The classical insurance business model has been successful for a long time but does not stack up to modern standards. Nowadays, just a policy no longer provides the best solution for managing risks. Why wait until something happens, when the technology and data are available to actually reduce the chance or impact of an unforeseen event?
There is only one sensible way forward: to rebalance insurance and prevention. Integrate data, services and insurance policies and help customers manage risks in a way they feel comfortable with.
I’ve named this the transformation from managing policies to managing risks. Connected Insurance, Smart Home/Smart Mobility or IOT-based insurance are relevant terms in this context. You would expect that insurers are well underway in preparing for this future.
The pressure to rebalance insurance with prevention is building
There are several drivers contributing toward the momentum for integrated, prevention-based safety and continuity solutions. Increased volatility and changing risks (related to climate, health, cyber, demography) are making safety and prevention particularly relevant and a traditional policy even less effective. The spread of connected devices and the rise of smart home offers significant potential to develop new value propositions. It’s becoming increasingly hard to explain to customers why "just a policy" is the best solution.
Large-scale adoption is still something for the future
I do see pockets of innovation in risk management and prevention initiatives. But the scale remains limited. It seems the devil is in the scale up. I have seen a lot of initiatives driven by motivated innovators that haven’t scaled up to serve a substantial portion of the customer base. Why? Let’s take a closer look at some barriers:
Barrier #1 – Not easy to find the right model
It’s one thing to set up a small operation or minimal viable product (MVP) safety and prevention concept that serves some customers. That already may be challenging for an average insurer, and scaling up requires something else: a sustainable business model, strong and stable partnerships and, not unimportant, insight to choose a scalable model that is attractive to customers. Too often, insurers take a plunge and create a safety and prevention solution with the best intentions, only to find it will never fly on a larger scale. That doesn’t mean safety and prevention concepts don’t work – it only proves that making the right design choices is not easy. If it didn’t work, you evaluate, regroup and try again with better design and implementation choices.
See also: A Self-Destructive Cycle in Insurance
Barrier #2 - Chicken-and-Egg Business Case
In decision making driven by business cases, a concept will get a fair chance when it makes financial sense within the current business model. That requires robust proof from actual data. Without data, no initiatives. Without initiatives, no data. That explains why so many risk and prevention activities remain largely driven from marketing and innovation budgets – that’s a different business case altogether. Large-scale adoption of prevention concepts is therefore limited to customer segments with high risks (e.g. young drivers), markets with mandatory safety requirements and those insurers that have a particularly effective internal prevention champion. Important, admirable but hardly fertile soil for building large-scale prevention concepts.
Barrier #3: Stove pipes blur the 20-20 view
What will be the total damages of a two-sided car accident? The actual impact may be much higher than is covered in the two associated car insurance policies. Indemnity, medical costs, inability to work, impact on employability, economic activity and personal life: The actual amount of the damage affects auto, health, income and liability business lines across multiple insurance companies. Different insurers handling parts of damages and liabilities not only increases overall costs but blurs the total costs to society of such an event. Prevention concepts should be judged with total costs to society in mind, not only by individual insurers from the perspective of an individual business line.
Barrier #4: Important but not urgent
In many insurance organisations, a lot of change capacity is required to tackle legacy and regulatory requirements. A shift in business model is not something you can do on the side. Organizations should find the balance between innovation horizons and separate existing and new businesses, but that’s easier said than done. And let’s not forget: there might be an initial fear of cannibalization if premiums go down because of higher safety.
Jumpstarting the shift toward building better solutions to manage risk
Let’s create effective partnerships with players that jointly invest in safety and prevention. There must be a winning combination among insurers, re-insurers, Big Tech/IoT firms, players in adjacent industries, insurtechs, academic communities and non-profit organizations.
Such a rich eco-system should be able to integrate data across traditional product lines, companies and other stakeholders to balance investment decisions with more weight attributed to the total costs to society.
The recently launched OPIN initiative may provide the much-needed lubricant by developing open standards and API definitions for data exchange, enabling a coordinated approach across regions, markets and traditional business lines.
Transforming a business is always challenging, but even more so when you’re in it. No single player in today’s value chain is going to succeed on its own. The key is to create a collaborative solution combining the strength of several players. The future belongs to those who can forge such an alliance.