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Insurers Will Be Even More Relevant

The insurance sector is now seeing the same dynamics many other sectors have already experienced — startups and other tech firms are innovating one or more steps of the value chain that traditionally belongs to financial institutions. Insurtech has seen extremely important investments in the last years, and the word “disruption” is coming out frequently in insurance debates. But I consider it a joke when an industry conference shows a picture of a newborn and sells it as its last intermediary or its last client to have purchased an insurance policy.

How to start from the strategy looks like

One U.K. insurer, MORE TH>N, addressed claims related to the obesity of the insured dogs. It invented a value proposition that provides the insurance coverage, adding all the preventive treatments a dog needs, a monthly box delivered to your home with the accessories and food that your specific dog needs and a pet tracker to nudge you to make the dog exercise more. Moving to insurance for humans, the South African insurer Discovery demonstrates incredible innovations. Over the last 20 years, the insurer has introduced new ways to improve policyholders’ lives using connected fitness devices to track healthy behaviors, generate discounts and deliver incentives for activities supporting wellness and healthy food purchases.

Insurers were able to imagine and execute these exceptional innovations. For this reason, I’m positive regarding the future of the sector. I’m convinced that insurance companies will still be relevant in the future — or will become even more relevant than they are now — but these companies will have to be insurtechs or players who use technology as the main enablers for reaching their own strategic objectives.

See also: Insurtech: How to Keep Insurance Relevant  

Insurance IoT is one of the first insurtech trends to come of age. Sensors have become a ubiquitous part of everyday life, expanding to include people and businesses around the world — even while they connect us more intimately with those nearby and with ourselves, as well as with our homes, workplaces, possessions and increasingly, insurers. Today, there is more than one connected device per person in the world, and some analysts estimate 50 devices for a family of four by 2022. The insurance sector cannot stop this trend; it can only figure out how to deal with it.

“Connected insurance” — insurance solutions using sensors to collect data on the state of an insured risk and telematics for remote transmission and management of that data — is the name of the game. Auto telematics is the most mature use case, but there are relevant innovative initiatives both on home and health insurance.

Connected insurance is affecting the whole insurance value chain and generating real value for insurance P&L. The five main value creation levers are:

  1. Behavior “steering” programs: leading the client toward less-risky behaviors, therefore reducing their claims;
  2. Value-added services: developing client-tailored ancillary services that allow the insurer to deliver enlarged value propositions;
  3. Loss control: developing a broad approach to reduce claim costs
    –acting in real time on the single situation to mitigating the risk before the damage happens and contain the damage
    –anticipating the claims management and improving reimbursement valuation, improving the efficiency of the claims process
  4. Risk selection: creating value propositions able to attract fewer risky clients, improving the quality of the underwriting process based on the sensors’ data or increasing the efficiency of the underwriting process
  5. Dynamic risk-based pricing: developing insurance policies with pricing linked to client individual risks and behaviors (on one side: reducing premium leakages; and on the other side: offering low-risk individuals lower prices to increase their retention and acquisition)

The connected insurance paradigm is based on the value sharing. In any business lines, insurers can, on one side, use the data from connected devices to generate a value on the insurance P&L, and, on the other side, build value propositions focused on sharing this value through incentives, services and discounts. The value creation equations will become more and more articulated with the diffusion of those approaches on the market, but that scenario will be characterized by relevant value sharing.

You can figure out the level of positive externalities generated by an insurance sector that is able to change behaviors and prevent risks.

I created two Insurance IoT think tanks — one dedicated to the North American market and one to the European one — consisting of more than 50 insurers, reinsurers and tech players and formed to discuss the insurance IoT opportunity and promote a culture of innovation in the insurance sector. From the discussion I have with them weekly, I believe the concrete and actionable five levers mentioned above will allow insurance carrier to exploit the value of the IoT data on their P&L. This approach represents a unique competitive advantage over any other players in the IoT arena. In this way, insurance carriers will stay relevant or become more relevant than ever. The benefits for the insurance sector of adopting this paradigm also include the increased frequency of interaction with the customer — a proven way to garner greater loyalty — and the unique opportunity to increase knowledge about customers and their risks.

See also: The Insurance Renaissance Rolls On  

It is a pity to hear futurologists at insurtech conferences imaging insurance IoT use cases as an AI within a connected home, buying insurance via smart contracts when the fridge needs maintenance or as an AI within a wearable watch buying insurance via smart contracts in case you are injured playing basketball.

This will not be insurance — there isn’t risk transfer or randomness (accidental and unintentional loss).

Instead, the business model and the role of insurance companies are enlarged by this technology. The essence of the insurance sector — since its origin in 1347 — has been assessing, managing and transferring risks — but the direct results of the technology adoption are “superpowers” to do the same things much better.

UBI Has Failed, but Telematics…Wow!

Insurance telematics has been out there for more than 20 years. Many insurers have tried to play with the technology, but few have succeeded in using the data available from connected telematics devices. The potential of this technology was misunderstood, and best practices have remained almost unknown, as it was not common in the insurance sector to look for innovation in other geographies, such as Italy, where progress has been made.

But the insurance sector is being overtaken by a desire to change, and it’s becoming more common to see innovation scouting taking place on an international level. In the last two years, billions of dollars have been invested in insurance startups; innovation labs and accelerators have popped up; and many insurance carriers have created internal innovation units.

On the other hand, I’m starting to hear a new wave of disillusion about the lack of traction of insurtech initiatives, the failure of some of them, or insurtech startups radically changing from their original business models.

In a world that tends toward hyperconnectivity and the infiltration of technology into all aspects of society, I’m firmly convinced all insurance players will be insurtech—meaning they all will be organizations where technology will prevail as the key enabler for the achievement of strategic goals.

See also: Telematics Has 2 Key Lessons for Insurtechs  

Starting from this premise, I’d like to focus on two main points:

  1. The ability of the insurance sector to innovate is incredibly higher than the image commonly perceived.
  2. While not all insurtech innovations will work, a few of them will change the sector.

In support of the first point, consider the trajectory of digital insurance distribution. The German Post Office first experimented with remote insurance sales at the beginning of the 1980s in Berlin and Düsseldorf using Bildschirmtext (data transmitted through the telephone network and the content displayed on a television set). Almost 60% of auto insurance coverage is now sold online in the U.K., and comparison websites are the “normal” way to purchase an auto insurance policy. In few other sectors is one able to see comparable penetration of digital distribution.

In the health insurance sector, the South African insurer Discovery demonstrates incredible innovation, as well. Over the last 20 years, the insurer has introduced new ways to improve policyholders’ lives using connected fitness devices to track healthy behaviors, generate discounts and deliver incentives for activities supporting wellness and even healthy food purchases. Discovery has been able to replicate this “Vitality” model in different geographies and different business lines and to exploit more and more usage of connected devices in its model each month. Vitalitydrive by Discovery rewards drivers for driving knowledge, driving course attendance and behavior on the road with as much as 50% back on fuel purchases at certain stations.

More than 12 months ago, I published my four Ps approach for selecting the most interesting initiatives within the crowded insurtech space. I believe initiatives will have a better chance to win if they can improve:

  • Productivity (generate more sales).
  • Profitability (improve loss or cost ratios).
  • Proximity (improve customer relationships through numerous customer touchpoints).
  • Persistency (account retention, renewal rate increase).

Those insurtech initiatives will make the insurance sector stronger and more able to achieve its strategic goal: to protect the way people live.

One trend able to generate a concrete impact on all four Ps is connected insurance. This is a broad set of solutions based on sensors for collecting data on the state of an insured risk and on telematics for remote transmission and management of the collected data.

In a survey of ACORD members by the North American Connected Insurance Observatory, 93% of respondents stated this trend will be relevant for the North American insurance sector. It’s easy to understand why. We live in a time of connected cars, connected homes and connected health. Today, there is more than one connected device per person in the world, and by some estimates the figure will reach seven devices per person by 2020. (Cisco Internet Business Solutions Group, “The Internet of Things: How the Next Evolution of The Internet Is Changing Everything,” April 2011, estimates seven per person; AIG/CEA, 2015, estimates five per person.) Others put the number at 50 devices for a family of four by 2022, up from 10 in 2014. The insurance sector cannot stop this trend; it can only figure out how to deal with it.

Moving to the concrete insurance usage of connected devices, the common perception of UBI is not positive at all. This is the current mood after years of exploring the usage of dongles within customer acquisition use cases, where the customer installs a piece of hardware in the car for a few months and the insurer proposes a discount based on the analysis of trips. This partially (only for a few months) connected car approach is based on the usage of data to identify good drivers, with the aim of keeping them as clients through a competitive price offer. In 2015, around 3.3 million cars in the U.S. sent in data to an insurance company in some way, representing less than 1.5% of the market.

In contrast, another market used telematics in a completely different way—and it succeeded. Almost 20% of auto insurance policies sold and renewed in the last quarter of 2016 in Italy had a telematics device provided by an insurer based on the IVASS data. The European Connected Insurance Observatory—the European chapter of the insurance think tank I created, consisting of more than 30 European insurers, reinsurers and tech players with an active presence in the discussion from their Italian branches—estimated that 6.3 million Italian customers had a telematics policy at the end of 2016.

Some insurers in this market were able to use the telematics data to create value and share it with customers. The most successful product with the largest traction is based on three elements:

  • A hardware device provided by the insurer with auto liability coverage, self-installed by the customer on the battery under the car’s hood.
  • A 20% upfront flat discount on annual auto liability premium.
  • A suite of services that goes beyond support in the case of a crash to many other different use cases—stolen vehicle recovery, car finder, weather alerts—with a service fee around €50 charged to the customer.

This approach is not introducing any usage-based insurance elements but is an approach clearly able to satisfy the most relevant needs of a customer:

  • Saving money on a compulsory product. Research shows that pricing is relevant in customer choice.
  • Receiving support and convenience at the moment of truth—the claims moment. Insurers are providing a better customer experience after a crash using the telematics data. Just think of how much information can be gathered directly from telematics data without having to question the client.
  • Receiving services other than insurance. That’s something roughly 60% of insurance customers look forward to and value, according to Bain’s research on net promoter scores published last year.

Let’s analyze this approach from an economic perspective:

  • The fee to the customer is close to the annual technology cost for the hardware and services. The €50 mentioned above represents more than 5% of the insurance premium for the risky clients paying an annual premium higher than €1,000. This cluster represents less than 5% of the Italian telematics market. The fee is more than 10% of the premium for the customers paying less than €400. This cluster represents more than 40% of the Italian telematics market.
  • The product is a constant, daily presence in the car, with the driver, with no possibility of turning it off. While the product ensures support in case of a crash, it is also a tremendous deterrent for anyone tempted to make a fraudulent claim, as well as for drivers engaging in risky behavior otherwise hidden from the insurer.
  • The telematics portfolio has shown on average 20% lower claims frequency on a risk-adjusted basis than the non-telematics portfolio, based on the analysis done by the Italian Association of Insurers.
  • Insurer best practices have achieved additional savings on the average cost of claims by introducing a claims management approach as soon as a crash happens and by using the objective reconstruction of the crash dynamic to support the claim handler’s decisions.
  • A suite of telematics services is delivered to the customer, along with a 25% upfront discount on the auto liability premium.

So, best practices allowed carriers to maximize return on investment in telematics technology by using the same data coming from the black box to activate three different value creation levers: value-added services paid for by the customer, risk selection and loss control. The value created was shared with the customer through the upfront discount. The successful players obtained a telematics penetration larger than 20% and experienced continuous growth of their telematics portfolios.

See also: Telematics: Moving Out of the Dark Ages?  

These insurers were able to orchestrate an ecosystem of partners to deliver a “customer-centric” auto insurance value proposition, satisfying the three main needs of customers—or at least those of “good” customers. Compared with many approaches currently being experimented with in different business lines around the world, where the insurance value proposition is simply enlarged by adding some services, this insurtech approach is also leveraging the insurers’ unique competitive advantage—the insurance technical P&L—to create a virtuous value-sharing mechanism based on the telematics data.

The story of the Italian auto telematics market shows how insurtech adoption will make the insurance sector stronger and better able to achieve its strategic goals: to protect the ways in which people live and organizations work

This article originally appeared on Carrier Management.

Insurtech: How to Keep Insurance Relevant

In the age of the fourth industrial revolution, risks are changing. The advent of technology has made digital assets more valuable than physical ones.

In this scenario, the insurance sector has been increasingly left to deal with technological change and disruption and is having to reconsider the way it defines itself. Having had the opportunity to discuss this transformation in more than 15 countries, I have seen that insurtech is helping to redefine the way the insurance industry is perceived.

Insurance is about providing protection for people in life and in employment. It is about providing a contract where someone promises to indemnify another against loss or damage from an uncertain event, as long as a premium is paid to obtain this coverage – the concept has been around since 1347.

It’s unthinkable for an insurer today not to ask how to evolve its business architecture by thinking which modules within the value chain should be transformed or reinvented via technology and data usage. I believe all the players in the insurance arena will be insurtech – that is, organizations where technology will prevail as the key enabler for the achievement of the strategic goals.

See also: Core Systems and Insurtech (Part 1)  

Insurtech startups have received more than $18 billion in funding to date, according to Venture Scanner data. Fantastic teams and interesting new insurance cases have been grabbing the attention of analysts.

Full-stack insurtech startups are generating a lot of excitement in the investor community and attracting relevant funds, and some have achieved stellar valuations, with Oscar, Lemonade, Sonnet, Alan, Element, Zhong An some of the most fascinating players. It looks like the aim of disrupting the status quo, combined with a skepticism about the incumbents’ ability to innovate, is focusing the attention on players to create new insurance products.

A business model adopted by more and more players is the MGA/MGU approach (Managing General Agents/Managing General Underwriter), a way to satisfy investor appetite for players covering a large part of the activities in the insurance value chain and partnering only with an incumbent for receiving underwriting capacity. Trov, Slice, so-sure, Insure the Box, Root, Bought By Many and Prima are some examples of this approach.

I am positive about the ability of the incumbents to innovate, and about the potential for incumbents and insurtech startups to collaborate. This view is based, for example, on the impressive international success of players such as Guidewire and Octo Telematics. I believe service providers for the insurance sector will be more successful in scaling at an international level than the other models described above. This kind of collaboration is leveraging on the incumbents’ technical knowledge and their customers’ trust, which has frequently been underestimated by insurtech enthusiasts. The most relevant opportunity is the collaboration between incumbents and specialized tech players capable of enabling the incumbents’ innovation in the different steps of the business model.

Denim for the awareness, Digital Fineprint for the choice, Neosurance for the purchase, MotionCloud for the claims, Pypestream for the policy management – these are a few players innovating on each step of the customer journey, based on my map to classify the insurtech initiatives.

For insurtech startups to outperform traditional insurance companies, they need to have their business models concentrated in what I call the four axes (4 Ps): productivity, profitability, proximity and persistency.

An excellent example is Discovery Holding, with its Vitality wellbeing program. This has been replicated in different business lines and countries with different business models – they are carriers in some countries, operate joint ventures with local insurers in other regions and are a service provider in other nations. They are using state-of-the-art technologies such as wearables and telematics to create a model based on value creation outperforming on all the four Ps, enabling them to share value with their customers through incentives and discounts.

See also: What’s Your Game Plan for Insurtech?  

Insurtech adoption will make the insurance sector stronger and in that way more able to achieve its strategic goal: to protect the way people’s lives and organizations work.

Telematics Has 2 Key Lessons for Insurtechs

Connected insurance represents a new paradigm for the insurance business, an approach that fits with the mainstream Gen C, where “C” means connectivity. This novel insurance approach is based on the use of sensors that collect and send data related to the status of an insured risk and on data usage along the insurance value chain.

Auto telematics represents the most mature insurtech use case, as it has already passed the test and experimentation phase. It is currently being used as an instrument for daily work within motor insurance business units. In this domain, Italy is an international best-practice example: Here, you can find at the end of 2015 half of the 10 million connected cars in the world have a telematics insurance policy. According to the SSI’s survey, more than 70% of Italians show a positive attitude toward motor telematics insurance solutions. According to the Istituto per la Vigilanza sulle Assicurazioni (IVASS), about 26 different insurance companies present in Italy are selling the product, with a 19% penetration rate out of all privately owned insured automobiles in the last quarter of 2016. Based on the information presented by the European Connected Insurance Observatory, the Italian market surpassed 6.3 million telematics policies at the end of 2016.

See also: Telematics: Moving Out of the Dark Ages?

Based on this data, we can identify three main benefits connected insurance provides to the insurance sector:

  1. Frequency of interaction, enhancing proximity with the customer while creating new customer experiences and offering additional services
  2. Bolstering the bottom line, through specialization,
  3. Creating and consolidating knowledge about the risks and the customer base.

The insurance companies are adopting this new connected insurance paradigm for other insurance personal lines. The sum of insurance approaches based on IoT represents an extraordinary opportunity for getting the insurance sector to connect with its clients and their risks.

The insurers can gradually assume a new and active role when dealing with their clients—from liquidation to prevention.

It’s possible to envision an adoption track of this innovation by the other business lines that are very similar to that of auto telematics, which would include:

  1. An initial incubation phase when the first pilots are being put into action to identify use cases that are coherent with business goals;
  2. A second exploratory phase that will see the first rollout by the pioneering insurance companies alongside a progressive expansion of the testing to include other players with a “me, too” approach;
  3. A learning phase in which the approach is adopted by many insurers (with low penetration on volumes) but some players start to fully achieve the potential by using a customized approach and pushing the product commercially (increasing penetration on volumes);
  4. Finally, the growth phase, where the solution is already diffused and all players give it a major commercial push. After having passed through all the previous steps in a period spanning almost 15 years, the Italian auto telematics market is currently entering this growth phase.

The telematics experience teaches us two key lessons regarding the insurance sector:

  1. Transformation does not happen overnight. Before becoming a relevant and pervasive phenomenon within the strategy of some of the big Italian companies, telematics needed years of experimentation, followed by a “me, too” approach from competitors and several different use cases to reach the current status of adoption growth.
  2. The big companies can be protagonists of this transformation. By adding services based on black box data, telematics has allowed for improvements in the insurance value chain. Recent international studies show how this trend of insurance policies integrated with service platforms is being requested by clients. The studies also show that companies, thanks to their trustworthy images, are considered credible entities in the eyes of the clients and, thus, valid to players who can provide these services. If insurance companies do not take advantage of this opportunity, some other player will. For example, Metromile is an insurtech startup and a digital distributor that has created a telematics auto insurance policy with an insurance company that played the role of underwriter. After having gathered nearly $200 million in funding, Metromile is now buying Mosaic Insurance and is officially the first insurtech startup to buy a traditional insurance company. This supports the forecast about “software is eating the world”— even in the insurance sector.

See also: Effective Strategies for Buying Auto Insurance

How can other markets capitalize on the telematics experience and create their own approach?

It’s Time to Act on Connected Insurance

It is not a secret that I’m an insurtech enthusiastic; I have shared my view about the need for any insurance player (insurer, reinsurer, distributors, etc.) to become an insurtech-player during the next several years. This will mean: organizations where technology will prevail as the key enabler for the achievement of the strategic goals.

It was only 12 months ago when I published my four Ps to assess the potential of each insurtech initiative. My approach is based on four axes related to the fundamentals of the insurance business:

  1. Productivity: Impact on client acquisition, cross-selling or additional fee collection for services;
  2. Proximity: What an insurtech approach can do to enlarge the relationship frequency, by creating numerous touch-points during the customer journey — a proven way to increase the customer’s satisfaction;
  3. Profitability: What can be done to improve the loss ratio or cut costs without an increase in volumes; and
  4. Persistence: Increasing the renewal rate, and, thus, stabilizing the insurance portfolio.

The insurtech ecosystem has shown terrific growth in the last 20 months, after many VCs complained about the absence of insurtech startups. The updated Venture Scanner’s map shows more than 1,000 initiatives, with more than $17.5 billion invested. The needs for a pragmatic approach, the ability to prioritize the initiatives and a stronger focus on innovation have become more and more relevant.

See also: 10 Trends at Heart of Insurtech Revolution  

I strongly believe in the effectiveness of the aforementioned four axes to evaluate a business. In the last few months, I followed this view to make investment and career choices.

Several months ago, I invested in Neosurance, an insurtech startup currently accelerated by Plug & Play in Silicon Valley, and I’m supporting the company as a strategic adviser. This company developed a platform to enable incumbents to sell the right product with the right message at the right time to the right person. By using artificial intelligence, Neosurance aims to become a virtual insurance agent with the ability to learn and improve how it sells. I fell in love with its model because of its productivity angle, the first of the four Ps.

Let’s consider all the non-compulsory insurance coverages. The large part of the purchases have been — and still are — centered on a salesman’s ability to stimulate awareness and to show a solution. In a world that is getting increasingly more digital and is becoming less about human interaction, I’m skeptical about the ability to cover the risks with the current approaches of online distribution, comparison websites and on-demand apps. All three of these approaches require a rational act and a lot of attention. But many customers look like more to Homer Simpson than to Mr. Spock.

Those are the reasons I’m optimistic about Neosurance’s business model. On one hand, its B2B2C model aims to be present where and when it matters most for the customer. And, its “push” approach is able to preserve underwriting discipline, which is the only way to continue in the middle term and distribute a product that keeps a promise to the customers. My investment choice was based on the business model evaluation, the company’s pipeline and the quality of its team. I hope to be able make more investments.

Connected Insurance Observatory from Matteo Carbone

I also decided it was time for a job change at the end of 2016. After 11 years, I left my career with Bain & Company, where I advised the main insurers and reinsurers on the European market. I had focused my activity on the insurtech trend, because I’m passionate about connected insurance. In the last several years, I have advised more than 50 players on this topic — from insurers to reinsurers and from service providers to investors. I consider the use of sensors for collecting data on the state of an insurable risk and the use of telematics for remote management of the data collected to be a new insurance paradigm. For years, many of the use cases we have seen globally have only somewhat used the potential of this technology to support an insurer and achieve his or her strategic goals.

My belief could be well understood by observing the best practices of auto insurance telematics and their performance regarding the other three Ps:

  • Let’s start with the proximity angle. Insurers have provided telematics-based services that have reinvented a driver’s journey. More and more players are focusing on this opportunity to create an ecosystem of partners to deliver their suite of services. Discovery Insure is one of the best at doing this because it is able to reward clients with a free coffee or smoothie for each 100 kilometers they drive without speeding or braking hard. Is there a way for you to be closer to your client?
  • The Italian market shows the potential benefits in terms of persistency. There are more than 6.5 million cars with a device connected to an insurance provider in Italy, and the telematics penetration reached 19% in the last three months of 2016. On average, the churn rate on the insurance telematics portfolio is just 11%, which is lower than the 14% churn rate on the non-telematics portfolio.
  • Last — but definitely not least — is the profitability side. The Italian telematics portfolio shows a claims frequency that, risk-adjusted, was 20% lower in comparison with the non-telematics portfolio, as I mentioned in a paper last year. The best practices were able to achieve an additional 7% average claims cost reduction by acting as soon as a claim happened and by reconstructing the claims dynamic. These savings let insurers provide an up-front discount to the clients. This makes the product attractive and achieves higher profitability.

See also: Insurtech: Unstoppable Momentum  

My day job is now to run an international think tank focused on connected insurance. More than 25 companies have joined the European chapter since the beginning of the year, and eight players have joined the North American chapter since March. This initiative is developing the most specialized knowledge on insurance IoT, which is based on a multi-client research. I personally deliver the contents through one-to-one workshops dedicated to each member. Throughout the rest of the year, I will host plenary meetings with all the players to discuss this innovation opportunity.

I felt honored and privileged last spring when former Iowa insurance commissioner Nick Gerhart invited me to present my four Ps at the Global Insurance Symposium 2017 in Des Moines, but I did not realize how this framework would so deeply influence my life decisions.

It is definitely an interesting time to be in the insurance sector.