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Key Trends in Innovation (Part 2)

This article is the second in a series on key forces shaping the insurance industry. Here is Part One.

Trend #2: Data: External data and contextual information will become increasingly more important than historical internal data for predicting risk and pricing.

The insurance industry tends to look backwards to understand the future. Underwriting and pricing are based on historical data using proxy factors.

However, the explosion of information from IoT devices, wearables, genomics, bionomics and health tech is driving a fundamental change in the approach to pricing, risk selection and underwriting across all lines of business.

It is now possible to base underwriting decisions on real time detailed information specific to the individual risk and monitor and update those decisions over the life of the policy.

See also: 10 Trends at Heart of Insurtech Revolution

How different product lines will accommodate external and contextual information

P&C personal Lines – personal lines products, particularly motor and home, are already seeing positive momentum in the use of data. For example, insurance propositions leveraging smart home devices. Data from these devices can help prevent accidents (for example, responding to a burst pipe) and can help inform and assess the risk profile of the policy in real time (for example, the period each day when the property is empty). Similarly, in motor the data from telematics devices can be used to determine the relative quality of the driver. Going forward it will be possible to adapt pricing based on the length and nature of a journey (for example, motorway versus city centre, weather conditions and weight of traffic).

“Real time pricing of motor and home based on an actual risk profile”

Commercial lines – the dynamic in commercial lines is slightly different and likely to drive commercial insurers and brokers more towards risk mitigation and risk management rather than traditional risk transfer solutions. For example, as the quality of monitoring devices and technology significantly reduces the chances of a piece of machinery going wrong the need for insurance falls. To remain relevant insurers therefore need to help their customers better manage their risk profile whilst providing protection in the event of a catastrophe. Also, IoT devices can supply detailed information about a risk during the life of the policy, presenting the opportunity to change the pricing or more likely allow the insurer to manage their reinsurance program in real time and provide valuable support to their client to help reduce accidents.

“Commercial lines insurance will become increasingly about risk mitigation rather than risk transfer”

Life and Health – in life and health, initial moves have seen insurers adopt wellness programs to help encourage policyholders to live more healthy lives. This is the tip of the iceberg. Over the next few years the quality and quantity of information about an individual is going to increase exponentially and can be used to identify potential health issues much earlier than traditional means thereby allowing intervention and increased likelihood of a successful outcome. Information will also be able to tell us a lot more about the relative health of the individual and susceptibility to certain diseases. In this environment, insurance is about prevention and providing access to the technology rather than simply protection after something has happened.

“Leading tech companies believe that historical underwriting factors in life insurance are completely irrelevant”

Where next?

The problem is that whilst the velocity of data is going to increase exponentially the ability of the vast majority of insurers to capture and use this new information is very limited due to the legacy IT environment.

Insurers cannot respond with their current systems and that creates the opportunity for insurtech companies, particularly those who can provide an end to end solution that both engages the customer and facilitates the capturing, processing and use of the information.

See also: 10 Predictions for Insurtech in 2017  

We hope you enjoy these insights, and look forward to collaborating with you as we create a new insurance future.

Next article in the series: Trend #3: Majority of the simple covers will be bought in standard units through a ‘marketplace/ exchange’, permitting just-in-time, need and exposure based protection through mobile access

This article was written by Sam Evans, Carl Bauer- Schlichtegroll, and Jonathan Kalman

Key Trends in Innovation (Part 1)

This article is the first in a series on key forces shaping the insurance industry.

Trend #1: In the future, insurance will be bought, sold, underwritten and serviced in a fundamentally different way, and that creates opportunities for industry leaders and problems for industry laggards.

We are still in the initial stages of what Gartner terms the Hype Cycle, with an ever-increasing amount of noise and expectation without clear impact and results.

Have we reached the peak of inflated expectations? We expect not. Certainly, valuations continue to rise with relatively new businesses still at the effectively pre-revenue stage commanding valuations in the tens of millions. Hard to justify on any fundamental level.

However, at the core of insurtech, we continue to see a huge opportunity to innovate in a sector that is ripe for change – lack of customer engagement, lack of customer trust, outdated and legacy infrastructure combined with traditional and unpopular products all highlight the need for change and the underlying potential.

Ignore Insurtech at Your Own Risk

Eos has talked with dozens of insurance companies, and there is a wide range of responses from the insurance community about when, where, if and how to engage with insurtech.

The top insurance companies have, for the most part, followed a two-phased approach combining an innovation team with a corporate venture initiative. These carriers see the impending disruption clearly and want to be able to shape and influence the impact. The results so far have been mixed, as some large incumbents have found it difficult to circumvent legacy mindsets, governance, organizational structures and technology.

See also: 10 Trends at Heart of Insurtech Revolution  

Other carriers have yet to agree/settle on an approach to deal with these disruptive forces.

Eos calculates that the impact of insurtech is at least 40% to the average carrier. We calculate that by looking at a 20% upside, and a 20% downside scenario:

On a conservative basis, insurers may risk losing at least 20% of their business to disruption. On the flip side, for those that embrace innovation there is an opportunity to grow their business by 20%.

Stated another way, the net present value (NPV) of insurtech is $100 million for every $1 billion of premium on the downside and $285 million on the upside, assuming a top-line and profitability improvement.

Timing is also key, as the scale of adoption and impact is not linear. The upside opportunity by investing now in the right opportunities is likely to give an insurer a lead that others can’t catch — essentially a “first-mover” advantage. At the same time, the lost opportunity by delaying is exponential, not linear.

There are many ways to create and capture value

The positive momentum is further driven by the growth of insurtech into all areas of the value chain and across multiple product lines. We see two broad types of innovator: the “enabler” and the “disruptor.”

The enabler is a business that significantly improves an existing part of the value chain driving efficiency, improved customer satisfaction or better customer outcomes. A great example is RightIndem, which is transforming the claims process by creating an end-to-end, customer-managed claims process.

The disruptor is a business that has developed a new approach to fulfilling part, or all, of the value chain. This is illustrated by Insure A Thing, an insurtech startup that has created a way of providing insurance without the need for an upfront premium.

On face value, the disruptors may appear more exciting, but the enablers perhaps better illustrate the underlying potential of insurtech, as there are an abundance of opportunities for most insurance companies to hit “the low-hanging fruit” and do things better, more cheaply and more aligned with the customer.

Insurtech is not an overnight revolution, and there are many ways to create and capture value that combine different elements of the above, for example:

  • Low-hanging fruit — these are mostly your enablers,
  • True differentiators — a combination of enablers and disruptors
  • Measured bets for the future — all pure disruptors

At Eos, we continue to adapt and evolve our investment strategy to take advantage of these opportunities, with an initial focus on our three core platforms:

  • Digital distribution
  • Frictionless claims
  • Artificial intelligence for risk selection, underwriting, pricing and capital optimization

All of the above underpin our first trend and belief that the future of insurance will look very different than today, with all areas of the value chain from distribution, underwriting, products, claims and customer engagement changing fundamentally:

  • Bought differently: As asset ownership (cars, homes, etc.) mobility and crossborder employment evolve with the shared economy, insurance covers (at least personal lines initially) will be bought on a just-in-time, on-demand, needs basis. Greater information transparency on the buyer and seller side will enable direct interaction with lower cost of intermediation/brokerage. We see this starting with simpler personal line covers and gradually evolving to more complex risks.
  • Sold differently: Insurance will be quoted, bound and issued at points of transaction/sales/service enabled by ubiquitous IoT, telematics and external data availability. Selling will become increasingly distributed and linked to companies with strong customer engagement across both B2C and B2B sectors.
  • Serviced differently: End consumers will choose how to be serviced and made whole via a channel, time and a manner of their choice. Servicing, especially claims, will focus on “delivering on the customer promise” as an integral part of the policy.

See also: Industry Trends for 2017  

We hope you enjoy these insights, and look forward to collaborating with you as we create a new insurance future.

Next article in the series: Trend #2: “External data and contextual information will become increasingly more important than historical internal data for predicting risk and pricing.”

This article was written by Sam Evans, Carl Bauer-Schlichtegroll and Jonathan Kalman.

10 Trends at Heart of Insurtech Revolution

As the insurance industry enters a period of profound change, we at Eos use a concept called the 20/20 dynamic to illustrate the point:

On a conservative basis, we believe most insurers risk losing at least 20% of their business to disruption. On the flip side, for those that embrace innovation there is an opportunity to grow their business by 20%.

Our goal is to ensure our strategic investors are on the right side of this equation.

Insurtech represents a unique opportunity for insurers to evolve their business model. Insurtech is not necessarily about disruption, but more an opportunity to take advantage of technology and data to create innovative solutions, reduce costs and capture greater value for customers, brokers and intermediaries, underwriters and service providers.

At one level, active participation is required just to meet the basic requirements of playing in the new market. For those committed to a strategic approach, insurtech can help drive true competitive differentiation, while enabling measured bets for the future.

See also: Insurtech: Unstoppable Momentum  

Underpinning this transformation are 10 key trends that we have identified and believe will be at the heart of the insurtech evolution:

  1. Insurance, as we have it known it historically, will be bought, sold, underwritten and serviced in a fundamentally different way within the next three years
  2. External data and contextual information will become increasingly more important than historical internal data for predicting risk and pricing
  3. A majority of the simple covers will be bought in standard units through a marketplace/ exchange, permitting just-in-time, need and exposure based protection through mobile access
  4. Solutions will continue to evolve from protection to behavioral change then to prevention — even across complex commercial insurance
  5. Although proliferation of data and increasing transparency on the buyer and seller will cause disintermediation for simple covers, it will also create opportunities for brokers and intermediaries to innovate solutions and channels for their B2C (non-standard risk pools, retirees/older generation, healthcare gaps) and B2B (emerging and unknown risks, cyber, global supply chains, cross-border liability, terrorism) customers
  6. The ability to dynamically innovate (new risk pools, new segments, new channels) and deliver on the customer promise will become the most important competitive advantage (as known risks continue to get commoditized and move to the direct channels)
  7. Internal innovation, incubation and maturing of capabilities will no longer be the optimal option; dynamic innovation will require aggressive external partnerships and acquisitions
  8. Simple “Grow or Go” decisions of the last decade will be sub-optimal, as the dust settles in insurtech; building in future optionality and degrees of freedom will be the key
  9. Consolidation just for economies of scale will provide increasingly less marginal value in non-life as well as life insurance; real value creation will come from “economies of skill” and digital capabilities
  10. Deep learning (next generation of AI), blockchain and genomics technologies will improve financial inclusion and better meet the needs of the under-insured and uninsured

We have linked the above trends to analysis of how profit pools will change over time to build an investment strategy that also focuses on platforms or clusters that allow us to build more compelling propositions by connecting related players in adjacent parts of the value chain.

Three areas of initial focus are:

1. A digital front office solution that leverages an open architecture platform developed by Convista (OneDigitalOffice), augmented by relevant startups including, for example, on-demand insurance by Oula.la and social media adoption by Digital Fineprint.

The ability to drive dynamic innovation is driven by technology stack/system flexibility to respond quickly to customer needs. New risk pools, new products and new ways to reach customers will place massive pressure on traditional systems, making a dynamic digital front office key to execution.

  • 360-degree multi-channel (direct, field sales force, internal sales force, independent agents/brokers) connectivity
  • Augmented functionality across the value chain from sales/distribution through underwriting, binding and servicing
  • Sales funnel optimizer (sales force effectiveness) — inquiry/quote, quote-to-submission, submission-to-bind ratio
  • Sales force/intermediary (broker/agent) segmentation and performance management

As an example, the impact of the sharing economy and need for on-demand insurance will require instant pricing and cover that switches on and off at point of sale to meet the needs of the customer.

2. An end-to-end claims solution developed by RightIndem and supported by additional capability from other technology providers

The claims space is an interesting one; it represents the largest individual expense on any P&C insurer’s P&L but conversely has seen very little innovation. This is now starting to change. RightIndem has developed a platform that achieves significant improvements in customer satisfaction while significantly reducing the cost of managing the claim. This is a win/win for the customer and the insurer and in our view a classic enabler technology that takes an existing function within the insurance value chain but does it much more effectively and with the interests of the customer at its core.

See also: Insurtech Checklist: 10 Differentiators  

3. Artificial intelligence (AI) with an initial focus on life and health insurance developed by Gen.Life

We are particularly excited about the combination of AI and the latest health technology to transform insurance. Examples include Livingo Health, which combines a blood glucose monitor support and intervention to help coach people through diabetes, and Cycardia Health, which employs machine learning predictive analytics software to categorize abnormal circadian patterns in otherwise healthy breast tissue to provide early detection of breast cancer. These types of technology will allow the early detection of potential diseases so that preventative treatment can be started much earlier, dramatically improving chances of success. Rather than life and health insurance being about prospective payments after an event, they can become the key mechanism for deploying technology to allow people to enjoy healthy lives.

The insurance industry will look very different in five years, but more importantly there is an opportunity to drive huge benefits to society through reducing under-insurance and supporting the transition from protection to prevention.