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May 27, 2020

How Startups Will Save Insurance

Summary:

The evolution is unstoppable because innovation benefits both the insurance markets and the underlying consumer.

Photo Courtesy of Pexels

Digital disruption used to be seen by insurance industry watchers as an existential threat to the sector. That argument no longer applies. Today, there’s no argument that the insurance needs digitalization to secure its future. 

Across the financial services sector, companies are being re-defined by their clients’ needs.

It’s what happened with banks. They were driven to embrace fintech because of the speed of innovation required, and what their customers were experiencing elsewhere, particularly in the retail sphere. In the same way, insurers (and brokers) are looking to insurtech for answers.

Actually, the insurance industry doesn’t have a choice, with insurance spending as a percentage of GDP declining over the course of the last two decades. The industry’s share of GDP has declined from a high of 7.5% in 2002 to 6.1% in 2017 (source: Swiss Re Sigma Explorer Dataset 2019).

This is happening in part due to an increase in the world’s population and disproportional prosperity growth in emerging markets, creating more consumers who need to protect their property and families. Meanwhile, value is changing in the corporate rankings, where businesses with high-value intangible assets, like Google, Alibaba or Apple, have overtaken companies trading in more tangible products.

It all points to a need for risk management and for the insurance industry to drive innovation and its relevance – especially during a period of great change. Arguably, the incumbent market simply should be innovating at a quicker pace to meet the evolving needs of its client base and its stakeholders.

Many clients today have unmet risk transfer needs, related to intellectual property, the gig worker economy, cyber threats, pandemic or climate, for example. We as an industry need to acknowledge these differences across traditional and emerging markets, tangible and intangible assets, and deliver a differentiated approach in our increasingly connected world.

Meanwhile, the entire sector – brokers and insurers – has been making healthy profits. This combination of an inverted innovation curve and profit pool has proved to be irresistible to entrepreneurs.

See also: Will COVID-19 Disrupt Insurtech?  

Incumbents’ fears around digital disruption are misplaced, however. After all, when the fintech wave hit the banking sector, it didn’t knock out the big players like JPMorgan Chase, Bank of America and Citi. They retained their positions because they took the best of innovation and applied it.

In a similar way, the insurance industry can and will adapt to the direction of change in the use of technology-enabled platforms.

The insurance industry has to incorporate digital distribution and automation in underwriting, the intersection of data science and actuarial science, to design modern underwriting models and create larger pools of insurable risk in ways that insurers remain profitable covering them.

Common ground with clients

Our clients themselves are looking for innovative solutions, so we have common ground. For example, new technology in trucks now allows for user-based analysis of driving behavior. Aon Affinity partnered with CarrierHQ to roll out a new motor insurance program that applies third-party data, real-time driving analytics and a proprietary rating algorithm to score each driver in a fleet of 20 or fewer trucks. Premiums are adjusted monthly for each truck based on the driver scores. To power this behind the scenes, Aon partnered with Instec to enhance the customer experience for small fleet trucking while improving underwriting results for the insurers.

By using our data analytics and insight, we can design technology-enabled platforms for all kinds of business, big and small. It’s why Aon acquired Coverwallet, the leading digital insurance platform for small and medium-sized businesses. 

The evolution is unstoppable because innovation benefits both the insurance markets and the underlying consumer. 

Even pacesetters like Amazon and Uber continue to be defined by their clients and appreciation of the transparency and convenience these platforms afford them.

See also: Time to Retire the Term ‘Insurtech’?  

To meet the needs of a changing consumer, incumbent businesses – including insurers – need to be client-driven and data-centric to embrace innovation and better network among themselves.

But crucially, everyone needs to stay safe in a dynamic environment heightened by cyber risk, global pandemics and climate change, a problem that insurtech is helping resolve to the benefit of both insurers and insureds.

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About the Author

John G. Bruno serves as Aon’s chief operating officer as well as chief executive officer of Aon’s data and analytic services solution line, which includes the firm’s technology-enabled affinity and human capital solutions businesses.

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