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Are You Ready for the New Paradigm?

Italians want connected insurance policies; they are not afraid of “Big Brother.” According to the Ania-Bain Observatory, insurtech can take off in the home and health sectors. Now is the time for both the model and management of connected insurance to be structured.

As of today, 22% of Italian households that have no home insurance are inclined to buy it—if it were connected insurance. This was the starting point of July’s meeting of the Connected Insurance Observatory, an Ania–Bain think-tank, which has put together executives from 30 insurance groups within the Internet of Things (IoT) sector to discuss the great potential of connected insurance, as well as the challenges it poses to the insurance business.

Among those challenges is the protection of auto insurance telematics data, a topic that the Data Protection Authority has recently tackled, promising to offer clients appropriate visibility into the usage of collected data.

But there are no real obstacles to innovation, because there has been an explicit acceptance of the validity of a try-before-you-buy application in auto insurance from the Italian regulator — except when it comes to the rights of the insured, which have to be respected. (Of course, this includes the provision of a detailed explanation to insurance customers of the business purpose for which the data is being collected.) In Italy, if there is the will, innovation can be achieved just as easily as in Silicon Valley.

See also: Not Your Father’s Insurance Industry  

A new model

On one hand, insurtech and connected insurance are transforming insurance business lines. On the other, it is essential to create the conditions needed for insurers and other specialized players to fulfill their role as providers, each in its own sector: from e-health to antifraud and from driverless cars to electronic payments and product design.

“A new and more connected insurance model has to be defined In order to achieve this, so that the full potential of the technology can be exploited,” says Luigi Di Falco, head of life and welfare, Ania. “In our opinion, there are many opportunities and areas to be explored within connected insurance that would allow for a more client-centric offering to be created. The demand would be easier to aggregate, and thus more client categories that are not insurable today would become insurable. Last, it reduces claims through the use of sensors with advantages for both the insurer and the insured.”

Managing an ecosystem

There are still plenty of challenges. Chief among them, according to Ania, are the evolution of rules and regulations on privacy, the risk of data monopoly from players like Google, the arrival of new insurance start-up competitors and the danger of insurance disintermediation. Di Falco warns that “the Observatory has to look at understanding both the advantages and the dangers that come with insurtech.”

At the foundation of everything is the synergy between numerous partners that drives insurance toward becoming the coordinator of a highly complex system. Insurers today are aware that using external providers is simply not enough and that the orchestration of the whole ecosystem needs to happen. This is a relatively new trend that represents the next frontier of connected insurance and is essential for reaching full potential.

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Less Privacy, More Services

Regarding privacy issues, the accepted principle states that if the client wants additional services, he or she needs to enable the insurer to provide them. As Di Falco says, “If the insured believes that a service is useful, he or she will be ready to renounce the privacy of his or her data. But this has to be reflected by a legal framework that specifies that the loss of privacy is strictly connected to perceived benefits on behalf of the client.”

Innovation are moving to the home and health sectors

Being aware of this, 76% of the insurance carriers participating at the Observatory expect to see significant innovation activity related to home products (the “connected home”) in the next 12 months. Also, 43% of companies believe the health sector—(“connected health”)— will be ripe for innovation, whereas, in the life and industrial sectors, the potential for innovation is expected only in the medium term. Some specialized insurance companies are already offering health insurance coverage related to wearables, claim detection and sideline services, starting with health monitoring, second opinions and medical consultation via chat and continuing with access to networks of healthcare structures and drug stores. Di Falco underscores the point: “In a country where the proportion of people over 65 will grow to become a third of the entire population, it is important to develop forms of insurance protection in rehabilitation and long-term assistance where the state is less present and the nuclear family is not holding together as it once did.”

The Connected Insurance Observatory was created with the purpose synthesizing Italian excellence in the connected insurance sector. It has three main goals: first, to rationalize existing industry knowledge and experience; second, to identify together with the companies what needs to be improved, what the main challenges and critical points are and what the main ambitions are; and third, to promote a culture of innovation in the insurance sector by encouraging dialogue between all players involved. We have created a think-tank centered on the insurance sector that boasts the participation of more than 15 other players—including the Italian Association of Insurance Brokers (AIBA)—coming from different backgrounds that are interested in sharing their own experiences with the insurance carriers.

See also: How Connected Will Connected World Be?  

Intermediaries’ interest on the rise

Forty percent of Italian brokers believe that connected insurance represents an interesting business opportunity in the medium term. A recent survey developed by AIBA and the Connected Insurance Observatory shows that, other than the growing interest of intermediaries in connected solutions, larger brokers are more likely to see the business opportunity within connected insurance: 67% of big brokers expressed this, compared with 60% of medium-size brokers and 40% of small brokers.

(The original version of this article appeared in Insurance Review.)

Secrets InsurTechs Need to Learn

The insurance sector is becoming more innovative. Various initiatives and projects launched around the globe are proof of that — from the classic “call for ideas” and corporate venture capital to innovation labs and accelerators that involve the largest insurance companies. According to CB Insights, InsurTech — which involves rethinking one or more steps of the insurance value chain through the use of technology — received $650 million in funding in the first quarter of 2016, and the number of transactions more than doubled compared with the same period in 2015.

The Italian insurance sector represents an interesting case history about InsurTech. Italy has the most advanced experience in combining the car insurance contract with hardware (the black box) and using that data throughout the insurance value chain. According to Bain Telematics, Connected Insurance & Innovation Observatory — a think tank Bain & Company developed with ANIA, AIBA and other insurance and non-insurance partners to help spread innovation culture in the insurance sector — telematics penetration reached 16% of all cars insured in Italy by the last quarter of 2015.

See also: The Future of Telematics is… Italy

In Italy, this type of approach is already mainstream — in contrast with other countries, where it is still a niche-value proposition. By looking at the Italian best practices, one can identify certain critical success factors. The most important element is telematics’ capacity to improve the insurance bottom line; a significant self-selection effect exists on customer acquisition and on material savings related to claims settlement (provided that adequate processes are in place and use the telematics information). The second aspect is represented by the benefit of introducing value-added services around the driver journey. The key element for both the client and the distributor is the partial kickback of the value generated by the telematics approach on the insurance bottom line to both the client (via a discount) and the distributor (via additional fees).

The current discussion of how telematics will evolve focuses on gamification and reward mechanisms  mechanisms to manage client engagement and retrocession prizes other than insurance premium discounts. For example, in the U.S., Allstate has adopted a score- and prize-based system related to driving behavior. The best practice internationally is undoubtedly Vitalitydrive, the approach through which Discovery (South Africa) has created a motor-telematics policy based on driving behavior. In this case, the cash-back incentive for gasoline bought from partner gas stops replaces the premium discount.

By comparing gamification use cases with Italian best practices, insurers can retain an incremental quota of generated value, through telematics solutions that provide rewards financed by partners instead of through premium discounts. This approach requires the creation of an ecosystem of partners to provide a tangible value for the customer.

Rewards can be effective ways to steer behavior if they are built on mechanisms that result in frequent interaction with the client. From this point of view, the integration of monitoring driving behavior and the reward-system mechanism has a greater influence on behavior than a tariff that calculates the renewal premium based on those same variables.

See also: InsurTech Forces Industry to Rethink

The stakes are high for the insurance sector, and the auto insurance mandate has created the conditions for insurance companies to become relevant actors within the ecosystem. That said, the insurance sector faces a double challenge: first, to introduce this type of creative thought inside the product development process and, second, to become equipped with competencies and instruments that enable the management of both gamification dynamics and the partner ecosystem. These challenges are forcing insurance carriers to start thinking and acting like InsurTech entities.