Insurance carriers and third -party administrators (TPAs) are well aware that emerging technologies are poised to change the industry. But, to many, it feels like the rhetoric has gone off the rails. You can hardly greet a consultant or surf the business pages without being told that digital reinvention is a do-or-die imperative.
A multitude of obstacles stand in the way of those left behind. Their organizations are often long on enthusiasm but short on vision. Senior executives, mindful of quarterly results, are excessively cautious about the near-term expense of IT innovation. Employees are prone to resist disruption that challenges skillsets or threatens jobs. And resource-stretched IT departments are hard-pressed to reinvent anything while struggling to keep existing systems running.
The good news is that these obstacles can be overcome — assuming tech leaders know where to start and adopt an effective approach. Below is advice on how to proceed, garnered from top performers in the industry.
Start simply — Find a vendor with a proven insurance-industry track record who can help conquer discrete challenges, such as automating adjustments or on-boarding new customers. Some consultants, hungry for seven-figure contracts, may advocate radical and immediate change across the organization that is over their head. Smart, targeted change tends to be the better approach. Forget about the big bang overhaul all at once, particularly if the company lacks vision or commitment. Instead, start small to build evidence and snowball your effort. Target minimally viable projects and iterate to get bigger.
Empower bridge builders — Partners can be the best source for finding talent fast, rather than stumbling through the difficult process of attracting and building it in-house. Outsourced teams of specialists driving cloud native solutions can move quickly and transfer expertise. The coders these vendors can attract are valuable. Competent coders who can collaborate well with your whole company are priceless. They’ll help you get your ideas out of the IT trenches and into strategic meetings, where they belong. And they’ll bring forward the company’s best ideas and biggest challenges. Find these people and partners, and cultivate them.
Be strategic — Fomenting a digital revolution requires forethought, planning, networking and disciplined execution. Just as a general doesn’t go to war by pointing his troops toward the enemy and shouting “charge,” a digital leader needs to understand what they are up against, where the pitfalls lie and how to best achieve her organization’s objectives with the people and assets at her disposal. The leader needs to be able to present convincing use cases up the chain of command.
Target early, conspicuous wins — Projects that streamline operations, achieve cost savings or provide visible improvements to the customer experience can help demonstrate the tangible benefits of digital transformation. An experienced insurance-industry tech partner may be able to quickly alleviate operational challenges, such as capacity spikes and customer-experience deficiencies in claims intake. Such quick wins can build momentum; they should be pursued even if it means delaying initiatives seen as urgent to IT, such as legacy-system modernization.
Be mindful of budget — In today’s environment, where all CEOs say they are running a technology business, the IT department needs the best talent available. Obviously, talent doesn’t come cheap, particularly with the current supply-demand imbalance. Given that nearly every industry from mining to warehouses, finance and retail is undergoing a shift to digital, there aren’t enough engineers and data scientists available or coming through the education system to meet the demand. Initiatives that help the CIO make a case for additional funding can mean the difference between an IT team that can barely keep up with the trouble-shooting backlog and one that propels the company into the future.
Cultivate allies — A battle is best fought by a coalition of the willing who can provide resources, ancillary support and political backing. Likewise, a CIO or director of technology needs to find executives within the organization who are enthusiastic and knowledgeable supporters of digital change. When IT departments choose to forge ahead without obtaining adequate buy-in from the business side, they can fail. Similarly, when seeking help from outside vendors, strong working relationships are critical.
Think broadly — Once you have achieved the critical mass of credible success stories, a viable budget and executive support, you can tackle the “transformational” aspect of digital transformation. That is, you can begin to revamp the organization’s culture to operate more like a nimble tech company than one weighed down by bureaucracy and legacy systems.
Digital transformation is meant to pave the way toward a more efficient and profitable future. For the moment, however, many insurance executives are concerned by the scope of what lies ahead. Some worry whether they have enough of a grasp on what is hype and what is real in the digital space to lead their companies through the initial steps of the journey. Others are daunted by accounts of digital initiatives gone awry and, conversely, by the winner-takes-all competitive dynamics inherent in tech-driven industries. Yet there is no doubt that change is coming. By following the advice summarized in this article, carriers and TPAs can start on the path of digital transformation and take control of their digital destiny.
The spirit of “insurance,” as we know it today, developed in response to a need to mitigate risks related to international maritime trade: treacherous waters and storms, piracy, war, physical handling of goods at ports, etc. While many of these risks have become obsolete and while new, more modern versions have appeared (think cyber security), the function of insurance companies has remained as old as the idea itself: to compensate for the effect of financial loss after it has been caused. Insurers that wish to remain competitive in the 21st century, however, must supplement their offerings to mitigating the cause before the effect. Workplace injuries and property loss will continue to happen, but the future of insurance is, quite palpably, preventing these events from happening in the first place.
To this end, companies have begun to leverage technology to aid in this process, and a whole new category of devices – dubbed the Internet of Things (IoT) – has emerged. These devices, and the sensors and algorithms they contain, hold the promise of enhancing our eyes and ears to perceive all things at all times. These new sources of data, and the analysis performed on them, hold the key to alerting customers of potential loss BEFORE it occurs. While the traditional insurance definition would say “this is not our responsibility,” the reality is that insurers can be uniquely equipped to use these new technological advancements to significantly reduce their losses and greatly improve the customer experience.
Let’s take a consumer use case – roughly one-third of all household claims relate to water leaks. Several companies such as Water Hero or Gems Sensors make a small connected device that attaches to a home’s main’s pipes and can seamlessly monitor water flow, continuously. If any anomaly is detected, both the customers and insurer can be alerted to take action before a catastrophic event occurs. Some devices can even turn off the main’s supply or make an automatic call to a plumber. While these devices won’t stop every incident, this low-cost technology can reduce the cost of claims to the insurer and provide a better experience for the home owner. This mutual benefit will make prevention a strategic advantage.
In commercial lines, similar examples can be found. Wearable technology and the valuable data it offers about worker safety can lead to a reduction in workers’ compensation claims while offering significant value to employees. For example, Kinetic has developed a wearable device for manual laborers to detect high-risk ergonomic movements and postures that can cause injury, gently alerting workers in real time. Data from the pager-sized device is fed into Kinetic’s software, which can identify ways of revising processes and workflows to reduce or prevent that risk in the first place. Deployments at manufacturing and logistics sites have shown reductions by up to 84% in the number of high-risk postures performed daily by workers. These postures are known leading indicators of musculoskeletal injuries, and customer sites have seen injury reductions of up to 60% for employees that have worn the device for over six months. Similar lessons can be drawn from telematics systems installed in vehicle fleets, which monitor driver activity through cameras and sensors. These systems provide feedback when certain activities or motions are detected, such as exceeding the speed limit or aggressive driving. As drivers start to modify and improve the way they drive, both accidents and the associated claims can often be reduced.
While some effort is needed to navigate, deploy and maintain these IoT devices in a cost-efficient manner, these products can change the nature of the relationship between insurers and customers from merely transactional to partnerships, where both parties are invested in preventing costly incidents. In this booming, digital era, it seems now is the time for insurance to seize the opportunity and light the way into its own future.
The industry used to be a tech laggard. No more. Though there’s still much work to be done, most insurers are now better-positioned to capitalize on their investment in technology.
Here are eight key tech trends that continue to shape the industry:
Greater stress on cybersecurity
An Ernst & Young security survey revealed that 59% of respondents had encountered a significant cybersecurity incident in their organization. Because insurers store so much sensitive personal and business data, they’re a prime target.
Cybersecurity strategy should be focused on proactive measures rather than reactive strategies. Cyber-crooks are relentless and inventive. Security has to be a top priority for insurers of all types and sizes.
2. Filling a gap in employee benefits automation
While group proposals and policy administration are both well-automated, between the two comes group onboarding, which has not been automated.
But solutions are being developed and implemented. Onboarding solutions will be built on automated data capture and importing. Data integrity is crucial. Employee information must be correct and complete when entered.
The solution must also offer robust data security and comply with privacy regulations to securely gather and store employee information. Flexibility is also mandatory because integrating onboarding closely with both proposal and policy systems is essential to efficient workflow.
Cloud computing will continue to be adopted widely by insurers and insurtech providers as it is cost-effective, speedy and flexible. Cloud providers will continue to improve their technology to deliver sophisticated capabilities.
The security risks associated with housing data off-site via a third-party, however, can present challenges. While cloud storage companies are expected to protect data, ultimately insurance IT departments are responsible for their cybersecurity. That requires constant vigilance, hiring skilled people and spending enough money.
4. Internet of things and big data
IoT continues to become more useful. Insurers can use real-time data to meet and enhance business objectives. This can boost efficiency and revenue and promote better customer service.
As the Big Data revolution continues to expand, IoT adoption in the insurance industry is expected to grow. It will enable collection of data in real time, resulting in lower premiums for insureds willing to participate. There will be continuing adoption of connected devices for loss prevention and pricing in property-casualty, life and health insurance.
Analytics can transform big data into actionable insights. As analytics and data science advance, insurers can better extract value from the huge amounts of data that now exist. Insurers can then leverage sophisticated information analytics to gain a competitive edge in the market.
For insurtech providers, there is a huge opportunity in the coming years to develop advanced analytical technologies that can make sense of unstructured data such as real-time video, social posts and live blogging.
6. Artificial intelligence
In 2018, more insurance and insurtech companies found effective ways to integrate AI. In 2019, companies will complement a significant part of their structured data decision-making with AI data analysis and decision-making.
Robotic process automation will begin to gain a wider application facilitating automation of repetitive processes across the entire IT infrastructure. Robotics and AI can offer improved productivity, shortened cycle times and better compliance and accuracy.
Augmented reality is starting to have a presence in insurance. An article by software development company Jasoren identifies several AR use cases, such as warning of risks, explaining insurance plans, estimating damages and increasing brand awareness. Alternate forms of AR such as virtual reality, mixed reality and extended reality are shaping how AR is being used.
The technology behind cryptocurrencies will be adopted for more promising applications. They include “smart” contracts and secure, decentralized data collection, processing and dissemination. While I do not expect to see a full-scale implementation of blockchain technology any time soon, many insurers and insurtech companies are launching projects and initiatives to test its applicability and effectiveness for insurance.
I have been asked a number of times to provide my perspective on the insurance industry in the time of the Industrial Revolution 4.0. In this piece I’ll do so, but first, how did we get to 4.0? What preceded and led to this brave new world of what’s now called “IR4”?
The first industrial revolution occurred in the late 1700s, with most agreeing that the seminal event was the development of the first mechanical loom in England in 1784. More broadly, the period was defined by mechanized production facilities, usually with the help of water and steam power.
The second industrial revolution, in the late 1800s, was defined by the concept of division of labor and by mass production, with the help of electricity. Think of hog slaughtering or early automobile assembly lines.
The third industrial revolution, starting in the late 1960s, was characterized by the introduction of the electronics and IT systems that accelerated the automation of production and business processes. Think of the room-sized computers of the ’60s and ’70s.
The fourth industrial revolution is happening right now. The IR4 concept was pioneered by Professor Klaus Schwab, founder and chairman of the World Economic Forum. The idea is that we are now entering the fourth major industrial era since the initial industrial revolution of the 18th century. This new world is characterized by the fusion of many technologies and the blurring of lines between the physical, digital and biological spheres.
This evolution to what we now call cyber-physical systems, or embedded systems, is leading very rapidly to a world dominated by systems that are controlled or monitored by computer-based algorithms, and integrated with the internet and its users. This kind of connected and communicating world has enabled the development of such things as a smart power grid, remote medical monitoring and autonomous vehicles. This is the “Internet of Things”: technology becoming embedded into all facets of society, and even into our bodies.
As dramatic as this may sound, the fourth industrial revolution is even more transformative than the previous three in other ways, as well. The speed of recent breakthroughs has no historical precedent; it is exponentially faster in adoption than previous industrial revolutions. Additionally, it is disrupting almost every industry in almost every country. This scope and pace is unprecedented.
Like the revolutions that preceded it, the fourth industrial revolution has the potential to raise global income levels and improve the quality of life for populations around the world. At the same time, however, this revolution could yield greater inequality along the way. Access to technology varies widely, so developments like robotics have the potential to displace workers in precisely the parts of the world that need help advancing most.
The reason is that there are three separate but connected kinds of disruption going on simultaneously.
Technological disruption: artificial intelligence, blockchain, telematics, genomics, the Internet of Things.
Economic disruption: imagine: AirBnB is now the #1 hotel company, Uber is the #1 taxi company, big stores and shopping malls are fighting for their lives. Sears, the Amazon of the 20th century, recently declared bankruptcy, and many traditional bricks-and-morter retailers are threatened.
Social disruption: some parts of the world are aging rapidly, with attendant retirement savings and healthcare challenges, while other parts, mostly in the Southern Hemisphere, have more young people than jobs; people want to be able to use things without necessarily owning them; concepts of work are changing; income equality and gender equality are major issues.
While the concept of a Fourth Industrial Revolution is now widely discussed, I would like to describe the Fourth Insurance Revolution as I see it. Like the eras of the four industrial revolutions, there have been three previous periods in insurance industry history that are somewhat similar to the evolution of the industrial world.
The first era, which I call Insurance 1.0, began logically enough in the parts of the world that were the cradles of civilization, the Middle East and Asia.
As far back as the second and third millennia BC, traveling Chinese merchants practiced an early form of risk management by distributing their wares among numerous ships and different trade routes, to minimize losses along the way. In Babylonia, merchants receiving a loan to ship goods paid the lender an additional fee that would cancel the loan if the goods were somehow lost – credit insurance. This form of coverage is even memorialized in the Code of Hammurabi. The Greeks and Romans introduced the origins of life and health insurance when they created guilds called benevolent societies, to pay family members for funeral expenses of deceased members. These are our industry’s beginnings.
Insurance 2.0 as I see it was the introduction of the first actual insurance contracts. These were developed in Genoa, Italy, in the 14th century and related to marine insurance for goods in transit. This was a formalization of the earlier concepts employed in the Insurance 1.0 period.
Our industry matured greatly in the 17th century, into what I deem Insurance 3.0, a major leap forward.
Much of the accelerated formalization of insurance was stimulated by the Great Fire of London in 1666. This enormous conflagration destroyed nearly 70,000 of the city’s 80,000 residences, and gave rise to urgent risk management and insurance planning. Property and fire insurance as we know it was launched by Nicholas Barbon in London in 1681. Around the same time, French mathematicians Blaise Pascal and Henri de Fermat conducted loss probability studies that resulted in the first actuarial tables. Insurance became an empirically based enterprise, and became widely understood to be a prudent expenditure for businesses and families.
With that brief history of the evolution of our industry, let’s now move on to insurance in the 21st century: Insurance 4.0
In my view, most of the change in the industry since Insurance 3.0 up until the present has been incremental. Broader product lines, more distribution channels and, recently, the first elements of digitization. But what’s happening now is fundamentally different. The basic function and processes of insurance are being disrupted at an accelerating pace.
So let me now present some of the issues and implications of change in the industry, what Insurance 4.0 looks like. I’ll start by making some comments on the insurance industry of today.
Of course much of the rapid change taking place now and defining Insurance 4.0 is related to technology. The insurance industry’s raw material is data. Data not only to make underwriting and loss reserving judgments, but increasingly to manage virtually every business process in the insurance value chain. Data is valuable. But how can insurers successfully plan and manage data when, as Science Daily magazine tells us, 90% of all the data in the world has been generated in the last two years?! How do we use this avalanche of data to make sound business decisions? More data does not inevitably lead to better decisions.
One promising set of tools: Artificial intelligence and machine learning, which represent a quantum leap from the predictive modeling insurers have been using over the past decade.
Moving rapidly from applications in high-frequency, low-severity lines like auto and home insurance, AI capabilities are now employed in more complex commercial lines, and already show evidence of having real underwriting and loss reserving value.
Skeptical about whether this can work in complex cases? Let me give you an AI example. A few years ago, a computer beat the world chess champion. Well, some said, that’s fine, but it will be a long time before a computer can beat a top Go player. As many of you know, Go is a complex Asian game played on a 19-by-19 grid, with more possible configurations than the number of atoms in the known universe. Google’s Deep Mind Lab computer input all the Go games ever recorded, over a 1,000-plus year span. After playing 4.9 million games against itself in a three-day period to learn, the computer immediately beat the world’s best Go player in a live game.
What’s more thought-provoking, though, is what happened next. Putting aside the input of historical game results, Google just uploaded the basic rules of the game – no experience data. This new program, AlphaGoZero, became expert simply from learning first principles alone, without any human knowledge or experience input. Does anyone still think sophisticated underwriting or loss reserving is beyond the capability of modern computers? I don’t.
Entrepreneurs have expanded the way technology can influence the insurance value chain to create an ecosystem we call insurtech. Leveraging off fintech’s huge impact on the banking and payments world, insurtech companies, which now number more than 100,000, are innovating in every insurance company department. Investments in them have grown by leaps and bounds. Insurtech attracted about $140 million in funding in 2011, $275 million in 2013, $2.7 billion by 2015 and more than $4 billion last year.
Insurtech products and services address product development, marketing, pricing, claims and distribution, especially reducing policy acquisition costs, and have been much more focused on nonlife insurance (especially personal lines) than life and health insurance to date. Up until now, insurtech ventures have tended not to displace the incumbent insurers, but have been invested in or acquired by them to enhance their existing operations.
Much of the industry’s current expanded use of technology, including insurtech, is focused on customer interface and the customer experience. It has always been said that an industry can’t disrupt itself; that disruption always comes from the outside. Not surprisingly, then, insurance policyholders and potential customers have had their expectations of customer experience elevated by their interaction with other product and service providers. No longer do they measure their satisfaction against other insurance companies. They want the kind of experience they get from Apple, Alibaba, Amazon, Starbucks and the like. They want mobile, 24/7, personalized service. Most insurers today are simply not capable of delivering this. They lack both the innovation mindsets and the IT budgets to deliver a 21st century insurance customer experience, and they will lose share of market to those companies that do.
Another element of change in today’s insurance business is the emergence of public/private partnerships. More sovereign and sub-sovereign governments have come to realize that they are effectively the insurers of last resort when catastrophes strike.
Efforts are accelerating to narrow the protection gap between total economic losses and the portion covered by insurance.
Because the governments often end up paying directly or indirectly for disasters, and their citizens feel their brunt in terms of higher taxes or reduced services, governments now increasingly seek to partner with insurers. This is a positive development for the industry, one that presents both an enormous growth opportunity and a benefit to society.
Recent years have seen the launch of the African Risk Capacity, the Caribbean Catastrophe Risk Insurance Fund and the Pacific Catastrophe Risk Insurance Company. All are regional public/private partnerships, and all are enabled by technology-driven parametric triggers. Others are in the works, facilities designed to address a range of perils including flood pools, terrorism pools and the like, best managed by governments and industry working together.
The “lower interest rates for longer” world we live in presents major challenges for investing the assets that support our policy liabilities. Insurers can no longer simply commit the bulk of their portfolios to investment grade corporate and government debt. Such a strategy just isn’t sufficient to pay claims and provide an adequate return on capital now.
Insurers and the asset managers who serve them have responded by changing their asset mix, to increase allocations to higher-return, not-much-higher-risk securities (let’s hope). More equities. Structured products and bundles of loans. Private equity funds. And recently, infrastructure debt, in both developed and emerging markets.
Portfolio yields are rising, but only time will tell whether these new investment allocations provide an appropriate margin of safety in more turbulent market conditions. It’s really too soon to tell if the industry’s investments have become riskier, or if insurers have simply better understood the true risks of 21st century investing.
A more subtle but truly profound change in Insurance 4.0 is the industry’s focus on talent. I’ve been in the insurance business more than 47 years, and I can say with complete confidence that insurers have never remotely spent as much time, money and thought on developing their future leadership as today. There has always been talk about this, but the action has never before matched the rhetoric.
With approximately 25% of the industry’s top management retiring in the next five years, as Baby Boomers retire in large numbers, the urgency of talent development has finally dawned on CEOs and even boards. Competing for top young talent isn’t easy. The lure of technology firms, entertainment, investment banking and other seemingly more exciting career paths is undeniable. But insurers have to try to attract at least some of the best, because our industry’s role in society is so critical, and the talent gap is large and growing.
For the first time in my career, CEOs bring up their programs for attracting, developing and retaining talent without me asking them first. More and more describe carefully thought-out programs that are so strategically important that they have high visibility with their boards. Believe me, this is a real change. These are the companies that will thrive over the long term.
All of these initiatives, in technology, in the customer experience, in public/private partnerships, in new investment approaches as well as in talent development, exemplify Insurance 4.0. Not just doing what we have always done, hoping to be somewhat better, but developing new tools to address new challenges, new opportunities and new competitors from within and without the industry.
This is because insurers are the financial first responders in this risky world. We rebuild communities and homes after disasters, we provide financial stability when families lose loved ones and we invest to build economies around the world, and in Insurance 4.0 we do it faster and better.
As numerous and daunting as the changes of today are for the insurance industry, there will be more and greater challenges in the industry of tomorrow.
The accelerating pace of change in our world not only demands new products, but presents entirely new forms of risk, as well. I referred earlier to the three generic kinds of disruption we are witnessing. Each of them carries new risk exposure the likes of which our industry has not dealt with before.
Technology disruption, for example, presents a host of new risks related to our connected world. Insurers are struggling to find their place as autonomous vehicles loom large in our future. What does this mean for the motor insurance business, the industry’s largest line of coverage? Will auto manufacturers simply bypass the insurance industry and go directly to the capital markets for their enormous coverage needs? Will commercial drones inspecting property damage claims improve workflow and reduce reliance on human error?
How will blockchain reduce expenses? The InsureWave project developed by EY, Maersk, Willis and GuardTime promises to slash marine insurance expense ratios by approximately 10 points! Other blockchain applications are in the works, and industry consortia like The Institutes’ Risk Block Alliance are finding new processes to save and make money every day now.
Finally, cyber risk represents the world’s first truly global peril, including a cascading potential due to our connectedness. Clearly, there is premium growth potential in cyber, but the early promoters of long-term-care insurance might remind us that revenue growth potential does not necessarily portend long-term profit. Current cyber combined ratios are running around 60%. True loss experience, though, will take years or decades to be fully understood.
Economic disruption also presents new challenges and opportunities for insurers going forward. Who will be the insureds of the future? How does a company insure Uber or AirBnB, let alone the people who use them and the facilities they work with? How does the collapse of traditional industry customers like retailers, coal companies and other industries that dominated the 20th century affect insurers? And by the way, is the industry prepared to cut 25% to 50% of its non-customer-facing jobs over the next decade as a “benefit” of AI and robotics? Some of the internal workforce can become part of the “hybrid system,” the human overlords who write and work alongside the smart systems to make their ultimate decisions, but not many.
Social disruption is also a source of new risks. For nonlife insurers, reputation risk and privacy risk have enormous potential exposures, and little existing loss data to make rates. It’s much too soon to tell if providing coverage for these exposures will be viable or not.
What are the insurance implications of the sharing economy, where more people want the ability to use things without owning them? Usage based insurance is gaining popularity, but also has the potential to significantly reduce premium volume. What about the “gig economy,” where many people hold several part-time jobs and no full-time job (meaning no benefits)?
And how will life and health insurers cope with a rapidly aging developed world? Retirement savings is a looming crisis. And even if we manage to avoid pandemics (consider: If the Spanish Flu of 1918 occurred today, it could kill 400 million people), what are the implications of a hotter and more polluted planet for healthcare? Will wearable devices driving the Internet of Things provide a cornucopia of information to enable better health outcomes?
And what of the big issue: climate change? Both the World Economic Forum and Lloyd’s of London define climate change as a top socio-economic risk to our society. Climate risk is now considered a core strategic issue by governments, businesses, even the military. Certainly for the insurance industry, adaptation and mitigation, the need to make future provisions for inevitable damage, and send pricing signals to insureds of the true cost of risk, is a defining issue of our time.
In a broad way, Insurance 4.0 means the industry is becoming part of an ecosystem of connected and communicating sectors that are symbiotic, not as “B to B,” business to business, or “B to C,” business to consumer, but “E to E”: everything to everybody, where the information exchange benefits all participants, but is not equally understood by all parties. The information flow is asymmetrical. We can all agree that reducing risk in our world is a good thing for society, but, if risk is materially reduced, will the size and relevance of our industry then shrink?
A few words are also in order about the political capital the insurance industry possesses. I have written herein mostly about the risk management side of our business, and indeed it is the very reason we are in business. But even in a time of increasing public/private partnerships seeking to mitigate and remediate natural disasters, politicians and policy makers primarily ascribe our industry’s power and influence to our investment portfolios.
Globally, the industry has over $35 trillion of invested assets. Assets that are invested in companies’ domiciliary countries’ government bond markets and are critical to those countries.
Assets invested in their stock and corporate bond markets, as well. And now, insurers’ role, along with pension funds, as the only true long-term investors, means they are vital to infrastructure funding. Growth projects for the emerging world, and reconstruction financing for the developed world. This is what gets the attention of policymakers. And so this attribute is what we must nurture and promote to enhance our stature. Our most promising avenue to high esteem with policymakers is by securing their understanding of the vital role our investment portfolios play in helping them achieve their goals.
And so, the world of Insurance 4.0 is not just one of new products covering new risks, but a whole new conception of what insurance can be and do. Some say that in the future, all companies will be technology companies. If that is even close to being true, then insurance companies, which run on information, must surely be technology companies to succeed.
But can they all be? No. Some don’t have the innovation mindset to adapt. I know of many insurers that employ only slightly modernized versions of the same processes that have been around for well over 100, and have yet survived. They will continue to try to muddle along until forced. Capital providers to stock insurers are getting impatient about returns, and so merger and acquisition activity is increasing. Few small insurers can afford to become state-of-the-art technology providers, and many will have to seek stronger partners. Most mutual companies, which do not have those demanding investors to answer to, will just carry on, but lose share of market to faster-moving competitors. I believe Insurance 4.0 will feature an accelerating consolidation of the global industry, driven by the technology leaders taking over technology laggards.
I also believe that more and better utilization of data by insurers will lead to better pricing and better loss reserving, reducing the amplitude of underwriting cycles. This, in turn, will result in the industry becoming less of a frequency business and more of a severity provider, a tail-risk provider. The greatest value of the industry to its customers will become having the ability to better forecast and the capacity to provide for extreme weather events and other large losses. Examples would include cyber, environmental and terrorism/civil unrest. This is yet another argument for industry consolidation around fewer, bigger, tech-savvy insurers, and for an even greater role for funding from the capital markets.
Another rapidly emerging concept of Insurance 4.0 is the industry’s role in loss mitigation. I’m shocked to find that many people still think our industry exists solely to pay money to people after bad things happen. In fact, the industry’s role in mitigating and even preventing losses before they occur is the key reason for the rapid rise of public/private partnerships and invitations by governments to help them anticipate and reduce, not just pay for, losses.
As an example, I participated in this year’s G20 meetings in Argentina , where, for the first time ever, a dedicated insurance summit was held. Industry and governments explored opportunities to work together better to reduce losses any way possible. It is becoming widely understood that every dollar spent on loss mitigation and prevention by governments saves five dollars of post-event spending.
This gets to a basic disconnect that the industry must come to grips with: Insurers basically want to sell protection for when losses occur, which they have done for centuries now. Customers, on the other hand, now want to buy loss prevention and mitigation, in the form of broader advisory services.
If real customer-centricity is to be achieved, making this fundamental shift in the business model of how the industry meets customer needs would truly mean we have reached Insurance 4.0!
Consumer attitudes toward the insurance industry are changing faster than ever. Millennials make up the most populous generation today, and with many of them entering their mid- and late thirties, they are shopping for insurance in higher numbers. This tech-savvy generation expects personalized services and demands greater control over their experiences and decisions. Millennial consumers are calling the shots in almost every B2C industry – and insurance is no exception.
The insurance industry traditionally relied on the fear of the unknown as its most powerful sales enabler, but with millennials making decisions based on brand experience, insurers need to turn to emerging technologies to transform and customize the way they reach customers. The status quo is simply unsustainable if they want growth. Forward-looking insurers know that the key to attracting and retaining clients is to leverage predictive technology and provide them with the seamless, smart, digital-first experience they need.
But for this future to become a reality, companies need to implement and use predictive analytics in a way that truly enhances the customer experience. Here are the steps every insurer needs to know before embarking on that journey:
Collect the Right – Not the Most – Data
Knowing the ins and outs of customer needs and behaviors is essential in operating an insurance business, but it is not enough to know the general needs of a customer base. In fact, the majority of consumers are willing to share personal information in exchange for added benefits like enhanced risk protection, risk avoidance or bundled pricing. To deliver personalized service, insurers must collect data at the individual level – and quantity does not always mean quality. The accuracy of predictive analytics relies on the certainty and relevancy of the data those systems are fed. Before doing anything else, insurers must determine exactly what information drives business decisions and collect that data on both individual and grand scale as efficiently as possible.
This is where the Internet of Things (IoT) steps in. As one of the most ground-breaking technologies on the market today, IoT has only just begun to realize its potential in the insurance industry. IoT sensors attached to infrastructure, cars, homes and other insurable items, can feed real-time data back to providers with unprecedented accuracy. Not only does this live feed of data prevent emergencies by identifying potential problems before they arise, the highly precise information acts as a foundation for analytics at a customer-specific level in the next phase of the process.
Get Personal With Predictions
Once insurers are collecting relevant, accurate and individualized data, the next step on the road to customer satisfaction is applying machine learning and AI to that information. The outcomes of this analysis not only determine truths about the current status of an asset or situation but reveal patterns that enable insurance companies to predict what is in store down the road. For an insurer, this predictive knowledge means more accurately being able to evaluate, price and plan for risk – whether evaluating individual portfolios or aggregating data to foresee larger trends in the marketplace.
But as predictive technology becomes more mainstream, the true value of digital foresight will be its ability to offer the millennial customers the deep personalization and hyper-relevance they crave and expect from all their services. By transforming the industry into a predictive and even preventative experience, insurance companies are changing the status quo of fear-based customer relationships and instead leverage technology to make insurance feel tailored and assuring.
Engage With Emerging Technology
The insurance industry is not and never will be based on static, one-time decisions. As risk is calculated on various constantly changing variables, it is essential to continue evolving customer predictions, recommendations and prices based on incoming information. Analyzing both existing and new data from IoT sensors allows companies to pivot strategies in the face of new predictions, enhance underwriting, reduce claim ratio and remain agile to meet the needs of their customers today and tomorrow.
Just as predictions do not stand still, neither should an insurance company’s methods for determining them. In an era of hyper customer relevance, with disruptive players like Uber, Venmo and Mint, millennials have come to expect services that are not only predictive but get deeply personalized in accuracy and usability overtime. The insurance industry has traditionally lagged behind other B2C industries in terms of adoption, however, due to its changing customer base it will have no other choice than to evolve rapidly over the next few years. Placing emerging technologies like AI, machine learning, automation and IoT at the core of business operations now will be key in setting insurance up for continued progression in the future.
Appealing to the new generation of insurance customer is all about offering tailored experiences that cater to their needs and expectations. The insurance industry is in for an acceleration of change to accommodate their new millennial consumer – a change fueled by technology that creates bonds of loyalty and trust via personalization, not fear.