Amazon, Uber and Netflix have changed how customers and companies interact, prioritizing the customer journey and experience over sheer profitability.
The impact of this trend on the insurance space has been significant; one-size-fits-all products are no longer enough, nor is expecting customers to weather the storms of poor customer service, opaque claims processing and product experiences that do not fit their lifestyles.
Newer players such as Lemonade, Trōv and Metromile have gained prominence by incorporating customer-centricity, flexibility and transparency heavily in their business models.
Our interviews confirmed that innovative technologies that will shape a connected future are coming to insurance, whether the industry is ready or not. Estimates of how many IoT devices will connect our cars, homes, communities, medical services and work lives by the year 2020 range from 30 billion[i] to 50 billion[ii].
Whatever the precise number, this will generate (and already is) a huge amount of data to be analyzed and monetized.
A growing number of insurance carriers now demonstrably buy in to the concept of technology-driven insurance and are utilizing IoT to realize this; John Hancock, for example, announced in 2018 that all new life insurance policies must henceforth use digital fitness trackers to monitor policyholders[iii]. But where are the biggest impacts being felt across the insurance business?
1. Where Technology is Impacting the Insurance Business Most
1.1 Real-time Risk Monitoring
A key benefit of realizing digital insurance is the ability to monitor events in real-time, which reduces both the likelihood of claims and the possibility of claim inflation. Cecilia Sevillano, Head of Smart Homes Solutions at Swiss Re, explains: “We know that the longer it takes people to file, the higher the probability of fraud, because they get time to think about how to build it up.
When it’s immediate, it’s genuine and spontaneous.” This is supported by empirical evidence from BNP Paribas Cardif, which launched a home telematics product in the Italian market in 2013, alongside its traditional offering. Simone Macelloni, Head of Marketing R&D at the company, confirms that a comparison of telematics and non-telematics claims shows that the former is up to 20% lower.
The modern automobile, being relatively simpler than a connected home, and able to transmit a greater quantity and quality of pertinent data, is viewed as something of an ideal testbed for connected insurance. Indeed, Matteo Carbone, Founder and Director of the IoT Insurance Observatory, states that “there are some Observatory members that have been able to reinvent their claim process to exploit the full potential of telematics data.
These carriers are sending near real-time data to their claims handlers showing precise reconstructions of the crash dynamics through telematics enriched with contextual data.” Among the advantages Carbone has observed are:
The increased use of preferred body shops for car repairs
Reduced claims settlement time and loss adjustment expenses
Improved claims evaluation and more accurate “reserving” of money to settle them
The minimization of inflated claims and fraud
1.2 Claims Prevention and Changes of Behaviour
The ability of carriers to continuously monitor the risks they are managing, and also influence them in real time, is controversial, but has the potential to reduce the likelihood of claims occurring.
The IoT Insurance Observatory has identified two main ways that companies are doing this: one is to intervene in real time if IoT data indicates that a client is getting into a risky situation, and the second is to adopt a more indirect, educative approach to promote safe behaviours.
This first strategy of intervening before a loss takes place is certainly contentious, giving an insurance carrier the potential to intervene in the lives of policyholders. It also subverts the traditional value proposition of insurance as customers are paying to be proactively kept safe, not reimbursed when something goes wrong.
Sevillano, is confident that we are in fact “shifting from a claims handling business to a claims prevention one” and the evolution of the value proposition could become a strong pull-factor driving uptake of connected insurance products; “The willingness to pay for actually preventing things from happening is much stronger than buying insurance that just pays out when there’s a claim and maybe there will never be a claim.”
Nick Ayrdon, Head of Strategy & Development at Aviva agrees that the transition towards claim prevention is already underway: “IoT is already enabling customers to avoid bad things happening to them. Some people call it prevention. I see it as empowerment of customers. In the past, that’s only been available to big businesses: sprinkler systems and CCTV systems, for example. IoT is shrinking that down to make it affordable and mass-market.”
1.3 Personalized Products and Services
The issue of pricing technology-based insurance was ever-present throughout our interviews, and there are not yet established best practices where pricing is concerned. The underlying principal is that the availability of abundant and detailed data about the risk insured ought to allow underwriters to calculate a unique price based on objective criteria.
As usual, the clearest case is presented by the auto line, which has the most advanced telematics, the most abundant data and (in theory), the clearest correlations between that data and the risks covered.
Michael Lebor, Chief Marketing Officer/SVP, Strategic Innovation, AmTrust Financial Services explains how accurate data can drive precise pricing: “It used to be, when you wanted to get personal auto insurance, you’d call up your carrier and they’d ask you a bunch of questions such as ‘how many miles do you drive every day?’, and you would say ‘I drive three miles every day.’
But in fact, you drive 30, through urban areas. So, pricing had to be increased as part of the actuarial calculation to account for lies and inflated claims.
But data doesn’t lie; phones don’t lie. GeoTelematics and all the diagnostics, they don’t lie. So, we can price it better because we don’t have to deal with the lies anymore. One of the two types of risk have become derisked using these IoT devices and I think that’s going to be transformative over the next couple of years.”
2. Taking Responsibility for Technological Transformation
There is no question as to whether the global insurance industry is going to go digital, and most of the industry understands why it will.
The real problem for most is how it should happen and creating an environment in which they can maximize the value of digital insurance technology. As Michael Lebor states, this is not simply a case of reorganizing a particular department or function: “In my opinion, IoT is not a product, it’s a paradigm shift, a completely different way for technologies to interact with each other.
Devices are going to be talking to each other, there are going to be hubs, and we must leverage that throughout the entire lifecycle of our product, whether for distribution, or on-boarding customers, or using it for claims and first notice of claims. It’s not one product, it’s a holistic way of thinking.”
As Figure 1 shows, a significant find from the survey was the relative lack of senior involvement in managing a connected product or technology (27% - fig. 1); given the predicted impact on the future growth of a company, one might imagine that the design, development and implementation of connected or digital insurance technology would be a matter for board-level consideration.
Despite this, only 14% said that senior management were currently affected by the introduction of insurance technology, with the most commonly cited reasons being that they have not reached the point where it has become necessary.
Equally, as companies figure out their first steps in this new environment, there is an apparent reluctance to put one department in charge of overall strategy; 46% said a connected insurance product was being jointly managed by their innovation/R&D, data analytics group and actuarial/pricing departments.
Other noteworthy findings are, once again, the relative lack of involvement of strategy departments (28%), and the disparity between the involvement of customer-facing departments in managing products compared with the products’ impact on them.
The most eye-catching of these is in underwriting and claims. In the former case, involvement stands at 35% but impact at 50%, a significant difference that may be explained by the fact that there is a natural lag before enough data is available to understand what change, if any, it brings to the risk profile in certain cases.
American Family Insurance Business Development Manager, Shaun Wilson,suggests that“until there are a lot of devices providing a lot of data about specific risks, the carrier is not going to have the insights about whether or not these devices mitigate risks to any level of significance. That’s the promise of this approach, but nobody has enough data yet to validate the hypothesis.” As carriers leverage connected technology more and the impact on the business deepens, however, we can expect to see greater top-down management and involvement from board level stakeholders[i].
3. The Insurance Tech Stack
More data is undoubtedly a good thing but as we have seen, maximising the value of plentiful and granular data is essential to truly leverage the benefits of technology and share them with policy holders. EY claim (and our interviews confirm) that while carriers recognize the potential of analytics to grow, optimize and create value, there is uncertainty around the far-reaching changes needed to transition to value-driven decision making[ii].
The Insurance IoT Observatory has rationalized the information systems architecture for insurance IoT offerings as six layers (see Figure 2), and while the technology challenges will be particular to each carrier, each line and each business objective, our interviews identified three chief challenges to managing and leveraging IoT data:
Data Security & Privacy: use and abuse of technology and personal data in other areas has led to erosion of trust among consumers. Insurance carriers must first regain trust to overcome suspicion of personal data misuse[i] and ensure sufficient cyber-security is in place.
Interoperability & Compatibility: as we are in the early stages of technology in insurance, the IT sector lacks a “common data environment” and common protocols required for interoperability of software. In time, common standards will emerge, but this may take some time. Currently, many large software vendors are working on proprietorial systems and the advent of ‘plug and play’ is quite distant.
Analytics: carriers are not used to continuous streams of live data and may not have the required technological expertise in-house[ii]. To offer any data-driven value-add services, reporting and analytic systems that can make use of the data effectively and securely must be in place.
4. Long-Term Opportunities
The long-term prospects of technology-driven insurance tend towards a carrier/client relationship predicated on claims prevention and increasingly engaged customers. In fact, the picture looks so radically different that the concept of “insurance 2.0” is rapidly gaining prominence across insurance boardrooms.
4.1 The Rise of Ecosystems
As insurance carriers continue to expand their services outside traditional areas of expertise, we have begun to witness the rise of ecosystems, wherein networks of companies from different industries combine to offer services on a common platform, such as a smartphone, smart speaker or social media website. How this will look in practice is as yet unclear, but McKinsey recently predicted a “paradigm shift” that will divide the global economy into 12 massive ecosystems with a combined revenue of $60 trillion by 2020.[i]
Taking the home line as an example, Cecilia Sevillano explains that carriers must decide where in their ecosystem they fit, i.e. their relationship with the device manufacturers, distributors and service providers. The range of options on the home front is broad, and includes the manufacture of sensors, their installations and maintenance, their role in accident prevention and service provision and claims-handling.
Each of those options is a potential “touchpoint” between the carrier and the client, and it is these touchpoints that carriers should organize themselves around.
While partnerships appear the natural solution, Sevillano states that “carriers fear they may lose client ownership, because at some point if they just become part of [another] company’s offer, the client will only see the distributor’s brand.” Carriers must therefore always consider the correct balance between building their own product distributed through their own network and using alternative distribution channels. Following this logic, home carriers should focus their investment on devices, data systems and reactive services that remove risk. What that means in reality is still to be decided, but the greatest progress to date has been in the detection of slow water leaks and intrusion detection, for which reliable sensors are already on the market.
4.2 Claims Prevention and Greater Engagement
Another characteristic of “insurance 2.0” is the ability to prevent claims owing to greater interaction with, and engagement from, policy holders. Put simply, technology allows insurance carriers to engage customers better – either through more interaction (incentivizing healthy lifestyles or safe driving) or less interaction. The picture that emerged from our interviews was that customers are happy to interact with their insurance providers if they are doing something that is considered socially to be a good thing to be doing, and the carrier does something to recognise and validate their behaviour.
A recent example is Discovery Healthcare’s Vitality programme, which gives its customers a pat on the back and a treat when they do something that promotes their health, such as going to the gym for a work-out, or just completing a certain number of steps in a day. Similar value sharing possibilities are created by vehicle telematics, which can measure and acknowledge sensible driving styles.
The latter approach is valid as some policy holders still prefer their insurance to work, as it were, by magic, and is possible using traditional analytics that don’t impose on the customer. Insurtech products tend to share the characteristic that they don’t need a lot of information before they write a policy or pay out on it, and this is a goal that established players can emulate. In our interviews, Andreas Braun, Allianz’s Head of Global Data, described a way of insuring a property based on nothing but a postcode. This approach is, of course, made possible by the company’s hoard of public and private data about the historical risk profiles of certain postcodes. Meanwhile, routine claims can be paid out within seconds of their being made, and suspicious claims can be picked out and escalated.
Yet, as “insurance 2.0” matures this situation is constantly evolving. At present, 46% of consumers would pay more for personalized, real-time services and would be willing to share more personal data to get them[ii], while a survey from Troubadour Research & Consulting found that nearly half of consumers would turn over data from wearables to insurance companies in exchange for cheaper products[iii]. We can expect this to increase as the value proposition of exchanging data for value becomes more concrete; consumer opinion will change over time but only with successful use cases being implemented and value to customers being proven.
As the industry begins to understand how it can exploit the possibilities of connected and digital insurance technology, the Connected Insurance Report has crystalized the concerns of those tasked with turning an unprecedented technological revolution into market-ready products. At first glance, one might assume that the ability to learn more about the risks they are insuring should allow both for policies to closely follow the risk over time, and secondly that the ability to gather more information about a claim will discourage fraud. The net result should therefore be greater profit for companies, and lower premiums for their customers.
At second glance, it is just as clear that the picture is much more complicated than that. As we talked to more and more executives, it became apparent that the industry is only just beginning to work through the practical problems it faces. Indeed, questions as basic as the best way to install a sensor in a building are still the subject of lively debate. Ultimately, the world of insurance may be next in line for the kind of creative destruction that the tsunami of digitisation had brought to IT, telecoms, media, retail, hospitality, manufacturing, financial and business services.
Despite the novel and complex nature of this new era, the Insurance Nexus Connected Insurance Report seeks to distil the main opportunities and challenges facing the insurance industry. Below is a selection of conclusions from the report:
Insurance must become fully digitised: It is unlikely that an attempt to marry digital products to an analogue company will be successful. To realize the promise of digital products, the whole enterprise has to be digital, from actuarial calculations of risk and product development at the back end to marketing, customer services and claims settlement at the front.
Carriers will have to sell more than just insurance: If the IoT is successful in reducing the frequency and cost of claims, it will also reduce the cost of premiums. This may expand the number of policies sold, but carriers can offset the loss on individual policies by adding extra value services. Some services will be preventative, while some will be administrative. Over time, carriers are likely to become more adept at designing services that use the data that flows to the company servers from IoT devices in homes, offices, vehicles and attached to the bodies of customers
A new kind of customer relationship: The move to a more responsive, individualized service will put a premium on customer engagement. At present insurance carriers and their customers tend to hold a rather wary attitude to each other: according to a 2015 IBM survey, only 43% of US customers polled said they trusted their insurance carrier.[iv] The rewards for a company that can gain customers’ trust is a level of differentiation that has, up until now, rarely been possible in the insurance world, and a level of loyalty that provided a base for selling further products and services, and upselling the ones that are already being bought.
The transformation of insurance has undoubtedly begun. The tools exist for insurance carriers to transform everything from customer engagement and marketing to claims, underwriting, fraud detection and analytics. But technology is a double-edged sword. With little precedent or accepted best practice, there are ample opportunities for carriers to overspend and under-deliver and there is little margin for error.
Ultimately, customers vote with their wallets and have shown they want personalized, on-demand and flexible services, and are willing to give up more to get them. This will only increase as digitally savvy millennials make up a greater proportion of carriers’ customer bases. Looking at the banking sector, by 2021, most retail banking will be done through apps, while customers of ‘neobanks’ (Monzo, Starling, etc.) regularly report higher satisfaction levels than those of legacy banks[v]. Similarly, technology represents insurance’s best chance to improve outcomes for both themselves and customers and realize “insurance 2.0”. The onus is on them to make it happen.