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The New Paradigm of Connected Insurance

Connected insurance represents a new paradigm for the insurance business. This new insurance approach is based on the use of sensors for collecting and transmitting data on the status of an insured risk and the deployment of big data capabilities that transform raw information into actionable knowledge along the insurance value chain.

The insurance sector, which is considered to be fairly traditional and resistant to change, is currently being overtaken by this transformative paradigm. Connected insurance represents one of the most relevant trends, considering its potential impact on the profitability of the insurance business, the productivity of each carrier, proximity to clients and portfolio persistency. Analysis by the Connected Insurance Observatory—a think tank created by Bain & Company and Italy’s National Association of Insurance Companies (ANIA)—shows how this new approach is starting to pay off. The auto insurance sector is being transformed by auto telematics, a technology undergoing experimentation in business-insurance lines, specifically the Internet of Things (IoT).

See also: The Future of Insurance Is Insurtech  

Let’s look at the Italian market’s experience and the key elements of the business opportunities presented by connecting an insurer with its customers and their risks.

The experiences on the Italian market

Italy is recognized as the most advanced auto insurance market at the global level for telematics. Leveraging the experience of the auto business, the country is affirming its position as a laboratory for the adoption of this new paradigm by other business lines. The fact that the Italian insurance market represents the state of the art for connected insurance gave rise to the idea of creating the Connected Insurance Observatory as a think tank to help generate and promote innovation in the insurance sector, offer a strategic vision and stimulate debate.

More than 70% of Italians show a positive attitude to auto telematics insurance solutions, and 26 different insurance carriers in the Italian market are currently offering this product. Telematics-based insurance contracts represented 16% of the personal cars insured in Italy in the first quarter of 2015, according to data from IVASS. This relevance of telematics was highlighted by insurer members of the Observatory responding to a question about the maturity level: 65% affirmed the “the way to manage day by day the auto insurance business was already impacted by the telematics.”

This kind of telematics adoption is a complex process requiring many years, due to the cross-functional impacts and the involvement of multiple parties (tech vendors, insurers, distributors, clients). It is important to consider the evolution path shown by the Italian market:

  1. Incubation phase: It began in the early 2000s, when first-mover players were studying the feasibility of combining the insurance product with the technology. The main question among carriers was, “Does the approach make sense?”
  2. Exploration phase: This commenced in the late 2000s, when pioneers started to achieve volumes from the solution rolled out on the market. In this phase, the average level of awareness in the markets was low, and other players started with pilots based on a “me-too approach”; their main question was, “What is the ROI of this program?” At the end of this phase, in 2012, the Italian market accounted for about 1.3 million black boxes.
  3. Learning phase: A few players started to move from focusing on “quick wins” to a more holistic approach. They were able to exploit the potential of the solution and were thus in a position to start pushing the selling phase. Some differentiation began to appear; the approaches became more articulated: Carriers also introduced insurance covers based on self-installed devices— moving away from the myth of the Italian telematics business case only being linked to anti-theft and anti-fraud—and this new approach represented around half of the telematics market’s growth through those years. The key question on the market was, “What is the best way to do it for my company?” Telematics have become mainstream, and this phase was completed by the Italian market in 2015.
  4. Growing phase: Currently, the Italian auto insurance sector has reached the point where telematics solutions have traction in the market. Each player will develop its own approach and experiment with further upgrades, introducing multiple segmented products with its offer. The 4.8 million insurance contracts with a black box fitted in the car—a statistic gathered by ANIA in December 2015—is expected to grow to almost 14 million by 2020, based on the Connected Insurance Observatory’s projections.

Figure 1 below highlights the current level of telematics maturity by country and the current leadership of the Italian market: At the end of 2015, 4.8 million Italian contracts accounted for more than 45% of all the insurance contracts active globally, with sensors sending data to an insurer.

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This sequence of stages seems to be the necessary evolution path for the offering of connected insurance in a new business line.

Connected insurance applied to other business-insurance lines have been a hot topic in the last 12 months. Insurance applied on personal lines like home and health is currently on top of the innovation agenda of many insurance carriers.

In recent years, five pioneers in the Italian market have introduced house-insurance coverage with sensors and a gateway that sends data to the carriers. More than 75% of the insurer members of the Observatory consider connected insurance to be the most relevant innovation expected in home insurance in the next year. This potential is confirmed by the consumers’ voice: Connected home insurance use cases appear to be able to double the penetration of home insurance in Italy.

See also: Not Your Father’s Insurance Industry  

The connected home insurance sector is currently moving from the incubation to the exploration phase. The connected health sector is less mature. Some carriers are currently running pilots, and only a couple are already selling a connected health product. Around 40% of the insurer members of the Observatory consider connected insurance to be the most relevant innovation expected in the health insurance industry over the next year.

What’s in it for the carrier?

The connected insurance paradigm opened incredible opportunities in the insurance sector, which underwent a tremendous digital transformation. Insurers can play a new, active role in their relationships with their customers. In a world where analysts project 10 connected things per person by 2020—a figure projected to grow to 200 by 2030–2040, we can calculate the house-insurance value proposition:

  • An active prevention service for all the risks that could occur in the house, based on the data coming from the sensors;
  • Actions to limit the damages and fix them, when the prevention was not enough; and
  • The guarantee of monetary reimbursement limited to the cases of “service failure,” meaning when the two services above were not working as expected.

The three business opportunities

The key business opportunities for the insurance carriers are:

  1. Achieve a direct impact on the insurance profit and loss;
  2. Enlarge the proximity and increase the interaction with clients by delivering a vastly superior customer experience, a proven way to achieve enlarged loyalty; and
  3. Create and consolidate knowledge about the risks and the customer base.

The value generation on the insurance P&L was the area more exploited in these years, and one of the key lessons learned was: There is no “one-size-fits-all” approach. Each carrier needs to design its own connected insurance journey based on its own strategy and specific characteristics.

See also: Key to Understanding InsurTech  

The five value-generation levers

The value-generation levers each player must combine to deploy its own approach are:

  • Risk selection. Telematics can be used to select risks either indirectly or directly at an underwriting stage. There is the opportunity to generate value with the sole goal of supporting the underwriting phase; without any telematics, the tariff will adjust the insurance rate base on the data gathered. This can be achieved in two ways: 1) Directly, using a set of information coming from sensors to improve the overall quality of the underwriting process; and 2) Indirectly, leveraging the ability of the value proposition to auto-select the customer base. The analyses of the ANIA actuarial department of all the Italian insurance telematics portfolios have shown a claim frequency risk-adjusted 20% lower than the non-telematics one;
  • Risk-based pricing monitoring the quantity and level of risk exposure on the basis of information monitored continuously. This personalized price requires the development of new risk models based on the fusion of the traditional insurance parameter with the connected insurance information and the contextual information.
  • Value-added services (VAS). It is about enriching the value proposition by adding services built upon data provided by connected insurance. The driver’s journey was already reinvented by innovative services delivered by insurers—beyond the well-known exceptional emergency response and help to the client through a critical situation—enabling many carriers to earn fees for these services. The importance of this aspect will grow exponentially with the volume of claims-reductions due to new-car safety systems in the next couple of decades. VAS could be the insurance sector’s way to stay relevant in the future age of semi-autonomous and autonomous cars.
  • Loss control. This impact can be observed from two different perspectives. The first is risk-prevention. Many carriers have this target as a challenge for the next years. Instead, the second area can be one of the most relevant impacts in the short term on profit and loss for the insurers that will adapt their claims processes in a consistent way, as proven by the auto telematics experience. Crash detection and the related anticipation of the FNOL (first notification of loss), as of the stolen vehicle recovery service, have demonstrated their effectiveness in the loss mitigation. Connected insurance reinforces the entire claims-handling process: The carrier can streamline claims-management using the structured and objective information extrapolated from the sensors’ raw data.
  • Loyalty and behavior-modification programs. This mechanism generates value from the insurance perspective by engaging clients and directing them toward less-risky behaviors, (mechanisms to manage client engagement and retrocession prizes other than insurance premium discounts), but also by indirectly creating a multi-year reward mechanism to reinforce customer loyalty.

For the full report from which this article is derived, “Connected and Sustainable Insurance,” click here.

The Future of Insurance Is Insurtech

The insurance sector has entered a phase of profound transformation. Numerous insurtech startups—around 1,000, according to Venture Scanner map—have popped up to challenge the traditional model.

I believe that we will see a completely changed insurance sector in the medium term. But I’m convinced that insurance companies will still be relevant in the future, or will become even more relevant than they are now, but these companies will have to be insurtechs, or players who use technology as the main enablers for reaching their own strategic objectives.

The reach of this digital transformation goes way beyond the elimination of “the middle man” from a distribution point of view. The direct digital channel dominates very few markets and deals only with compulsory insurance. In the vast majority of markets, a multichannel-oriented customer continues—with variations from country to country—to choose at least at some point of the customer journey to interact with an intermediary. But the digital transformation happening in the insurance industry is widespread and encompasses all of the phases of the insurance value chain, from underwriting to claims.

See also: Insurtech Has Found Right Question to Ask

Every insurance sector player—whether it’s a reinsurer, a carrier or an intermediary—ought to pose this question: How should the insurance value chain be reshaped by using the new technologies at hand? There are numerous relevant technologies that come to mind, including: the cloud, the Internet of Things (IoT), big data and advanced analytics, quantum computing, artificial intelligence, autonomous agents, drones, blockchain, virtual reality and self-driving cars.

To take full advantage of these technologies, there has to be a structured approach that begins with identifying use cases that can have an actual contribution to reaching strategic business goals, then maximizes their effects inside the insurance value chain of each player. Finally, the approach should look at the software/hardware selection or the “make vs. buy” choices. The essential idea is that “one size does not fit all. Each player needs to create customized use cases based on their individual strategy and characteristics.

To date, there are several types of approaches to mapping insurtech initiatives. I have developed my own classification framework based on six macro areas (awareness, choice, purchase, usage, IoT and peer-to-peer (P2P)).

Insurance IoT, also known as connected insurance, represents one of the most relevant and mature insurtech trends.

Connected Insurance represents a new paradigm for the insurance business, an approach that fits with the mainstream Gen C, where “C” means connectivity. This novel insurance approach is based on the use of sensors that collect and send data related to the status of an insured risk and on data usage along the insurance value chain.

Auto telematics represents the most mature insurtech use case, as it has already passed the test and experimentation phase within the innovation unit. It is currently being used in daily work within motor insurance business units. In this domain, Italy is an international best practice example: According to the SSI’s survey for the Connected Insurance Observatory, more than 70% of Italians show a positive attitude toward motor telematics insurance solutions. According to the Istituto per la Vigilanza sulle Assicurazioni (IVASS), about 26 different insurance companies present in Italy are selling the product, with a 16% penetration rate out of all privately owned insured automobiles in the second quarter of 2016. Based on information presented by the Connected Insurance Observatory—a think tank I created in partnership with Ania that brings together more than 30 European insurer and re-insurer groups—the Italian market will surpass 6 million telematics policies by the end of the year.

See also: Insurtech: One More Sign of Renaissance  

Based on this data, we can identified three main benefits connected insurance provides to the insurance sector:

  1. Frequency of interaction, enhancing proximity and interaction frequency with the customer while creating new customer experiences and offering additional services
  2. Bolstering the bottom line, improving insurance profit and loss through specialization,
  3. Knowledge creation and consolidating knowledge about the risks and the customer base


The insurance companies that are part of the Observatory are adopting this new connected insurance paradigm for other insurance personal lines. The sum of insurance approaches based on IoT represents an extraordinary opportunity for getting the insurance sector to connect with its clients and their risks. The insurers can gradually assume a new and active role when dealing with their clients—from liquidation to prevention.

It’s possible to envision an adoption track of this innovation by the other business lines that are very similar to that of auto telematics, which would include:

  • An initial incubation phase when the first pilots are being put into action to identify use cases that fit with business goals;
  • A second exploratory phase that will see the first rollout by the pioneering insurance companies alongside a progressive expansion of the testing, to include other players with a “me, too” approach;
  • A learning phase in which the approach is adopted by many insurers (with low volumes) but some players start to fully achieve the potential by using a customized approach and pushing the product commercially (increasing volumes);
  • Finally, the growth phase, where the solution is already diffused and all players give it a major commercial push.

After having passed through all the previous steps in a period spanning almost 15 years, the Italian auto telematics market is currently entering this growth phase. The telematics experience teaches us three key lessons regarding the insurance sector:

  • Transformation does not happen overnight. Telematics—before becoming a relevant and pervasive phenomenon within the strategy of some of the big Italian companies—needed years of experimentation, followed by a “me, too” approach from competitors and several different use cases to reach the current status of adoption growth.
  • The companies can be protagonists of this transformation. By adding services based on black box data, telematics has allowed for improvements in the insurance value chain. Recent international studies show how this trend of insurance policies integrated with service platforms is being requested by clients. It also shows that companies, thanks to their trustworthy images, are considered credible in the eyes of the clients and, thus, valid to players who can provide these services.
  • If insurance companies do not take advantage of this opportunity, some other player will. For example, Metromile is an insurtech startup and a digital distributor that has created a telematics auto insurance policy with an insurance company that played the role of underwriter. After having gathered nearly $200 million in funding, Metromile is now buying Mosaic Insurance and is officially the first insurtech startup to buy a traditional insurance company. This supports the forecast about how “software is eating the world”— even in the insurance sector.

Secrets InsurTechs Need to Learn

The insurance sector is becoming more innovative. Various initiatives and projects launched around the globe are proof of that — from the classic “call for ideas” and corporate venture capital to innovation labs and accelerators that involve the largest insurance companies. According to CB Insights, InsurTech — which involves rethinking one or more steps of the insurance value chain through the use of technology — received $650 million in funding in the first quarter of 2016, and the number of transactions more than doubled compared with the same period in 2015.

The Italian insurance sector represents an interesting case history about InsurTech. Italy has the most advanced experience in combining the car insurance contract with hardware (the black box) and using that data throughout the insurance value chain. According to Bain Telematics, Connected Insurance & Innovation Observatory — a think tank Bain & Company developed with ANIA, AIBA and other insurance and non-insurance partners to help spread innovation culture in the insurance sector — telematics penetration reached 16% of all cars insured in Italy by the last quarter of 2015.

See also: The Future of Telematics is… Italy

In Italy, this type of approach is already mainstream — in contrast with other countries, where it is still a niche-value proposition. By looking at the Italian best practices, one can identify certain critical success factors. The most important element is telematics’ capacity to improve the insurance bottom line; a significant self-selection effect exists on customer acquisition and on material savings related to claims settlement (provided that adequate processes are in place and use the telematics information). The second aspect is represented by the benefit of introducing value-added services around the driver journey. The key element for both the client and the distributor is the partial kickback of the value generated by the telematics approach on the insurance bottom line to both the client (via a discount) and the distributor (via additional fees).

The current discussion of how telematics will evolve focuses on gamification and reward mechanisms  mechanisms to manage client engagement and retrocession prizes other than insurance premium discounts. For example, in the U.S., Allstate has adopted a score- and prize-based system related to driving behavior. The best practice internationally is undoubtedly Vitalitydrive, the approach through which Discovery (South Africa) has created a motor-telematics policy based on driving behavior. In this case, the cash-back incentive for gasoline bought from partner gas stops replaces the premium discount.

By comparing gamification use cases with Italian best practices, insurers can retain an incremental quota of generated value, through telematics solutions that provide rewards financed by partners instead of through premium discounts. This approach requires the creation of an ecosystem of partners to provide a tangible value for the customer.

Rewards can be effective ways to steer behavior if they are built on mechanisms that result in frequent interaction with the client. From this point of view, the integration of monitoring driving behavior and the reward-system mechanism has a greater influence on behavior than a tariff that calculates the renewal premium based on those same variables.

See also: InsurTech Forces Industry to Rethink

The stakes are high for the insurance sector, and the auto insurance mandate has created the conditions for insurance companies to become relevant actors within the ecosystem. That said, the insurance sector faces a double challenge: first, to introduce this type of creative thought inside the product development process and, second, to become equipped with competencies and instruments that enable the management of both gamification dynamics and the partner ecosystem. These challenges are forcing insurance carriers to start thinking and acting like InsurTech entities.

Buckle Up: Monetary Events Are Speeding

Just when you thought the world could not spin much faster, global monetary events in 2015 have picked up speed. Buckle up.

A key macro theme of ours for some time now has been the increasing importance of relative global currency movements in financial market outcomes. And what have we experienced in this very short year-to-date period so far? After years of jawboning, the European Central Bank has finally announced a $60 billion monthly quantitative easing exercise to begin in March. Switzerland “de- linked” its currency from the euro. China has lowered the official renminbi/U.S. dollar trading band (devalued the currency). China lowered its banking system required reserve ratio. The Turkish and Ukrainian currencies saw double-digit declines. And interest-rate cuts have been announced in Canada, Singapore, Denmark (four times in three weeks), India, Australia and Russia (after raising rates meaningfully in December to defend the ruble). All of the above occurred within five weeks.

What do all of these actions have in common? They are meant to influence relative global currency values. The common denominator under all of these actions was a desire to lower the relative value of each country’s or area’s currency against global competitors. As a result, foreign currency volatility has risen more than noticeably in 2015, necessarily begetting heightened volatility in global equity and fixed income markets.

If we step back and think about how individual central banks and country-specific economies responded to changes in the real global economy historically, it was through the interest-rate mechanism. Individual central banks could raise and lower short-term interest rates to stimulate or cool specific economies as they experienced the positive or negative influence of global economic change. Country-specific interest-rate differentials acted as pressure relief valves. Global short-term interest-rate differentials acted as a supposed relative equalization mechanism. But in today’s world of largely 0% interest rates, the interest-rate “pressure relief valve” is gone. The new pressure relief valve has become relative currency movements. This is just one reality of the historically unprecedented global grand central banking monetary experiments of the last six years. At this point, the experiment is neither good nor bad; it is simply the environment in which we find ourselves. And so we deal with this reality in investment decision making.

There has been one other event of note in early 2015 that directly relates to the potential for further heightened currency volatility. That event is the recent Greek elections. We all know that Greece has been in trouble for some time. Quite simply, the country has borrowed more money than it is able to pay back under current debt-repayment schedules. The New York consulting/ banking firm Lazard recently put out a report suggesting Greek debt requires a 50% “haircut” (default) for Greece to remain fiscally viable. The European Central Bank (ECB), largely prompted by Germany, is demanding 100% payback. Herein lies the key tension that must be resolved in some manner by the end of February, when a meaningful Greek debt payment is due.

Of course, the problem with a needed “haircut” in Greek debt is that major Euro banks holding Greek debt have not yet marked this debt to “market value” on their balance sheets. In one sense, saving Greece is as much about saving the Euro banks as anything. If there is a “haircut” agreement, a number of Euro banks will feel the immediate pain of asset write-offs. Moreover, if Greece receives favorable debt restructuring/haircut treatment, then what about Italy? What about Spain, etc? This is the dilemma of the European Central Bank, and ultimately the euro itself as a currency. This forced choice is exactly what the ECB has been trying to avoid for years. Politicians in the new Greek government have so far been committing a key sin in the eyes of the ECB – they have been telling the truth about fiscal/financial realities.

So, to the point: What does this set of uncharted waters mean for investment decision making? It means we need to be very open and flexible. We need to be prepared for possible financial market outcomes that in no way fit within the confines of a historical or academic playbook experience.

Having said this, a unique occurrence took place in Euro debt markets in early February: Nestle ́ shorter-term corporate debt actually traded with a negative yield. Think about this. Investors were willing to lose a little bit of money (-20 basis points, or -.2%) for the “safety” of essentially being able to park their capital in Nestle’s balance sheet. This is a very loud statement. Academically, we all know that corporate debt is “riskier” than government debt (which is considered “risk-free”). But the markets are telling us that may not be the case at the current time, when looking at Nestle ́ bonds as a proxy for top-quality corporate balance sheets. Could it be that the balance sheets of global sovereigns (governments) are actually riskier? If so, is global capital finally starting to recognize and price in this fact? After all, negative Nestle ́ corporate yields were seen right alongside Greece’s raising its hand, suggesting Euro area bank and government balance sheets may not be the pristine repositories for capital many have come to blindly accept. This Nestle ́ bond trade may be one of the most important market signals in years.

As we have stated in our writings many a time, one of the most important disciplines in the investment management process is to remain flexible and open in thinking. Dogmatic adherence to preconceived notions can be very dangerous, especially in the current cycle. As such, we cannot look at global capital flows and investment asset class price reactions in isolation. This may indeed be one of the greatest investment challenges of the moment, but one whose understanding is crucial to successful navigation ahead. In isolation, who would be crazy enough to buy short-term Nestle ́ debt where the result is a guaranteed loss of capital in a bond held to maturity? No one. But within the context of deteriorating global government balance sheets, all of a sudden it is not so crazy an occurrence. It makes complete sense within the context of global capital seeking out investment venues of safety beyond what may have been considered “risk-free” government balance sheets, all within the context of a negative yield environment. Certainly for the buyer of Nestle ́ debt with a negative yield, motivation is not the return on capital, but the return of capital.

This leads us to equities and, again, this very important concept of being flexible in thinking and behavior. Historically, valuation metrics have been very important in stock investing. Not just levels of earnings and cash-flow growth, but the multiple of earnings and cash-flow growth that investors have been willing to pay to own individual stocks. This has been expressed in valuation metrics such as price-to-earnings, price relative to book value, cash flow, etc. To the point, in the current market environment, common stock valuation metrics are stretched relative to historical context.

In the past, we have looked at indicators like total stock market capitalization relative to GDP. The market capitalization of a stock is nothing more than its shares outstanding multiplied by its current price. The indicator essentially shows us the value of stock market assets relative to the real economy. Warren Buffett has called this his favorite stock market indicator.

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The message is clear. By this valuation metric, only the year 2000 saw a higher valuation than the current. For a while now, a number of market pundits have suggested the U.S. stock market is at risk of a crash based on these numbers.

Wells Capital Management recently developed data for the median historical price-to-earnings multiple of the NYSE (using the data for only those New York Stock Exchange companies with positive earnings). What this data tells us is that the current NYSE median PE multiple is the highest ever seen. Not exactly wildly heartwarming for anyone with a sense of stock market valuation history.

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It is data like this that has prompted a number of market commentators to issue warnings: The big bad stock market wolf isn’t coming; he’s here!

In thinking about these numbers and these dire warnings from a number on Wall Street, we again need to step back and put the current cycle into context. We need to put individual asset class movements into context.

In isolation, current stock market valuations should be very concerning (and they are). In isolation, these types of valuation metrics do not make a lot of sense set against historical precedent. But the negative yield on Nestle corporate debt make littles to no common sense, either…unless it is looked at as an alternative to deteriorating government balance sheets and government debt markets.

Trust us, the LAST thing we are trying to do is be stock market cheerleaders. We’ll leave that to the carnival barkers at CNBC, with its historically low viewer ratings. What we are trying to do is “see” where the current set of global financial market, economic and currency circumstances will lead global capital as we move throughout 2015.

Heightened global currency volatility means an increasing amount of global capital at the margin is seeking principal safety. The recent Greek election results are now forcing into the mainstream commentary the issue of Euro bank and government fiscal integrity, let alone solvency. We believe the negative yield on the Nestle ́ corporate bond is an important marker that global capital is now looking at the private (corporate) sector as a potential repository for safety. The Nestle ́ bond is an investment that has nothing to do with yield and everything to do with capital preservation. Nestle ́ has one of the more pristine corporate balance sheets on Earth. We need to remember that equities represent a claim on not only future cash flows of a corporation but also on its real assets and balance sheet wherewithal.

We need to be open to the possibility that, despite very high-valuation metrics, a weak global economy and accelerating global currency movements that are sure to play a bit of havoc with reported corporate earnings, the equity asset class may increasingly be seen as a global capital repository for safety in a world where global government balance sheets have become ever more precarious over the last half decade. The investor who survives long-term is the one with a plan of action for all potential market outcomes. Avoid the tendency to cry wolf, but, of course, also keep in mind that even the boy who cried wolf was ultimately correct.

It’s all in the rhythm and pacing of each unique financial and economic cycle. Having a disciplined risk management process is the key to being able to remain flexible in investment thinking and action.