Leaders in telematics innovation—John Heffernan, Senior Sales Director-Claims for Octo Telematics; Matteo Carbone, Founder and Director of the Connected Insurance Observatory; and Josh Thompson, Vp of Claims and Risk Engineering for State Auto Insurance—join Wayne Allen, CEO of Innovator’s Edge, to discuss innovation and telematics, and where opportunities lie in the future.
Connected insurance represents a new paradigm for the insurance business. This new insurance approach is based on the use of sensors for collecting and transmitting data on the status of an insured risk and the deployment of big data capabilities that transform raw information into actionable knowledge along the insurance value chain.
The insurance sector, which is considered to be fairly traditional and resistant to change, is currently being overtaken by this transformative paradigm. Connected insurance represents one of the most relevant trends, considering its potential impact on the profitability of the insurance business, the productivity of each carrier, proximity to clients and portfolio persistency. Analysis by the Connected Insurance Observatory—a think tank created by Bain & Company and Italy’s National Association of Insurance Companies (ANIA)—shows how this new approach is starting to pay off. The auto insurance sector is being transformed by auto telematics, a technology undergoing experimentation in business-insurance lines, specifically the Internet of Things (IoT).
Let’s look at the Italian market’s experience and the key elements of the business opportunities presented by connecting an insurer with its customers and their risks.
The experiences on the Italian market
Italy is recognized as the most advanced auto insurance market at the global level for telematics. Leveraging the experience of the auto business, the country is affirming its position as a laboratory for the adoption of this new paradigm by other business lines. The fact that the Italian insurance market represents the state of the art for connected insurance gave rise to the idea of creating the Connected Insurance Observatory as a think tank to help generate and promote innovation in the insurance sector, offer a strategic vision and stimulate debate.
More than 70% of Italians show a positive attitude to auto telematics insurance solutions, and 26 different insurance carriers in the Italian market are currently offering this product. Telematics-based insurance contracts represented 16% of the personal cars insured in Italy in the first quarter of 2015, according to data from IVASS. This relevance of telematics was highlighted by insurer members of the Observatory responding to a question about the maturity level: 65% affirmed the “the way to manage day by day the auto insurance business was already impacted by the telematics.”
This kind of telematics adoption is a complex process requiring many years, due to the cross-functional impacts and the involvement of multiple parties (tech vendors, insurers, distributors, clients). It is important to consider the evolution path shown by the Italian market:
Incubation phase: It began in the early 2000s, when first-mover players were studying the feasibility of combining the insurance product with the technology. The main question among carriers was, “Does the approach make sense?”
Exploration phase: This commenced in the late 2000s, when pioneers started to achieve volumes from the solution rolled out on the market. In this phase, the average level of awareness in the markets was low, and other players started with pilots based on a “me-too approach”; their main question was, “What is the ROI of this program?” At the end of this phase, in 2012, the Italian market accounted for about 1.3 million black boxes.
Learning phase: A few players started to move from focusing on “quick wins” to a more holistic approach. They were able to exploit the potential of the solution and were thus in a position to start pushing the selling phase. Some differentiation began to appear; the approaches became more articulated: Carriers also introduced insurance covers based on self-installed devices— moving away from the myth of the Italian telematics business case only being linked to anti-theft and anti-fraud—and this new approach represented around half of the telematics market’s growth through those years. The key question on the market was, “What is the best way to do it for my company?” Telematics have become mainstream, and this phase was completed by the Italian market in 2015.
Growing phase: Currently, the Italian auto insurance sector has reached the point where telematics solutions have traction in the market. Each player will develop its own approach and experiment with further upgrades, introducing multiple segmented products with its offer. The 4.8 million insurance contracts with a black box fitted in the car—a statistic gathered by ANIA in December 2015—is expected to grow to almost 14 million by 2020, based on the Connected Insurance Observatory’s projections.
Figure 1 below highlights the current level of telematics maturity by country and the current leadership of the Italian market: At the end of 2015, 4.8 million Italian contracts accounted for more than 45% of all the insurance contracts active globally, with sensors sending data to an insurer.
This sequence of stages seems to be the necessary evolution path for the offering of connected insurance in a new business line.
Connected insurance applied to other business-insurance lines have been a hot topic in the last 12 months. Insurance applied on personal lines like home and health is currently on top of the innovation agenda of many insurance carriers.
In recent years, five pioneers in the Italian market have introduced house-insurance coverage with sensors and a gateway that sends data to the carriers. More than 75% of the insurer members of the Observatory consider connected insurance to be the most relevant innovation expected in home insurance in the next year. This potential is confirmed by the consumers’ voice: Connected home insurance use cases appear to be able to double the penetration of home insurance in Italy.
The connected home insurance sector is currently moving from the incubation to the exploration phase. The connected health sector is less mature. Some carriers are currently running pilots, and only a couple are already selling a connected health product. Around 40% of the insurer members of the Observatory consider connected insurance to be the most relevant innovation expected in the health insurance industry over the next year.
What’s in it for the carrier?
The connected insurance paradigm opened incredible opportunities in the insurance sector, which underwent a tremendous digital transformation. Insurers can play a new, active role in their relationships with their customers. In a world where analysts project 10 connected things per person by 2020—a figure projected to grow to 200 by 2030–2040, we can calculate the house-insurance value proposition:
An active prevention service for all the risks that could occur in the house, based on the data coming from the sensors;
Actions to limit the damages and fix them, when the prevention was not enough; and
The guarantee of monetary reimbursement limited to the cases of “service failure,” meaning when the two services above were not working as expected.
The three business opportunities
The key business opportunities for the insurance carriers are:
Achieve a direct impact on the insurance profit and loss;
Enlarge the proximity and increase the interaction with clients by delivering a vastly superior customer experience, a proven way to achieve enlarged loyalty; and
Create and consolidate knowledge about the risks and the customer base.
The value generation on the insurance P&L was the area more exploited in these years, and one of the key lessons learned was: There is no “one-size-fits-all” approach. Each carrier needs to design its own connected insurance journey based on its own strategy and specific characteristics.
The value-generation levers each player must combine to deploy its own approach are:
Risk selection. Telematics can be used to select risks either indirectly or directly at an underwriting stage. There is the opportunity to generate value with the sole goal of supporting the underwriting phase; without any telematics, the tariff will adjust the insurance rate base on the data gathered. This can be achieved in two ways: 1) Directly, using a set of information coming from sensors to improve the overall quality of the underwriting process; and 2) Indirectly, leveraging the ability of the value proposition to auto-select the customer base. The analyses of the ANIA actuarial department of all the Italian insurance telematics portfolios have shown a claim frequency risk-adjusted 20% lower than the non-telematics one;
Risk-based pricing monitoring the quantity and level of risk exposure on the basis of information monitored continuously. This personalized price requires the development of new risk models based on the fusion of the traditional insurance parameter with the connected insurance information and the contextual information.
Value-added services (VAS). It is about enriching the value proposition by adding services built upon data provided by connected insurance. The driver’s journey was already reinvented by innovative services delivered by insurers—beyond the well-known exceptional emergency response and help to the client through a critical situation—enabling many carriers to earn fees for these services. The importance of this aspect will grow exponentially with the volume of claims-reductions due to new-car safety systems in the next couple of decades. VAS could be the insurance sector’s way to stay relevant in the future age of semi-autonomous and autonomous cars.
Loss control. This impact can be observed from two different perspectives. The first is risk-prevention. Many carriers have this target as a challenge for the next years. Instead, the second area can be one of the most relevant impacts in the short term on profit and loss for the insurers that will adapt their claims processes in a consistent way, as proven by the auto telematics experience. Crash detection and the related anticipation of the FNOL (first notification of loss), as of the stolen vehicle recovery service, have demonstrated their effectiveness in the loss mitigation. Connected insurance reinforces the entire claims-handling process: The carrier can streamline claims-management using the structured and objective information extrapolated from the sensors’ raw data.
Loyalty and behavior-modification programs. This mechanism generates value from the insurance perspective by engaging clients and directing them toward less-risky behaviors, (mechanisms to manage client engagement and retrocession prizes other than insurance premium discounts), but also by indirectly creating a multi-year reward mechanism to reinforce customer loyalty.
For the full report from which this article is derived, “Connected and Sustainable Insurance,” click here.
The insurance sector has entered a phase of profound transformation. Numerous insurtech startups—around 1,000, according to Venture Scanner map—have popped up to challenge the traditional model.
I believe that we will see a completely changed insurance sector in the medium term. But 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.
The reach of this digital transformation goes way beyond the elimination of “the middle man” from a distribution point of view. The direct digital channel dominates very few markets and deals only with compulsory insurance. In the vast majority of markets, a multichannel-oriented customer continues—with variations from country to country—to choose at least at some point of the customer journey to interact with an intermediary. But the digital transformation happening in the insurance industry is widespread and encompasses all of the phases of the insurance value chain, from underwriting to claims.
Every insurance sector player—whether it’s a reinsurer, a carrier or an intermediary—ought to pose this question: How should the insurance value chain be reshaped by using the new technologies at hand? There are numerous relevant technologies that come to mind, including: the cloud, the Internet of Things (IoT), big data and advanced analytics, quantum computing, artificial intelligence, autonomous agents, drones, blockchain, virtual reality and self-driving cars.
To take full advantage of these technologies, there has to be a structured approach that begins with identifying use cases that can have an actual contribution to reaching strategic business goals, then maximizes their effects inside the insurance value chain of each player. Finally, the approach should look at the software/hardware selection or the “make vs. buy” choices. The essential idea is that “one size does not fit all. Each player needs to create customized use cases based on their individual strategy and characteristics.
To date, there are several types of approaches to mapping insurtech initiatives. I have developed my own classification framework based on six macro areas (awareness, choice, purchase, usage, IoT and peer-to-peer (P2P)).
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 within the innovation unit. It is currently being used in daily work within motor insurance business units. In this domain, Italy is an international best practice example: According to the SSI’s survey for the Connected Insurance Observatory, 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 16% penetration rate out of all privately owned insured automobiles in the second quarter of 2016. Based on information presented by the Connected Insurance Observatory—a think tank I created in partnership with Ania that brings together more than 30 European insurer and re-insurer groups—the Italian market will surpass 6 million telematics policies by the end of the year.
Based on this data, we can identified three main benefits connected insurance provides to the insurance sector:
Frequency of interaction, enhancing proximity and interaction frequency with the customer while creating new customer experiences and offering additional services
Bolstering the bottom line, improving insurance profit and loss through specialization,
Knowledge creation and consolidating knowledge about the risks and the customer base
The insurance companies that are part of the Observatory 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:
An initial incubation phase when the first pilots are being put into action to identify use cases that fit with business goals;
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;
A learning phase in which the approach is adopted by many insurers (with low volumes) but some players start to fully achieve the potential by using a customized approach and pushing the product commercially (increasing volumes);
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 three key lessons regarding the insurance sector:
Transformation does not happen overnight. Telematics—before becoming a relevant and pervasive phenomenon within the strategy of some of the big Italian companies—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.
The 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. It also shows that companies, thanks to their trustworthy images, are considered credible 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 how “software is eating the world”— even in the insurance sector.
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.
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.
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.”
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.
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 insurance sector, which is considered to be fairly traditional and resistant to change, is currently being overtaken by a macro trend of digital transformation. This is causing institutions with hundreds of years of tradition to rethink their insurance business models, by identifying modules within their own value chain that need to be transformed or reinvented with the help of technology and data usage. InsurTech represents a macro trend destined to take on an ever-growing relevance in a world that tends toward hyperconnectivity and the infiltration of technology into all aspects of society. The insurance business will become more InsurTech-oriented, and technology will have a decisive role in reaching strategic goals. This applies to insurance companies, reinsurers, intermediaries and newcomers. During 2015, InsurTech start-ups received around $2.5 billion in funding, according to LTP.
The number of innovative initiatives is growing exponentially, raising interest for all phases of the customer journey and all steps in the insurance value chain. This reveals a very crowded map of innovations that were introduced by the incumbents of the insurance sector or by start-ups. The innovations can be divided into seven macro areas: awareness, choice, acquisition, use, recommendation, Internet of Things (IoT) and peer-to-peer (P2P). One of the main challenges for analysts, incumbents, start-ups and investors is identifying the degree of relevance that these innovations represent for the insurance sector.
After many discussions with venture capitalists and insurance thought leaders, I’ve come up with my own answer for the following question: What is the potential of each InsurTech initiative? My approach is based on four axes related to the fundamentals of the insurance business:
Profitability: Impact that an innovation may have on the level of profitability of the insurance portfolio, acting on the loss-ratio level or on the cost level without an increase in volume.
Proximity: Contribution for creating improved relationship that is based on numerous touchpoints during the customer journey. Bain’s international research reveals that the customer satisfaction (measured with the Net Promoter Score approach) of those clients that have interacted directly with the insurance company is markedly superior to those who have not. Obviously, there is a predictable relationship between satisfied clients and their economic effects.
Persistence: The reach of the new initiative in terms of renewal rate increase, and thus of stabilization of the insurance portfolio.
Productivity: Evaluation of the contribution that a certain InsurTech approach can have at the top-line insurance level in terms of client acquisition, cross-selling or additional fee collection for services.
These considerations refer to a specific innovation initiative and are not absolute. On the contrary, they should be customized to each specific market, line of business and client segment. In a similar manner, an insurance company has to make these considerations by taking into account both the contribution brought toward the achievement of strategic priorities and the coherence with its distribution approach.
I am convinced that evaluating InsurTech opportunities based on this pragmatic approach clarifies the rationale behind each innovation initiative. It facilitates the prioritization of initiatives and ultimately helps focus investors’ and innovators’ efforts.
If we consider some connected-insurance use cases, it is easy to understand the reason why the World Economic Forum identified connected insurance as one of the main insurance innovation trends:
Profitability: From this perspective, the experience of the Italian insurance market in motor telematics (which is the most advanced market at an international level, with a 16% penetration for private use vehicles) shows how this approach is able to generate actual value for the insurance bottom line by acting on risk selection and the claims management process.
Proximity: Nowadays, within the connected car line of business, there are dozens of different services based on data collected from black boxes—services that the insurance company offers to the final client. By focusing instead on health insurance, the Chinese insurer Ping An has built an initiative based on connected health that recently raised a round A financing of $500 million, with an valuation of $3 billion.
Persistence: The experience of Discovery Holding in the field of protection has shown relevance when it comes to reducing the lapse rate by using the Vitality approach—which works by identifying and rewarding healthy behaviors.
Productivity: The data recorded by sensors represents a great opportunity for getting to know customers and to send personalized offers at the best moment possible. This potential, which is yet to be explored, is precisely the driver that helped create the start-up Neosurance, recently awarded the IoT Newcomer award at the Insurance IoT Europe Summit.
These insurance approaches suggest the use of sensors for data collection for different business lines. This data refers to the status of an insured risk, and to the telematics for remote transmission and informatics management, alongside the insurance value chain of the collected data. These approaches represent a great opportunity for connecting the insurance sector with its own clients and their risks.
Italy is today one of the most advanced ecosystems of connected insurance, encompassing 4,9 million auto insurance contracts, which include a box provided by the company, and almost 50,000 home insurance contracts, which are characterized by the use of sensors communicating with the company. In this context, the Connected Insurance Observatory was born: a think tank dedicated to spreading the culture of insurance innovation. I put together the Observatory at the beginning of 2016 with the support of the Italian National Association of Insurance Companies (ANIA). The Observatory has made it possible to unite 30 primary Italian and international insurance groups and some 15 other interested players to bring a contribution to the InsurTech story in the making.