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How to Protect Those Who Need It Most

In brief

  • The EY 2021 Global Insurance Consumer Survey explored the financial anxiety caused by COVID-19, how consumers plan to respond and the protections they want now.
  • The pandemic’s powerful financial and psychological effects were felt most intensely by younger consumers and in emerging markets.
  • Given increased consumer interest, there is huge opportunity for insurers that develop accessible, purpose-led solutions and update distribution channels.

For consumers, the COVID-19 pandemic has been the equivalent of a massive life event. Its broad-based and multi-dimensional effects were felt psychologically, emotionally and economically. The profound financial impacts forced people around the world to reassess their priorities, goals and needs — indeed their entire lifestyles in some cases.

Widespread health concerns, pervasive economic uncertainties and strict lockdowns bound people around the world into a shared experience of unprecedented scale. But while anxiety and psychological effects were felt universally, it truly has been a tale of two pandemics, financially speaking.

Consumers in emerging markets were hit harder than those in mature economies, both in terms of their health and finances. They faced more severe consequences such as job loss, reduction in working schedules and the need to dip into savings. Younger generations were more heavily affected financially, while older citizens faced a greater mortality risk. Of course, many of these initial effects are still lingering as the virus persists.

Recent EY research confirms how the pandemic fundamentally changed consumer needs, how they plan to increase their financial security and what insurers can do to seize the opportunity. Between May and August 2021, EY surveyed 4,200 people in seven countries (Brazil, Canada, Japan, the Netherlands, the Philippines, South Africa and the U.S.) about the pandemic’s financial impacts, respondents’ plans going forward, their interest in different types of insurance products and their buying preferences (see full methodology). We also spoke to people in cities across the world to get their perspective.

The results of our research reveal consumers’ interest in new products, with strong value propositions and specific features, and an openness to interact and buy in new ways. Insurers will need to engage consumers with empathy, develop solutions that strengthen financial well-being, innovate their product sets and optimize digital distribution channels. Ultimately, insurers must live their purpose of providing protection to those who need it most, with an eye toward bridging the protection gap.

The four key findings from the EY 2021 Global Insurance Consumer Survey:

  1. The pandemic caused almost universal anxiety, which has prompted consumers to take action and increased their interest in new protections.
  2. Beyond the shared psychological impacts, emerging markets and younger generations took the biggest financial hit and show the greatest interest in new products.
  3. Emerging market consumers are digitally savvy, open to sharing data and ready to buy new products in new ways.
  4. Because corporate social responsibility matters to consumers, insurers need to stand behind great values as well as great products.

How consumers plan to respond to universal financial anxiety — Short-term protections are the priority.

The threats of the COVID-19 pandemic were felt quite close to home. Losing a loved one earlier than expected was the top concern for consumers worldwide, with 76% of overall respondents citing concern. Clearly, this was more than an economic crisis, though the financial stakes were high, too. Financial well-being was the second-highest concern, cited by 73% of all respondents. 

Consumers around the world also have much in common in terms of their reaction to the pandemic. Three out of four (75%) anticipate making financial preparations in response to the pandemic. Specifically:

  • 50% plan to save more
  • 30% expect to develop emergency plans
  • 23% plan to speak with a financial adviser

The implication is clear: Nobody wants to be caught out like this again. Recovery and preparation for another crisis are the immediate priorities, rather than retirement or estate planning.

Significant percentages of respondents are interested in new types of insurance products. They expressed the greatest interest in policies that pay for hospitalization expenses (94% in emerging markets and 64% in developed markets are interested), followed by an add-on feature for life insurance that allows access to funds in case of emergencies (91% in emerging markets and 56% in developed markets are interested). They are also thinking about short-term income protection products, like insurance that funds college education plans or pays for credit card bills in the case of a job loss. 

Compared with a similar study EY conducted in mid-2020, these findings show a remarkable consistency. Despite the hopeful signs in the late spring and early summer of 2021, financial worries do not look likely to abate anytime soon. Consumers are keenly interested in avoiding what we call “long financial COVID-19,” a sustained state of financial anxiety due to overall uncertainty and a sense of not being prepared for another highly disruptive event. 

See also: 3 Tips for Improving Customer Loyalty

The intense impact on emerging markets and younger consumers — Financial distress drives new demand.

Our survey results quantify the varying financial impacts across markets. Consumers in emerging markets felt more severe impacts, but consumers in developed markets were not unscathed. In fact, significant proportions of the latter group dipped into savings or lost income. 

Interestingly, consumer responses to financial distress show the differences across markets: 93% of respondents in emerging markets plan to make at least some type of financial preparation, compared with 61% in developed markets. About one in four, or 23%, of consumers in emerging markets plan to purchase new forms of insurance, and nearly 42% plan to speak with their adviser about an emergency plan. The desire to prepare for future disruptions is surely prompting these actions.

It’s important to note how demographics correlate to these findings. Typically, emerging markets have younger populations, as reflected in our survey design. In emerging markets, 75% of the respondents were under the age of 45, compared with 35% in developed markets. Among our respondents, only 10% in emerging markets have more than $100,000 in investable assets, versus 37% for developed markets.

The varying levels of concern across different markets can also be attributed to the relative strength of healthcare systems, social safety nets and access to vaccinations. For instance, in emerging markets, where vaccination rates are considerably lower than in developed markets, concerns about losing a loved one and financial well-being were notably higher. That anxiety remains high more than a year after the onset of the pandemic speaks to the severity and extent of the psychological trauma. 

The word cloud below includes the most common comments from our survey respondents in emerging markets, demonstrating the diversity and intensity of their fears. Facing threats of economic instability, along with increased crime and delinquency, this population may require even more protection of their assets.

Our analysis of these findings confirms that there is a huge and largely underserved segment of the market that needs — and is ready to buy — new forms of protection. For example, 61% of respondents in emerging markets are interested in purchasing life insurance in response to the pandemic. Consumers in developed markets also want more life coverage, as evidenced by the significant uptick in sales and applications during the last year. Research and markets estimates global life insurance market growth at 16% from 2020 to 2021.

It’s no surprise that the greatest opportunity is with the consumers most affected by the pandemic, both in terms of health and finances. Historically, this has been a tough market to serve profitably. But insurers should view the scope of the growth potential in terms of greatly expanded and intensified consumer interest in their products. The opportunity to bridge the protection gap and build lifelong customer relationships has never been greater. 

See also: Digital Solution for Income Protection

A new wave of digitally savvy consumers emerges — Desire for new solutions in new ways

In considering how to take advantage of the demand spike, insurers will of course consider the most cost-effective ways to serve consumers in emerging markets. In this sense, our survey presents good news in that this digitally savvy demographic vastly prefers online channels: 80% are likely to purchase health insurance, and 73% are likely to purchase life insurance digitally. Nearly 60% prefer contacting their agents or brokers digitally. 

Further, they are ready to share more data, with more than half of emerging markets respondents willing to share personal information in exchange for meeting savings goals or individual health-related goals. They are also open to new buying options — 47% are comfortable purchasing an embedded insurance policy from a healthcare firm or hospital chain.

To connect with these consumers, insurers will need stronger digital capabilities, in addition to accessible and affordable products. Those are the necessary elements to satisfy these customers efficiently and prepare for potential competition from healthcare firms. Insurers will also need to communicate more effectively, demonstrating that they understand what consumers have been through and what they need now.  

Some forward-looking insurers are already taking steps in this direction. One Asian carrier developed a new policy with clearly defined benefits — coverage for up to three months of expenses in the case of a pandemic-related hospitalization. 

The offering was targeted at younger consumers, with whom the carrier had limited previous engagement. The business case was founded on a few strategic principles: that the firm’s network of advisers would gain access to new customers, that these relationships could be expanded and grown profitably and that the new offering aligned to the firm’s purpose of promoting financial security.

Our conversations with consumers highlight the demand for innovative products and distribution channels, along with strong customer relationships.

Why great values matter, along with great products — Social commitments count with consumers.

The pandemic, along with other events of the last year, advanced consumer interest in corporate social responsibility (CSR) and raised expectations about how companies contribute to society. A full 59% of consumers worldwide know their insurers’ CSR stance at least somewhat well, with consumers under the age of 45 more aware of social commitments. An average of 56% took at least some CSR-related action involving insurance or other financial products. Reputation is the most critical factor, with a quarter of respondents saying that they have chosen one insurance brand over another due to its CSR reputation.

Consumers in emerging markets are more actively engaged around CSR than their counterparts in advanced economies: 73% say they are aware of the social responsibility stance of companies they do business with, versus 48% in developed markets.

These numbers are consistent with our 2020 consumer survey findings, where we found the most financially affected consumers are both highly concerned about social justice causes and place a greater value on an insurer’s social efforts in their purchasing decisions.

Other EY research supports these conclusions. The latest edition of the EY Future Consumer Index suggests 43% of global consumers want to buy more from organizations that benefit society, even if their products or services cost more. Nearly two-thirds, or 64%, are prepared to behave differently if it benefits society.

More and more, consumers are choosing brands that share their values, especially regarding urgent societal issues, including climate change, diversity and inclusion and income inequality. By articulating a purpose beyond profits and amplifying their CSR efforts, insurers can gain traction with a socially active, energized audience. That their products can directly improve financial well-being and facilitate the transition to a greener economy demonstrates how insurers are uniquely positioned to show leadership and differentiate on CSR.

See also: How to Use AI in Customer Service

What’s next for insurers: implications and takeaways

The powerful effects of the pandemic will be felt for a long time, at both the level of the global economy and within individual human lives. The lockdowns and social isolation; the fear of contracting the virus and of losing a loved one; the disruption of jobs, careers and everyday activities; the yearning for a return to normalcy and greater financial security — these are the universal truths of the COVID-19 era. Insurers can respond and help people recover in meaningful ways.

1. Communicate with empathy to build trust: Our research, along with other studies, provides a detailed understanding of the new challenges that consumers face, their interests in specific products and how they intend to prepare for future shocks. The first thing insurance companies need to do is show that they understand all the impacts — from financial to physical and mental health.

Next, carriers should connect to their customers on a human level, with warmth and empathy, acknowledging the trauma of the last year. Language matters, especially in the digital channels younger consumers prefer. A human touch is the prerequisite to building trust and becoming a partner in strengthening financial well-being.

2. Innovate around customer value: The huge demand for new protections and financial well-being solutions cannot be ignored after a decade of sluggish industry growth. It must be seized vigorously and creatively, with new solutions and distribution options closely aligned to consumer needs and preferences. The key is to provide relevant guidance and scalable solutions now that will help consumers navigate the pandemic’s lingering financial impact and restore their financial well-being.

3. Strategically engage younger consumers: Personalized communications and new solutions are not only for mass-affluent and high-net-worth consumers. The pandemic opened a door to connect with younger and underserved consumers, a segment that insurers have long struggled to engage. It’s a moment of truth to introduce these individuals to the value of insurance as a means to prepare for future financial shocks and as the basis for long-term financial security. By providing relevant solutions now, insurers can lay the foundation for lifelong relationships.

4. Demonstrate purpose and commitment: Many carriers showed their purpose in the immediate aftermath of the pandemic, offering premium discounts and holidays and supporting local communities. Going forward, all operations — starting with products, communications and customer interactions —must be infused with such purposeful commitment and humanity. By linking their products to their core values and purpose, insurers can demonstrate they are good corporate citizens sincerely invested in delivering the protections that individuals, communities and society need now.

Will Blockchain End Up Like 3DTV?

When technology is baked into a device, we rarely give it much thought. We buy a smartphone for its utility – not its operating system. Sometimes a new technology dramatically changes how everyone does things; the internet is a good example. Some plausibly great innovations, such as 3D television, just never gain traction. Which of these outcomes will blockchain have?

Recently, blockchain has emerged as a technology that will potentially transform industries in a way similar to what the Internet did a couple of decades ago. Still a nascent technology, its many uses have not yet been discovered or explored.

Most people know a little about blockchain:

    • It lets multiple parties agree on a common record of data and control who has access to it.
    • Its platform makes cryptocurrencies like bitcoin possible.
    • Movement of cryptocurrency verified by blockchain allows peer-to-peer cash transfers without involving banks.
    • Blockchain is a permanent, auditable record, so any tampering with it is obvious.

Some people think blockchain will transform security in financial services and fundamentally reshape how we deal with and trust complex transactions, though this could be a response to hype or a fear of missing out. Many other people ask why and how they should use blockchain.

On the face of it, using a shared (or distributed) ledger to process multiple transactions doesn’t seem so revolutionary. Blockchain is essentially a recordkeeping system. Perhaps its association with cryptocurrency – such as bitcoin – lends it a darker, more enigmatic edge than the software traditionally used for processing multiple transactions. One way or another, insurers face pressure to update antique systems with new ones that can compete with the demands of a digital world, and that means incorporating blockchain technology.

A distributed ledger of transactions

A blockchain can be seen as an ever-growing list of data records, or blocks, that can be easily verified because each block is linked to the previous one, forming a chain. This chain of transactions is stored on a network of computers. For a record to be added to the chain, it typically needs to be validated by a majority of the computers in the network. Importantly, no single entity runs the network or stores the data. Blockchain technology may be used in any form of asset registry, inventory and exchange. This includes transactions of finance, money, physical property and intangible assets, including health information.

Because blockchain networks consist of thousands of computers, they make any effort to add invalid records extremely difficult. Every transaction is secured using a random cryptographic hash, a digital fingerprint that prevents its being misused. Every participant has a complete history of the transactions, helping reduce the chance of transactions being corrupted. Simply put, a blockchain is a resilient, tamper-proof and decentralized store of transactions.

Complex processing and automation with smart contracts

Blockchain ecosystems enable a large number of organizations to join as peers to offer services, data or transactions that serve specific customers or complex transaction workflows transparently. These ecosystems can automatically process and settle transactions via smart contracts that encapsulate the logic for the terms and triggers that enable a transaction.

Smart contracts are created on the blockchain and are immutably recorded on the network to execute transactions based on the software-encoded logic. Transparency through workflows recorded on the blockchain facilitate auditing. Peers and partners within a blockchain ecosystem independently control their business models and the economics without the need to use intermediaries.

Self-executing smart contracts can be used to automate insurance policies, with the potential to reduce friction and fraud at claim stage. A policy could be coded to pay when the conditions are undeniably reached and decentralized data feeds verify that the event has certainly occurred. The blockchain offers enhanced transparency and measurable risk to this scenario.

Parametric insurance, which operates through smart contracts with triggers that are based on measurable events, can facilitate immediate payments while decreasing the administrative efforts and time. Effectively, the decision to pay a claim is taken out of the insurer’s hands. Other possible models are completely technology-based without the need for an actual insurance company. The decentralized blockchain model lends itself well to crowd-sourced types of insurance where premiums and claims are managed with smart contracts.

See also: Blockchain’s Future in Insurance  

Blockchain-based insurance

New insurers using blockchain are emerging and offering increased transparency and faster claims resolution. Here are some examples:

    • Peer-to-peer property and casualty insurer Lemonade uses an algorithm to pay claims when conditions in blockchain-based smart contracts are met.
    • Start-up Teambrella also leverages blockchain in a peer-to-peer concept that allows insured members to vote on claims and then settles amounts with bitcoin.
    • Dynamis provides unemployment insurance on a blockchain-based smart contract platform.
    • Travel delay insurer insurETH automatically pays claims when delays are detected and verified in a blockchain data ledger.
    • Etherisc is another new company building decentralized insurance applications on blockchain that can pay valid claims autonomously.

Traditional insurance companies, such as AXA and Generali, have also begun to invest in blockchain applications. Allianz has announced the successful pilot of a blockchain-based smart contract solution to simplify annual renewals, premium payments and claims submission and settlement.

Blockchain has the potential to improve premium, claim and policy processing among multiple parties. For example, in the last year the consultancy EY and data security firm Guardtime announced a blockchain platform to transact marine insurance. This platform pulls together the numerous transactional actions required within a highly complex global trade made up of shipping companies, brokers, insurers and other suppliers.

A consortium of insurers and reinsurers, the Blockchain Insurance Industry Initiative (B3i), has piloted distributed ledger technology to develop standards and procedures for risk transfer that are cross-market compatible. Whether or not the outcome is adopted industry-wide, it seems important for digital solutions to be created with this transparency and inclusiveness in mind.

There is clear potential for blockchain in reinsurance where large amounts of data are moved between reinsurers, brokers and clients, requiring multiple data entry and individual reconciliation. Evaluating alternative ways of conducting business is one reason for the collaboration of Gen Re with iXledger, which can explore ideas while remaining independent.

Handling of medical data and other private or sensitive information

Individuals will generate increasing amounts of personal data, actively and passively, from using phones and Internet of Things (IoT) devices, and processing digital healthcare solutions. Increasingly, consumers will want control of this scattered mass of digital data and share it with whomever they choose in exchange for services. This move aligns perfectly with the concept of a “personal data economy.” Think of information as currency and think about using blockchain to secure private data and reveal it in a secure and trusted manner to selected parties, in exchange for something.

Electronic health records are now common. Several countries use blockchain to secure patient data held digitally. This helps counter legitimate concerns about how sensitive personal data can be kept secure from theft or cyber-attack. Code representing each digital entry to the patient record is added to the blockchain, validated and time-stamped. A consortium of insurers in India is using blockchain to cut the costs of medical tests and evaluations, and to ensure the data collected is kept secure, along with other benefits including identification of potential claims fraud.

Looking to leverage the data economy, companies may employ innovative insurance propositions to engage people. Because the propositions will rely on shared data, people may be put off, fearing a loss of control over their personal information. While this fear poses a huge challenge for an industry seeking to improve its reputation for trust, blockchain technology may help insurers to reassure customers the digital data they share with them is safe.

Verification of documents

Verification of the existence and purpose documents in banks and insurance companies relies on storage, retrieval and access to data. A blockchain simplifies this process with its open ledger, cryptographic hash keys and date-stamped transactions. Actual hard copies of documents are not stored; instead, the hash represents the exact content in a form of scrambled letters and numbers. A change in a document will be exposed because it will not match the encoded one. The effect is an immutability that proves the status of the data at an exact moment and beyond doubt.

Blockchain technology is a “trustless” system because nobody has to trust anybody else for the system to function; the network of users acts together to vouch for the accuracy of the record. Examples of blockchain protecting patient records demonstrate its potential to implement other trusted and secure transactions with less bureaucracy.

There are other opportunities for insurers to move to a digitized paradigm and catalyze efficiency gains; blockchain need not be reserved for cross-industry platforms, and it’s not only useful in multiparty markets with high transaction volumes and significant levels of reconciliation; smaller-scale solutions can bring benefits, too.

Features that ensure privacy and data security

Beyond driving efficiencies, blockchain employs agreed standards for data care, which reduce the vulnerability of data that arises with the mass of sensitive data that digital connectivity creates. Other features that enhance privacy and data security include the contract process: Transactions are not directly associated with the individual, and personal information is not stored in a centralized database vulnerable to cyber-attack. Insurance companies, as well as technology companies, are accountable to their users for the security of their devices, services and software, and hackers are less likely to target enterprises with strong security.

Multiple participants and the removal of a central authority

Transparency, audit-ability and speed are standard requirements for any organization to successfully compete and transact in an increasingly complex global economy. Data is a valuable catalyst to that process and is complemented by blockchain’s ability to organize, access and transact efficiently and compliantly.

Trusted transactions require access to valuable data, and blockchain facilitates efficient access across multiple organizations. The economics for data usage will drive new business models fueled by micropayments, which will require efficiencies to scale. Business models based on data aggregation by third parties in centralized repositories with total control and limited transparency will be replaced by distributed blockchain-enabled data exchanges where data providers are peers within the ecosystem.

Decentralized peer organizations can use the blockchain for permission access, and for facilitating payments, to ensure total control of their economic models, without having a centralized authority. Data access and transactions are controlled directly by each member of the ecosystem, with complete transparency and immediate compensation.

Token economies

Ecosystems supporting peer organizations that transact or share data will require an effective mechanism for micropayments. These business models require efficiency, with less overhead than traditional account payable and account receivable workflows.

Event triggers, cryptlets that enable secure communication between blockchain, and external verification sources (oracles) will execute based on predetermined criteria, and token payments will be made simultaneously. Counterparty agreements may initially define the relationships between parties on the network, but payments are executed within the smart contract transactions.

See also: How Insurance and Blockchain Fit  

The elimination of a time delay in payments acts as a stimulant for economies; tokens earned can immediately be spent, increasing the speed at which organizations will earn and spend. Traditional delays and fees that occur throughout accounting workflows and through intermediary banks that process payments can be eliminated.

Cross-border processing

Currently, global payments involving foreign exchange introduce complexities in addition to time delays. Economic indicators and political events dramatically affect the exchange rates and profitability of transactions. Cross-border payments require access to the required currencies by intermediary banks, which can cause additional delays beyond the internal accounting workflows.

With blockchain technology, using a token-enabled economic layer simplifies the payments to support micropayment efficiencies. Participants on the blockchain network will be able to efficiently use the preferred fiat currencies to acquire or sell tokens without using intermediaries, banks or currencies.

Merging blockchain and data

Today, there are more connected IoT devices than there are people on the planet, and the data generated is growing at an exponential rate. Various sources have predicted that the number of connected devices will grow to more than 70 billion by 2025; the numbers are almost irrelevant.

IoT devices are used in homes, transportation, communities, urban planning, environment, consumer packaged goods, services and soon in human bodies. A number of insurance companies use these devices to assess driver habits and usage. Autonomous cars and changing ownership and usage models are creating a generation of insurance products that can be facilitated through IoT-collected data. Home devices can detect leaks, theft and fire damage – capabilities that reduce risk. Shipping companies use the IoT for fuel and cargo management, which offers operating efficiencies, transparency and loss prevention.

Merging the mass of IoT data with the blockchain is not without challenges, but this combination can provide a completely new way of creating an insurance model that is far more efficient and faster, and where data flows directly from policyholders to the insurer.

Summary

Interest in the trinity of bitcoin, blockchain and distributed ledger technology has significant momentum. However, the technology is not magic or a panacea for every corporate woe. It has disadvantages and limitations, and there are situations where it would even be the wrong solution. There is enough about it, though, to merit continued closer investigation – the many emerging cases of its application bear testament to that – but in place of hype we still need answers.

EY’s Ed Majkowski

Ed Majkowski, Americas Insurance Sector Leader and Advisory Leader for EY, discusses his vision for helping insurance clients successfully navigate the complexity of innovation and digital transformation and growing EY’s insurance practice to serve those needs.


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Reinsurance: Dying… or in a Golden Age?

Much has been said about the challenges facing the reinsurance industry, to the point where the industry and a few of its major players have been characterized as being in a potentially terminal decline. However, to focus on recent results is to overlook fundamental changes in the nature of risk in the 21st century that could benefit the world’s major reinsurers, with opportunities unlike any seen before in the modern history of reinsurance.

A difficult financial backdrop for reinsurance in 2017

Financial results for major reinsurers in 2017 saw substantial contractions from prior years, driven by large catastrophe losses from hurricanes and California wildfires. These results have been followed by cost reduction in the reinsurance industry, which has elicited surprise in two conflicting ways. For some, the surprise was that the cost-reduction efforts could affect reinsurance, given that such exercises were more common for their cedent primary carrier clients. For others, the surprise was that it had taken so long for a focus on cost to come to the reinsurance market.

Concerns about the future financial performance of the reinsurance industry are held at the very highest levels of leadership among major reinsurers. In response to questions about the company’s 2017 performance, Swiss Re CEO Christian Mumenthaler commented on the state of the property catastrophe market that “we need to get used to a world where margins are much lower.” Given that property catastrophe profits have been one of the best-performing segments, not just in reinsurance,but in the entire insurance industry, according to McKinsey, this is an unwelcome development for the medium-term profitability of reinsurance firms.

Bearish commentators do not blame recent poor results on an unfortunate confluence of large-scale U.S. property losses, excess capital in the reinsurance industry or a temporary soft market. Rather, global advisory firm EY points to “clear signs that reinsurers face a long-term structural phenomenon rather than a short-term fluctuation of the insurance cycle.” EY goes on to warn in a report on the reinsurance industry that there is “compelling evidence that reinsurers are inexorably moving toward a ‘dead end’ with their legacy business models.”

The potential for reinsurance, with a longer-term lens

Such pronouncements about the potential for the reinsurance industry to perish are, however, overblown. Far from the rapidly changing risk environment undercutting the role of reinsurance, changes in the nature of risk have the potential to unlock a golden age of reinsurance where reinsurance institutions could play an even more important role in the future of the global economy than ever before. Two megatrends affecting society in the 21st century could bode very well for the reinsurance industry.

The shift from physical to non-physical assets on balance sheets

First, the emergence of non-physical assets fundamentally alters the nature of risk, which will require major changes in the P&C insurance industry.

According to Ocean Tomo, in 1975, more than 80% of the market capitalization of the S&P 500 was derived from physical assets and infrastructure. Property insurers, therefore, had a key role in insuring the most valuable assets of the business community. However, by 2015, property assets made up a relatively small share of the value of businesses, with 87% of that value being tied to intangible assets. For centuries, the P&C insurance industry was focused on the protection of property, but in the space of a generation the relative importance of physical property has declined precipitously. Risk to assets hasn’t gone away; there has just been a shift from physical to non-physical assets.

See also: The Dawn of Digital Reinsurance  

The shift toward digital risks as a driver of risk to a company’s income statement

Second, the emergence of digital risk is fundamentally changing the potential causes of loss for businesses. When you move beyond a balance sheet perspective, where physical property has declined in importance, and look at the income statements of contemporary businesses, you also see an increasing reliance on digital technologies with substantial potential for business interruption when these technologies are disrupted. These losses are already being witnessed today with the recent NotPetya attack illustrating that many major businesses can lose hundreds of millions of dollars from a single cyber event. It is, therefore, no surprise that cyber risk has skyrocketed in importance from the #15 item on the minds of risk managers in 2013 to the #2 item on the minds of risk managers in 2018, according to a report from Allianz.

What is remarkable is not just the meteoric rise in importance of cyber risk over the past five years but the fact that we are just scratching the surface of a megatrend that promises to have an even greater impact in the years to come. Changes in technology are fundamentally changing the nature of risk due to the digitization of the economy, the automation of entire industries and the explosion of Internet of the Things (IoT) devices. As the economy shifts from having 10 billion Internet of Things (IoT) devices to more than 200 billion IoT devices, sources of digital risk are set to skyrocket, along with the potential for cyber losses.

The foundation for any financial risk transfer product – where is the financial loss?

Estimating the financial impact of cyber risk is a difficult endeavor. A recent piece of research conducted by RAND, supported by the CyberCube unit of Symantec and the Hewlett Foundation, estimated that cybercrime today costs the global economy at least $275 billion to as much as several trillion dollars. When you layer on the emergence and deployment of new technologies, this number will only increase over time.

Not only will these losses due to cyber events rise, but cyber catastrophe modeling research undertaken by CyberCube suggests that there will be a shift from attritional day-to-day losses affecting individual to firms to more and more large-scale losses affecting multiple companies simultaneously from global aggregation events. Such events were once deemed somewhat theoretical, but the last 18 months have revealed a series of cyber aggregation events that have shown that cyber events have the potential to lead to simultaneous losses from many companies, and we are just at the beginning of a major technological change.

In many cases, the absolute level of risk for the global economy will decline. For example, with the emergence of new safety features in automated cars, the incidence of property and casualty losses from automobiles will decline.

However, new sources of catastrophic risk emerge as the potential arises for mass losses from the simultaneous failure of the technology affecting thousands of companies simultaneously. CyberCube has identified more than 1,000 technology “single points of failure” that could pose sources of aggregation risk to insurers, and this number will only grow as the years go by and new cloud-connected technologies are rolled out. To draw an analogy to the property insurance market, you can expect far fewer one-off damages from one-off fires burning down a single home and far more wildfires destroying entire towns.

Implications for reinsurers

So what are the implications for reinsurers?

1. The foundation for any financial risk transfer product – where is the financial loss?

Changes in the nature of company assets, technology and the emergence of connected digital risk are reducing absolute levels of risk to the society overall but concentrating the potential for financial losses in a smaller number of catastrophic events. This is precisely the type of risk and financial transfer that the reinsurance industry can provide.

2. Emerging cyber risk is so complex that the largest and most sophisticated reinsurers stand to gain the most from this shift in the risk landscape

Given that cyber risk is not geographically constrained, the ability of smaller and less sophisticated reinsurers to participate in a large number of geographically diversified natural catastrophe treaties is diminished. The nature of cyber risk is so complex and dynamic that only reinsurers with a critical mass of expertise in connected digital risk will be able to effectively understand, monitor and model cyber risk. There will be more differentiated insight in cyber risk than in natural catastrophe risk.

3. Investment from reinsurers is needed to understand cyber risk today, in advance of catastrophe events that could create tremendous financial opportunities for reinsurers in the future

It is a cliché to say that it is just a matter of “if not when” for cyber attacks on individual companies. What is becoming increasingly apparent is that the same can be said for catastrophic cyber aggregation events that cause material damage to many companies simultaneously. When this happens, insurance history suggests that demand for coverage will increase, capital will flee the market and prices will harden. The reinsurance market for cyber as a peril might be small today, but reinsurers that have taken the time to invest in their own capabilities ahead of these events, with informed capital to deploy when market demand spikes, will benefit tremendously.

See also: Mamas, Tell Your Kids to Sell Reinsurance  

Conclusion: Terminal decline or golden age?

The nature of risk is fundamentally changing, which means the nature of financial risk transfer also must change. 2017 may have been a bad year for the financial performance of the reinsurance industry, but this is a market where time horizons need to be considered over many decades and certainly not over the results from one financial year alone.

Far from the reinsurance industry being in a potentially terminal decline, changes in the nature of risk in the 21st century, stand to benefit the most sophisticated players in the reinsurance industry if they can take advantage of digital trends and understand new risk concentrations.

Reinsurers that invest in understanding the nature of cyber risk, and the sources of catastrophic losses, not only stand to benefit in outsized ways relative to other insurers, but they also stand to help society reap the tremendous rewards of new technology by mutualizing financial risk when technology inevitably goes wrong.

The reinsurance industry as a whole is neither in terminal decline nor at the beginning of a new golden age. It is the action of individual reinsurance companies, and their efforts to understand, quantify and model digital risk that forms the basis of whether they will thrive or falter in this emerging digital age.

Transforming Claims for the Digital Era

As insurers undertake digital transformation programs, many rightly turn to the claims function. Claims is a very good candidate for such initiatives because of its importance to the relationship between customers and their insurers. Claimants and insurers both want speedy and fair resolution, based on clear lanes of direct and personalized service. A data-driven, analytics-enabled claims process can satisfy the objectives of all parties.

Continuous improvement to customer experience in claims is critical to any strategy. After all, claims are a real “moment of truth” for insurers, with meaningful impacts on outcomes and customer loyalty. Insurers that craft the right strategies and deploy the right mix of digital technologies will be able to turn their claims operations into a source of competitive advantage, market differentiation and brand perception. While advanced technologies such as robotic process automation (RPA) and artificial intelligence (AI) are very much part of the long-term transformation story, there is much insurers can do that will generate immediate benefits.

What matters to claimants — and how to deliver

EY’s insurance consumer research confirms that speed, efficiency and transparency are among the most important characteristics of a quality claims experience. Better data and analysis can help streamline steps in the claims process, setting the foundation for an enhanced experience. Those analytics also set the foundation for the future where many claims will be resolved via “no-touch” processes.

See also: 4 Ways That Digital Fuels Growth  

Insurers seeking to automate their claims processes or to achieve straight-through processing for basic claims have multiple options, including:

  • Advanced telematics data (including video imagery) can be instantaneously captured during an automobile accident and downloaded from the cloud to automatically trigger a first notification of loss (FNOL) entry. Underwriters can “score” the data to determine the extent of loss relative to the automobile’s current value.
  • Drones and satellites can survey damage and collect information about property damage to initiate claims before a homeowner makes contact.
  • Via intuitive apps or other interfaces, insureds can submit photos of damage to their homes or vehicles to initiate the claims process, provided there is no sign of fraudulent behavior (which analytics programs can evaluate).
  • Property and casualty (P&C) insurers may use historical repair data to dramatically decrease estimating times for different types of vehicles and homes. They may also better manage repair costs and quality based on deeper analysis of these data sets.
  • AI may be used in combination with social media and other data to scan claims for the likelihood of fraudulent behavior.

Insurers also have good options when it comes to personalizing service, which include:

  • Voice analytics that can assess customer sentiment during phone calls, with appropriate classification and prioritization of resolution.
  • Behavioral analytics that can be applied to model likely customer needs and identify high-value policyholders or those likely to dispute a claim.
  • Analyses of customer records that can identify claimants facing renewal as well as good candidates for purchasing additional products.

A redesigned claims experience can pay immediate dividends (e.g., lower processing costs, improving claims resolutions or higher renewal rates). In all of them, insurers can engage at key points during the claims life cycle, with accurate and consistent information delivered on a timely and transparent basis. At the same time, claims teams can focus on high-value interactions, high-risk claims and other exceptions.

The path toward a better claims experience

No matter where insurers fall on the maturity curve today, there is much they can do to transform the claims process. The path to success begins with a series of well-thought-out steps designed to produce useful learning and incremental value. Huge investments in new technology or large teams of data scientists are not required for substantial improvements. Organizational and cultural factors are also part of the claims transformation equation.

Insurers should endeavor to integrate third-party data (such as medical claims, consumer credit and weather data) with existing records. They also have the opportunity to pilot the use of automated notifications via chatbots and to encourage customers to submit photos of damage. While taking these initial tactical steps, they can begin building the business case for, and perhaps even pilot, more advanced capabilities, such as “no-touch” claims handling for specific products, regions, claims types or payments.

Insurers in the intermediate phases of their digital transformation journey should consider expanding automated claims handling to more claims types and larger amounts, broaden their use of chatbots for communication and seek to integrate more external data sources. They can also deploy drones as “adjusters” and establish analytics Centers of Excellence in claims.

More mature organizations will look to leverage new data storage and management technologies as the basis for advanced analytics and real-time visualization. They may also strengthen antifraud efforts by implementing machine learning. The most forward-looking insurers may build out data science teams to probe large and diverse data sets stored in analytics ecosystems. Similarly, they may expand claims volumes handled via RPA-enabled straight-through processing and evaluate medical treatments or repair effectiveness against leading practices.

See also: Digital Transformation: How the CEO Thinks  

As claims organizations become more digital, the benefits of additional data and more effective analytics should extend beyond the customer experience. Machine learning and visualization techniques can help assess and predict claims risk with greater accuracy and certainty. They also provide a consistent claims handling approach relative to unbiased reserving, litigation, subrogation and other claims processes.

It is worth noting that technology enhancements alone will not produce a claims organization for the digital era. A cultural willingness to embrace change also matters. Many insurers must overcome risk-averse cultures to encourage experimentation and “fast failures” in the spirit of learning what works best for their culture and customers.

How do they do that? Test-and-learn approaches are a good start for insurers with limited digital capabilities. Pilot programs for automated claims processing and bot-driven notification systems are an ideal place for many organizations to start.

Customer experience is everywhere

In the digital era, where customers have been trained to expect real-time access to data and personalized service, the stakes for the claimant customer experience have been raised. Insurers must learn to deliver what customers want and expect — and deliver it efficiently, accurately and quickly. Digital transformation makes it possible, while offering insurers significant upside in terms of lower costs, increased customer loyalty and reduced risk of fraud.