May 5, 2014
$1.2 Trillion Disruption in Personal Insurance
The active, accurate valuation -- in real time, without human involvement -- of all the things people own will turn the industry on its head.
Most of us don't think much about insurance. That's by design, of course. Insurance is supposed to be a safety net that affords us the leisure of not thinking about it. Unless of course, we have to. That generally happens about once a year when we're reacquainted with our premium. Ouch. According to statisticians, most of us will also have to think about our insurance about once every seven to eight years when we'll encounter a loss of some sort. Another ouch.
My insurance is pretty confusing. I pay for coverage of my house – a fairly precise calculation based on its quality, size, age, materials, etc. I get a guarantee that, if I keep paying my premium, my home will be covered for its replacement costs. That's pretty reassuring. But then it gets a little weird. I get a “blanket” (insurance-speak is very comforting), which is really a formula that assumes that all the stuff I own is worth, um, somewhere around 50% to 70% of the value of my home. Huh? Maybe there's a bit of science to this, but surely there's a lot of guess…and, according to research, about 39% of the time the formula is just wrong. (As one insurance CEO recently confessed to me, most folks are probably 50% underinsured). The complications go on: If I own something really valuable, some bauble or collectible, well, that has to go on a list of things that are really valuable, and those things get their own coverage. Then, so my stuff continues to be well-protected, I have to re-estimate the value of those things from time to time, or employ an appraiser. What's more, if I buy something or donate something I own, or if any of my things goes down or up in value for whatever reason, my insurance doesn't change — because my provider doesn't know about these changes. And, if you've ever had a claim to file, the process starts with the assumption of fraud, with the burden of proof borne by the policyholder, because most people don't have an accurate accounting of their possessions and their value. Still another ouch.
So while I'm not supposed to be thinking about insurance, maybe I should be paying closer attention.
Change is coming like a freight train, and its impact has the potential to shake one of the world's largest industries to its core. For a little perspective: The property and casualty insurance industry collected some $1.2 trillion (!) in premiums in 2012, (or about twice the annual GDP of Switzerland).
At the core of the P/C insurance enterprise is (and I know I am simplifying here) the insurance-to-value ratio, which estimates whether there's enough capital reserved to insure the value of items insured — if values go up, there'd better be enough money around in case of a loss. All good, right? Except that for as long as actuaries have been actuarying, the value side of that ratio has been a guess — especially for personal property (the stuff I own other than my home). So, if I forget to tell my insurer about something I bought, or if I no longer own that painting, watch, collectible, antique; or if the precious metal in my jewelry has increased…then what? Am I paying too much, or am I underinsured for the current value of the things I own? Of course, these massive companies make calculated allowances for the opacity…but these allowances also cost us policyholders indirectly in increased premiums, and the inefficiency costs the insurer in potential returns on capital.
The coming changes can be summarized in terms of three trends. First is the expectation of the connected generations, now entering their most acquisitive years and set to inherit $30 trillion of personal wealth. Second is the connected availability of current data about the value of things. Third is the emergence of the personal digital locker for things.
Data, data! I want my data! — the expectation of the connected generations.
If they're anything, the connected generations are data-savvy and mobile. If you’ve shopped for just about anything with a Millennial recently, you’re familiar with their reliance on real-time data about products, local deals, on-line values and even local inventories. (I was with one of Google's brains, and he showed me how retailers are now sending Google local inventory data so now it can post availability and price of a searched-for item at a local store). Smartphone usage is nearly 90% for Gen Xers and Millennials, and data is mother's milk to the children of the connected generations who are being weaned on a diet rich with direct (disintermediated) access to comparisons, descriptions, opinions, crowd-sourced knowledge and even current values. The emerging generations rarely rely on the intermediation of experts (unless validated on a popular blog with a mass following) and are not likely to be satisfied with an indirect relationship with those affecting their financial health. Smartphones in hand, depending on data in the cloud, they will demand and receive visibility into the data shaping all their risk decisions.
And here's where the insurance revolution will begin: A connected generation that is apt to disintermediate and has access to real-time info on just about any thing will demand that they insure only what they own (bye bye, blanket); that their insurance should track to real values, not formulaic guesses; and that they have the ability to reprice more frequently than once a year.
The time is coming for variable-rate insurance that reflects changes in the values of items insured and is offered on a real-time basis for any item that the owner deems valuable.
The price is wrong — the real-time valuation of everything.
Over the past few years, several data services have sprung up whose charters are similar: something like developing the world's largest collection of data about products — their descriptions, suggested retail price, current resale value, user manuals, photos and the like. No one has yet dominated, but it's early yet, and someone (or probably a few) will conquer the objective. Similarly, there are a few excellent companies that are collecting and indexing for speedy retrieval the information about every collectible that has been sold at auction for the past 15 years. I know something of these endeavors because our core product relies on the availability and accuracy of these data providers to collect the values (and other attributes) of the items people are putting into their Trovs (our moniker for the personal cloud for things). It is only a matter of time before we will be able to accurately assign a fair market value to most every thing — in real-time and without human intervention. This real-time value transparency will transform the way that insurance is priced, and how financial institutions view total wealth.
My stuff in the clouds — the automated collection and secure storage for the information about my things.
Within 12 to 24 months, connected consumers will embrace applications that will automatically (as much as possible) collect the information about all they own and store it in a secure, personal cloud-hosted locker. These “personal data lockers” will proliferate because of their convenience, because of real financial incentives from insurers and other service providers and because data-equipped consumers will have powerful new tools with which to drive bargains based on the data about everything they own. These new tools will pour fuel on the re-invention of insurance because all the information needed to provide new types of insurance products will be in the personal cloud-hosted data locker.
Progressively (pun noted, not intended) engineered insurance products that account for the connected generations' expectation of access to data, the abundance of data about products and collectibles and the active collection and accurate valuation of the things people own may turn the 300-year-old insurance industry on its head. Doubtless, the disruption will leave some carriers grappling for handholds and wondering how they could have insured against a different outcome.
This article first appeared in JetSet magazine.