July 31, 2015
Insurance at a Tipping Point (Part 3)
by Jamie Yoder and Anand Rao
Here is a look at how the tipping point will play out in each key insurance sector and at how businesses can capitalize.
From the impact of analytics, digitization and more exacting customer expectations to the disruptive effect of regulation, geopolitical instability and two-speed global economic growth, the insurance marketplace will look very different in 2020. With the industry at a tipping point, the future belongs to businesses that can make sense of the gathering transformation and act strategically rather than simply reacting to events.
While some of the drivers of change in the insurance industry are common to all business lines, we believe that the impact will be seen in different ways and occur at different speeds. So what are the implications for each key insurance segment and how can businesses capitalize on them?
Property and casualty personal lines
- A combination of automated underwriting and competition from aggregators and new entrants will drive down prices and accelerate the commoditization of motor, property and other core business lines. At the same time, new opportunities will continue to open up through new information-based models, both within traditional areas of insurance coverage and new fields, such as maintenance and concierge services. This “home intelligence” could pave the way for a broader range of concierge services built around a combination of customer knowledge and sensor technology.
- Some customers might go further by giving the insurer – or information company, which might be a better description for this evolving business model – access to much of their personal data, which the company would use to tender for a range of personalized services on customers’ behalf.
- Pressure on costs will make agency channels less economically viable and could lead to digital becoming increasingly dominant. But there will continue to be a strong role for agents in helping people to understand and manage what can often be complex protection needs. People may own more but have less time to manage the risks, be this damage, theft or breakdown, making the agent a valuable partner.
- Opportunities for partnerships exist with travel companies and motor manufacturers, with insurance forming part of a bundled service. However, such partnerships could limit the insurer’s opportunities to build customer relationships and take advantage of policyholder data.
- Data from car and equipment diagnostics, along with user behavior, will be exchanged with manufacturers and repairers, breaking down commercial boundaries and opening up further opportunities in design and maintenance. Further instances of this new ecosystem of information and assets include the integration of home sensor data with utilities’ and emergency services’ systems.
- We estimate that the reduction in accident, personal injury and other auto-related claims as advanced driver assistance systems (ADAS) technology becomes more widespread could reduce annual auto insurance losses in a developed market such as the U.S. by at least 10% by 2025. But the risk and claims profile would be more complex as the driver switches between self-driving (and hence driver liability) on the one side and ADAS driving (and hence product liability) on the other. While there are regulatory prohibitions on autonomous driving at present, it may eventually not just be permitted in many countries, but even be obligatory, especially in high-risk situations.
- Revenue models will shift from premiums to premiums plus subscriptions in offerings such as maintenance, prevention and vehicle management.
- As the risk environment and client demands continue to evolve, commercial lines insurers have considerable growth opportunities in areas such as cyber risk and supply chain risk. Holistic analyses open the way for broader risk prevention and mitigation discussions with both agents and policyholders.
- Alternative risk transfer will continue to develop and expand, moving beyond catastrophe into areas such as cyber and supply chain risk.
- Advanced analytics that help to quantify exposure change patterns could help to mitigate the frequency of accidents, business interruption and other losses.
- Given the potential for sharply rising losses and ever more complex loss drivers, there will be a growing need for coordinated risk management solutions that bring together a range of stakeholders, including corporations, insurance/reinsurance companies, capital markets and policymakers across the globe. For some of these risks, such as cyber risk, some form of risk facilitator, possibly the broker, will be needed to bring the parties together and lead the development of effective solutions.
Life, annuities and pensions
- The focus of life coverage will shift from life benefits to promoting well-being and quality of life. This new model will combine digital data and partnerships with gyms, diet and fitness advisers and healthcare providers. Well-being benefits are likely to appeal to typically affluent segments that tend to focus on staying fit and healthy, including both younger and active older customers. For a sector that has had significant challenges attracting young, single, healthy individuals, this represents a great opportunity to expand the life market, as well as attract older customers who normally would think it is too late for them to purchase life products.
- Advanced analytics will enhance the precision, customization and flexibility of financial planning and risk protection, paving the way for solutions that easily adapt to life changes and stretch beyond insurance to cover a comprehensive range of financial needs.
- Sensor technology will lead to increasing integration between insurers and healthcare providers, marked by information exchange, better understanding of risks and costs and the potential to not only make cover for people with pre-existing conditions more accessible but also improve health and prolong life.
- Life coverage will shift to shorter-term contracts. At present, typical life insurance contracts are for the long term. However, this is a deterrent to most customers today. Moreover, behavioral economics shows us that individuals are not particularly good at making long-term saving decisions, especially when there may be a high cost (i.e. surrender charges) to recover from a mistake. Therefore, individuals tend to delay purchasing or rationalize not having life insurance at all. With well-being benefits, contract durations can be much shorter – even only one year.
To help dramatize how the different markets may look, here are three possible scenarios:
Scenario One: Property and Casualty in 2025
All-’round prevention and protection
“I got a text in the morning saying there’s a potential fault with the boiler. But by the time I got home it was fixed,” says Akil Badem from Istanbul. “I don’t worry about breakdowns anymore, because I know that my insurer will have it all sorted out.”
Akil’s boiler, security and other home equipment are all connected to automated sensors that optimize performance and minimize fuel usage. The connected devices can also detect potential faults and, if they can’t be put right automatically, alert the nearest repair and maintenance team. No more breakdowns, no more waiting. The comprehensive coverage provided by market leader, There When You Need It, also takes care of all Akil’s transport requirements, including best-price bus and rail fares, a car when he needs one and insurance that automatically adjusts to how far he travels, his speed, the road type and other risks, and whether he or the automated driving system is in control of the car. “It’s just so easy. A couple of clicks on my mobile, and it’s all up and running. I can’t believe how people got along before,” he says.
Grace Nkomo, CEO of There When You Need It, says, “In 2015, we saw that everything was changing in our marketplace, be this how auto insurance is underwritten or the possibilities opened up by the Internet of Things. We knew that if we use the technology to change how we connect with and serve our customers, we could create an early-mover advantage that we’ve maintained ever since.”
Scenario Two: Life, Annuities and Pensions in 2025
Fit for the future
“I’ve never felt better,” says Karen O’Neil from Seattle. “Every time I go to the gym, the cost of my health insurance and life coverage comes down. My insurance company even got me a great deal on trainers.”
Karen’s lifestyle, health and financial planning coverage is designed to make it easier to stay healthy, manage her finances and plan for the future. A wearable sensor monitors key aspects of her health and alerts her to fitness advice and any medical issues that need following up. The healthcare and life insurance package includes tie-ups with gyms, well-being counselors and sports-wear providers, putting the emphasis on how to stay fit and healthy, as well as medical and life benefits when they’re needed. There is also a savings plan that puts aside any money left over from the rent, food and other spending and automatically adjusts investments to market movements and Karen’s investment goals. “At 29, I thought that these kind of schemes were for people a lot older and wealthier than me,” Karen says. “But my personalized package helps me to feel good now – and I know I can adjust as my needs change.”
Scenario Three: Commercial Insurance in 2025
Advanced risk detection averts cyber attack
Remote monitoring centers operated by a major insurance company have thwarted a coordinated attack on a retail group’s online network. Cyber gangs were planning to bring down the group’s server and then hack into the accounts of its millions of customers. The insurance company’s monitoring centers were able to not only detect the breaches but protect the server from damage and ensure business carried on as usual.
The cyber protection forms part of a comprehensive “business as usual” risk management package, which automatically anticipates and responds to any problems in supply, customer service and reputational integrity. The service is designed to zero in on any threats and take preemptive action. Advanced risk evaluation and pricing analytics enable the insurer to take account of multiple existing and emerging risk factors and determine a dynamic price based on the cost of reducing and mitigating the risks, as well as transferring the risks in alternative markets. Monitors continuously track real-time events (e.g. geo- political, technology, environmental and social events) around the world to build an accurate and evolving qualitative profile of the exposures facing clients and how they can be managed.
How to Design Your Strategy to Face the Future
For many – if not most – insurers, this changing market is likely to require a significant change in products and the redesign of long-established business models. This will not be easy. It’s important to develop a clear vision of where and how the business intends to compete.
For some, it could include a wholly new value proposition. For life insurers, this could include a broader and more compelling offering built around quality of life and well-being on the one hand and the targeting of untapped segments on the other. For P&C companies, this could include assessing opportunities to enhance data and risk monitoring and looking at how this information could apply to a broader range of risk-prevention and protection needs.
Having established strategic intent, it’s important to determine how to target individuals through different messages and channels, simplify product design and re-engineer distribution and product economics. Further considerations include how to reshape the underwriting process to capitalize on new analytics and sensor information, as well as steps to make the sales and policy administration process more straightforward and real-time.
Such is the speed of market developments that it’s virtually impossible to predict what customer demand will look like in a few years’ time. Old approaches to strategic planning and execution may be too slow to keep up with the pace of change. Instead, we propose a four-step LITE (Learn-Insight-Test-Enhance) approach to marketing, distribution, product design, new business, operations and servicing.
- Learn your target segments’ needs
- Build the models that can provide insight into customer needs
- Test innovations with pilots to see whether they resonate with customers and refine the value proposition
- Enhance and roll out the new value proposition for specific segments
Using this approach, developments that would have taken years can be brought to market in a matter of months, if not weeks, and then assessed, adapted, and discarded/expanded to meet changing market needs. The result will be a much faster and more responsive business, capable of keeping pace with customer demands and capitalizing on unfolding commercial opportunities.
In conclusion, the future should be bright for insurers. They have opportunities to engage more closely and become a much more valued and intrinsic part of people’s lives, be they individuals, families or businesses. Insurers will have more information upon which to base smart solutions and serve a broader range of needs.
The challenge is how to make sure insurers capitalize, as the marketplace will be much more open and potentially less loyal.
For the full report from which this article is excerpted, click here.