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.
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”
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