Tag Archives: KPMG

Where Are Driverless Cars Taking Industry?

While more than half of individuals surveyed by Pew Research express worry over the trend toward autonomous vehicles, and only 11% are very enthusiastic about a future of self-driving cars, lack of positive consumer sentiment hasn’t stopped several industries from steering into the auto pilot lane. The general sentiment of proponents, such as Tesla and Volvo, is that consumers will flock toward driverless transportation once they understand the associated safety and time-saving benefits.

Because of the self-driving trend, KPMG currently predicts that the auto insurance market will shrink 60% by the year 2050 and an additional 10% over the following decade. What this means for P&C insurers is change in the years ahead. A decline in individual drivers would directly correlate to a reduction in demand for the industry’s largest segment of coverage.

How insurers survive will depend on several factors, including steps they take now to meet consumer expectations and needs.

The Rise of Autonomous Vehicles

Google’s Lexus RX450h SUV, as well as 34 other prototype vehicles, had driven more than 2.3 million autonomous miles as of November 2016, the last time the company published its once monthly report on the activity of its driverless car program. Based on this success and others from companies such as Tesla, public transportation now seems poised to jump into the autonomous lane.

Waymo — the Google self-driving car project — recently announced a partnership with Valley Metro to help residents in Phoenix, AZ, connect more efficiently to existing light rail, trains and buses by providing driverless rides to stations. This follows closely on the heels of another Waymo pilot program that put self-driving trucks on Atlanta area streets to transport goods to Google’s data centers.

In the world of personal driving, Tesla’s Auto Pilot system was one of the first to take over navigational functions, though it still required drivers to have a hand on the wheel. In 2017, Cadillac released the first truly hands-free automobile with its Super Cruise-enabled CT6, allowing drivers to drive without touching the wheel for as long as they traveled in their selected lane.

Cadillac’s level two system of semiautonomous driving is expected to be quickly upstaged by Audi’s A8. Equipped with Traffic Jam Pilot, the system allows drivers to take hands off the vehicle and eyes off the road as long as the car is on a limited-access divided highway with a vehicle directly in front of it. While in Traffic Jam mode, drivers will be free to engage with the vehicle’s entertainment system, view text messages or even look at a passenger in the seat next to them, as long as they remain in the driver’s seat with body facing forward.

While the Cadillacs were originally set to roll off the assembly line and onto dealer lots as early as spring of 2018, lack of consumer training as well as federal regulations have encouraged the auto manufacturer to delay release in the U.S.

Meanwhile, Volvo has met with similar constraints as it navigates toward releasing fully autonomous vehicles to 100 people by 2021. The manufacturer is now taking a more measured approach, one that includes training for drivers starting with level-two semi-autonomous assistance systems before eventually scaling up to fully autonomous vehicles.

“On the journey, some of the questions that we thought were really difficult to answer have been answered much faster than we expected. And in some areas, we are finding that there were more issues to dig into and solve than we expected,” said Marcus Rothoff, Volvo’s autonomous driving program director, in a statement to Automotive News Europe.

Despite the roadblocks, auto makers’ enthusiasm for the fully autonomous movement hasn’t waned. Tesla’s Elon Musk touts safer, more secure roadways when cars are in control, a vision that is being embraced by others in high positions, such as Elaine Chao, U.S. Secretary of Transportation.

“Automated or self-driving vehicles are about to change the way we travel and connect with one another,” Chao said to participants of the Detroit Auto Show in January 2018. “This technology has tremendous potential to enhance safety.”

See also: The Evolution in Self-Driving Vehicles  

We’ve already seen what sensors can do to promote safer driving. In a recent study conducted by the International Institute for Highway Safety, rear parking sensors bundled with automatic braking systems and rearview cameras were responsible for a 75% reduction in backing up crashes.

According to Tesla’s website, all of its Model S and Model X cars are equipped with 12 ultrasonic sensors capable of detecting both hard and soft objects, as well as with cameras and radar that send feedback to the car.

Caution, Autonomous Adoption Ahead

The road to fully autonomous vehicles is expected to be taken in a series of increasing steps. We have largely entered the first phase, where drivers are still in charge, aided by various safety systems that intervene in the case of driver error.

As we move closer to full autonomy, drivers will assume less control of the vehicle and begin acting as a failsafe for errant systems or by taking over under conditions where the system is not designed to navigate. We currently see this level of autonomous driving with Audi Traffic Jam Pilot, where drivers are prompted to take control if the vehicle departs from the pre-established roadway parameters.

In the final phase of autonomous driving, the driver is removed from controlling the vehicle and is absolved of roadway responsibility, putting all trust and control in the vehicle. KPMG predicts wide-scale adoption of this level of autonomous driving to begin taking place in 2025, as drivers realize the time-saving and safety benefits of self-driving vehicles. During this time frame, all new vehicles will be fully self-driving, and older cars will be retrofitted to conform to a road system of autonomous vehicles.

Past the advent of the autonomous trend in 2025, self-driving cars will become the norm, with information flowing between vehicles and across a network of related infrastructure sensors. KPMG expects full adoption of the autonomous trend by the year 2035, five years earlier than it first reported in 2015.

Despite straightforward predictions like these, it’s likely that drivers will adopt self-driving cars at varying rates, with some geographies moving faster toward driverless roadways than others. There will be points in the future where a major metropolis may have moved fully to a self-driving norm, mandating that drivers either purchase and use fully autonomous vehicles or adopt autonomous public transportation, while outlying areas will still be in a phase where traditional vehicles dominate or are in the process of being retrofitted.

“The point at which we see autonomy appear will not be the point at which there is a massive societal impact on people,” said Elon Musk, Tesla CEO, at the World Government Summit in Dubai in 2017. “Because it will take a lot of time to make enough autonomous vehicles to disrupt, so that disruption will take place over about 20 years.”

Will Self-Driving Cars Force a Decline in Traditional Auto Coverage?

At present, data from the National Highway Traffic Safety Administration indicates that 94% of automobile accidents are the result of human error. Taking humans largely out of the equation makes many autonomous vehicle proponents predict safer roadways in our future, but it also raises an interesting question. Who is at fault when a vehicle driving in autonomous mode is involved in a crash?

Many experts agree that accident liability will be taken away from the driver and put into the hands of the automobile manufacturers. In fact, precedents are already being set. In 2015, Volvo announced plans to accept fault when one of its autonomous cars is involved in an accident.

“It is really not that strange,” Anders Karrberg, vice president of government affairs at Volvo, told a House subcommittee recently. “Carmakers should take liability for any system in the car. So we have declared that if there is a malfunction to the [autonomous driving] system when operating autonomously, we would take the product liability.”

In the future, as automobile manufacturers take on liability for vehicle accidents, consumers may see a chance to save on their auto premiums by only carrying state-mandated minimums. Some states may even be inclined to repeal laws requiring drivers to carry traditional liability coverage on self-driving vehicles or substantially alter the coverage an individual must secure.

Despite the forward thinking of manufacturers such as Volvo, for the present, accident liability for autonomous cars is still a gray area. Following the death of a pedestrian hit by an Uber vehicle operating in self-driving mode in Arizona, questions were raised over liability.

Bryant Walker Smith, a law professor at the University of South Carolina with expertise in self-driving cars, indicated that most states require drivers to exercise care to avoid pedestrians on roadways, laying liability at the feet of the driver. But in the case of a car operating in self-driving mode, determining liability could hinge on whether there was a design defect in the autonomous system. In this case, both the auto and self-driving system manufacturers and even the software developers could be on the hook for damages, particularly in the event a lawsuit is filed.

Finding Opportunity in the Self-Driving Trend

Accenture, in conjunction with Stevens Institute of Technology, predicts that 23 million self-driving vehicles will be coursing across U.S. highways by 2035.

As a result, insurers could realize an $81 billion opportunity as autonomous vehicles open new areas of coverage in hardware and software liability, cybersecurity and public infrastructure insurance by 2025, the same year that KPMG predicts the autonomous trend will begin to rapidly accelerate. Simultaneously, Accenture predicts that personal auto premiums, which will begin falling in 2024, will hit a steeper decline before leveling out around 2050 at an all-time low.

Most of the personal premium decline is due to an assumption that the majority of self-driving cars will not be owned by individuals, but by original equipment manufacturers, OTT players and other service providers such as ride-sharing companies. It may seem like a logical conclusion if America’s love affair with the automobile wasn’t so well-defined.

Following falling gas prices in 2016, Americans logged a record-breaking 3.22 trillion miles behind the wheel. Even millennials, the age group once assumed to have given up on driving, are showing increased interest in piloting their own vehicles as the economy improves. According to the National Household Travel Survey conducted by the Federal Highway Administration, millennials increased their average number of miles driven 20% from 2009 to 2017.

Despite falling new car sales, the University of Michigan Transportation Research Institute shows that car ownership is actually on the rise. Eighteen percent of Americans purchase a new car every two to three years, while the majority (39%) make a new car bargain every four to six years.

Americans have many reasons for loving their vehicles. Forty percent say it’s because they enjoy driving and being in their cars, according to a survey conducted by Cars.com.

ReportLinker reveals that 83% of people drive daily and that half are passionate about the behind-the-wheel experience of taking on the open road. Another survey conducted by Gold Eagle determined that people even have dream cars, vehicles that they feel convey a sporty, luxurious or efficient image.

Ownership of autonomous vehicles would bring at least some liability back to the owner-occupant. For instance, owing to security concerns, all sensing and decision-making hardware related to the Audi Traffic Jam Pilot system is held onboard. With no over-air connections, software updates must be made manually through a dealer.

In situations like these, what happens if an autonomous vehicle crash is tied to the driver’s failure to ensure that software was promptly updated? Auto maintenance will also take on a new level of importance as sensitive self-driving systems will need to be maintained and adjusted to ensure proper performance. If an accident occurs due to improper vehicle maintenance, once again, the owner could be held liable.

As the U.S. moves toward autonomous car adoption, one thing becomes clear. Insurers will need to expand their product lines to include both commercial and personal lines of coverage if they are going to take part in the multibillion-dollar opportunity.

Preparing for the Autonomous Future of Insurance

Because the autonomous trend will be adopted at an uneven pace depending upon geography, socioeconomic conditions and even age groups, Deloitte predicts that the insurers that will thrive through the autonomous disruption are those with a “flexible business model and diverse product mix.”

To meet consumer expectations and maintain a critical focus on customer acquisition and retention, insurers will need a multitude of products designed to protect drivers across the autonomous adoption cycle, as well as new products designed to cover the shift of liability from driver to vehicle. Even traditional auto policies designed to protect car owners from liability will need to be redefined to cover autonomous parameters.

Currently, only 25% of companies have a business model that is easily adaptable to rapid change, such as the autonomous trend. In insurance, this lack of readiness is all the more crucial, considering the digital transformation already underway across the industry.

According to PwC, 85% of insurance CEOs are concerned about the speed of technological change. Worries over how to handle legacy systems in the face of digital adoption, as well as the need to accelerate automation and prepare for the next wave of transitions, such as autonomous vehicles, are behind these concerns.

As insurers look toward the complicated future of insuring a society of self-driving automobiles, we believe that focusing on four main areas will prepare them to respond to the autonomous trend with greater speed and agility.

Make better use of data

Consumers are looking for insurers to partner on risk mitigation. To meet these expectations, insurers will need to start making better use of data stores, as well as third-party sources, to help customers identify and reduce threats to life and property. Sixty-four percent want their insurer to provide real-time notifications about roadway safety, while, on the home front, 68% would like to receive mobile alerts on the potential of fire, smoke or carbon dioxide hazards.

“Technology is changing the insurer’s role to one of a partner who can address the customer’s real goals – well beyond traditional insurance,” said Cindy De Armond, managing director, Accenture P&C core platforms lead for North America, in a blog.

Armond believes that as insurers focus more on the customer’s prevention and recovery needs, they can become the everyday insurer, integrated into the lives of their customers rather than acting only as a crisis partner. This type of relationship makes insurer-insured relationships more certain and extends longevity.

For insurers and their insureds, the future is likely to be more about predicting and mitigating risk than about handling claims, so improving data capture and analytics capabilities is essential to agile operations that can easily adapt to new trends.

See also: Autonomous Vehicles: ‘The Trolley Problem’  

Focus on digital

Consumers want to engage with their insurer in the moment. Whether that means shopping online for coverage while watching a child’s soccer game or making a phone call to ask questions about a policy, they expect to be able to engage on their time and through their channel of choice. Insurers that develop fluid omni-channel engagement now are future-proofing their operations, preparing to survive the evolution to self-driving, when the reams of data gathered from autonomous vehicles can be used to enable on-demand auto coverage.

Vehicle occupants will one day purchase coverage on the fly, depending on the roadway conditions they encounter and whether they are traveling in autonomous mode. Forrester analyst Ellen Carney sees a fluid orchestration of data and digital technologies combining to deliver this type of experience, putting much of the power in the hands of the customer.

“On your way home, you’re going to get a quote for auto insurance,” she says. “And because your driving data could basically now be portable, you could do a reverse auction and say, ‘Okay, insurance companies, how much do you want to bid for my drive home?’”

To facilitate the speed and immediacy required for these transactions, insurers will need to digitally quote, bind and issue coverage.

Seek automation

In the U.K., accident liability clearly shifts from the driver to the vehicle for level four and five autonomous automobiles. As driverless vehicles become the norm, the U.S. is likely to adopt similar legislation, requiring a fundamental shift in how risk is assessed and insurance policies are underwritten. Instead of assessing a policy on the driver’s claims history and age, insurers will need to rate risk by variables related to the software that runs the vehicle and how likely owners are to maintain autonomous cars and sensitive self-driving systems.

The more complicated underwriting becomes, the more important automation in underwriting will be. Consumers who can get into a car that drives itself will have little patience for insurers that require extensive manual work to assess their risk and return bound policy documents. Even businesses will come to expect a much faster turnaround on policies related to self-driving vehicles despite the complexity of the various coverages that will be required. In addition, on-demand coverage will require automated underwriting to respond to customer requests.

According to Lexis Nexis, only 20% of commercial carriers have automated the quoting process, and less than half are investing in underwriting automation.

Invest in platform ecosystems

McKinsey defines a platform business model as one that allows multiple participants to “connect, interact and create and exchange value,” while an ecosystem is a set of connected services that fulfill multiple needs of the user in “one integrated experience.” By definition, an insurance platform ecosystem in the age of autonomous vehicles would be a place where consumers and businesses could research and purchase the coverage they need while also picking up related ancillary services, such as apps or entertainment to make the autonomous ride more enjoyable.

Consumers are in search of ecosystem values today. According to Bain’s customer behavior and loyalty study, consumers are willing to pay higher premiums to insurers that offer ancillary services, such as home security monitoring or an automotive services app, and they are even willing to switch insurers to get time-saving benefits like these.

More important to insurers is the ability to partner with other carriers on coverage. Using a commission-based system, insurers offer policies from other carriers to consumers when they don’t have an appetite for the risk or don’t offer the coverage in house. This arrangement allows an insurer to maintain a customer relationship, while providing for their needs and price points.

See also: Autonomous Vehicles: Truly Imminent?  

As the autonomous trend reaches fruition, insurers will need to have access to a wide range of coverage types to meet consumer and business needs, and not all carriers will be able or want to create the new products.

Extreme Customer Focus Prepares for the Future

Insurers can prepare for autonomous vehicle adoption by establishing an extreme customer focus, dedicated to establishing enduring loyalty as insurance needs change. Loyal customers spend 67% more over three years than new ones. As the insurance marketplace opens up to the sale of ancillary services, gaining wallet share from loyal consumers will certainly help to boost revenues as demand for traditional products decline, but to stay competitive, insurers will need a broader mix of coverage types.

While current coverages have remained largely unchanged over the decades, the coming years will see an industry in flux as insurers phase out outmoded types of coverage while phasing in new products and services. In this environment, the platform ecosystems may be the most critical aspect of bridging the gaps.

Today, they allow insurers to fulfill the needs of price-sensitive consumers while also meeting the evolving needs of their customers. Tomorrow, platform ecosystems will provide the “flexible business model and diverse product mix” that Deloitte says will be critical to success for insurers in the autonomous age of driving.

How to Prepare for Self-Driving Cars

For decades, privately owned, privately insured cars have been so common that few people have questioned these models of transportation and the associated risk.

Property and casualty insurers deal with thousands of individual vehicle owners and drivers as a result. Insurers deal with those drivers’ mistakes, too. A study by the National Highway Traffic Safety Administration (NHTSA) estimates that human error plays a role in 94% of all car accidents.

The entire auto insurance industry is built on this humans-and-their-errors model. But autonomous vehicles stand to turn the entire model on its head — in more ways than one.

Here are some of the biggest changes self-driving cars are poised to make to the auto insurance world and how P&C insurers can prepare for the shift.

Vehicle Ownership

Most conversations about self-driving cars and insurance focus on questions of fault, compensation and risk.

In a 2017 article for the Harvard Business Review, however, Accenture’s John Cusano and Michael Costonis posited that an even bigger disruption to P&C insurance practices would be a change in patterns of vehicle ownership.

“We believe that most fully autonomous vehicles will not be owned by individuals, but by auto manufacturers such as General Motors, by technology companies such as Google and Apple and by other service providers such as ride-sharing services,” Cusano and Costonis writes.

Indeed, companies like GM and Volvo are already exploring partnership with services like Lyft and Uber, as keeping self-driving vehicles on the road as much as possible amortizes their costs more effectively.

Paralleling the autonomous vehicle/ride-sharing partnership trend is a decrease in vehicle ownership. Young adults and teens are less interested in owning vehicles than their elders were, Norihiko Shirouzu reports for Reuters. Instead, they’re moving to more walkable areas or using ride-sharing services more often, already putting pressure on auto insurance premiums.

See also: Time to Put Self-Driving Cars in Slow Lane?  

U.S. roads are likely to be occupied by a combination of human-driven and self-driven vehicles for several decades, Cusano and Costonis estimate. As ownership trends change, however, P&C insurers’ focus on everything from evaluating risk to branding and outreach will change, as well.

Connected closely to the question of ownership is a second question: Who is at fault in a crash?

Fault Ownership

NHTSA’s statistics on human error as a crash factor imply that reducing the number of human drivers behind the wheel would reduce accidents. A McKinsey & Co. report agrees, estimating that autonomous vehicles could reduce accidents by 90%.

Taking human drivers’ mistakes out of the equation means taking human fault out of the equation, too. But questions of human fault stand to be replaced by even more complex questions regarding ownership, security and product liability.

Several automakers have already begun experimenting with approaches that upend traditional questions of fault and liability. Concerned over the patchwork of federal and state regulations in the U.S., Volvo President and CEO Håkan Samuelsson announced in 2015 that the company would assume fault if one of its vehicles caused an accident in self-driving mode.

The statement appears to apply to Volvo’s vehicles during the development and testing phases, according to Cadie Thompson at Tech Insider. It is too early to tell whether the company will extend its acceptance of fault to autonomous Volvo vehicles that function as full-fledged members of the transportation ecosystem. Nonetheless, the precedent of automakers accepting liability has been set — and, as automakers continue to explore partnerships or other models of fleet ownership, accepting liability or even providing their own insurance may become part of automakers’ arsenal, as well.

Ultimately, Volvo seems unconcerned about major liability shifts. “If you look at product liability today, there is always a process determining who is liable and if there is shared liability,” Volvo’s director of government affairs, Anders Eugensson, told Business Insider. “The self-driving cars will need to have data recorders which will give all the information needed to determine the circumstances around a crash. This will then be up to the courts to evaluate this and decide on the liabilities.”

Meanwhile, in Asia, Tesla is trying another method: including the cost of insurance coverage in the price of its self-driving vehicles, according to Danielle Muoio at Business Insider.

“It takes into account not only the Autopilot safety features but also the maintenance cost of the car,” says Jon McNeill, Tesla’s former president of sales and services (now COO of Lyft). “It’s our vision in the future we could offer a single price for the car, maintenance and insurance.”

Doing so would allow Tesla to take into account the reduced accident risk of the autonomous system and to lower insurance premium prices accordingly. This might reduce the actual cost of the vehicle over its useful life.

The NHTSA has already found that accident risk in Tesla vehicles equipped with Autopilot are 40% lower than in vehicles without, and the company believes insurance coverage should reflect that, according to Muoio.

If P&C insurers don’t adjust their rates accordingly, Tesla is prepared to do so itself.

Future Ownership

Property and casualty insurers seem torn on how self-driving cars will affect their bottom line.

On the one hand, “insurers like Cincinnati Financial and Mercury General have already noted in SEC filings that driverless cars have the potential to threaten their business models,” Muoio reports.

On the other, 84% don’t see a “significant impact” happening until the next decade, according to Greg Gardner at the Detroit Free Press.

Other analysts, however, believe the insurance industry is moving too slowly in response to autonomous vehicles.

“The disruption of autonomous vehicles to the automotive ecosystem will be profound, and the change will happen faster than most in the insurance industry think,” KPMG actuarial and insurance risk practice leader Jerry Albright tells Gardner. “To remain relevant in the future, insurers must evaluate their exposure and make necessary adjustments to their business models, corporate strategy and operations.”

KPMG CIO advisory group managing director Alex Bell agrees. “The share of the personal auto insurance sector will likely continue to shrink as the potential liability of the software developer and manufacturer increases,” Bell tells Gardner. “At the same time, losses covered by product liability policies are likely to increase, given that the sophisticated technology that underpins autonomous vehicles will also need to be insured.”

See also: The Unsettling Issue for Self-Driving Cars  

Major areas of concern in recent years will likely include product liability, infrastructure insurance and cybersecurity.

Meanwhile, the number of privately owned vehicles — and individually insured drivers — on the road will likely continue to drop, placing further pressure on auto insurance premiums.

What should P&C insurers to do prepare? Cusano and Costonis recommend the following steps:

  • Understand and use big data and analytics. As Eugensson at Volvo notes, autonomous vehicles will generate astounding quantities of data — data that can be used to pinpoint fault. It can also be used to process claims more quickly and efficiently, if insurers are prepared to use it. Building robust data analysis systems now prepares P&C insurers to add value by analyzing this data.
  • Develop actuarial frameworks and models for self-driving vehicles. As Tesla’s insurance experiment and NHTSA data indicates, questions of risk and cost for autonomous cars will differ in key ways. P&C insurers that invest the effort into developing and using more sophisticated actuarial tools are best-prepared to answer these questions effectively.
  • Seek partnerships. The GM/Lyft and Volvo/Uber ventures demonstrate how partnerships will change the automotive landscape in the coming years. Insurers that identify and pursue partnership opportunities can improve their position in this changing landscape by doing so.
  • Rethink auto insurance. Currently, P&C insurers’ auto work involves insuring large numbers of very small risks. As our relationship to vehicles changes, however, insurers will need to change their approach, as well — for instance, by moving to a commercial approach that trades many small risks for a few large ones.

Autonomous vehicles are poised to become one of the most profound technological changes in an era of constant change. Fortunately, the technology to manage this change is already available for insurers that are willing to embrace a digital future.

What’s Your Game Plan for Insurtech?

Over a year ago, Stephen O’Hearn, global insurance leader at PwC, predicted, “Insurtech will be a game changer for those who choose to embrace it.” Since then, the insurtech playing field has matured. Many insurers that have operated in the “good enough” zone are finding that it is no longer, well, good enough. The game has changed. Whether you’re in underwriting, claims or exposure management or are a CIO, insurtech will have an impact on you. There’s no option to stay on the bench.

So, what’s your game plan?

Partnership is the way forward

Right now, collaboration should be a part of everyone’s game plan — not just insurers, but everyone from commercial tech providers to managing agents and brokers. Insurance is a team sport and has been since its inception. Insurtech will not change that; it will only amplify the need to partner — quickly. Who insurers pick as their partners to accelerate transformation matters, and the technology they employ to transform matters.

See also: Insurtechs Are Pushing for Transparency  

In the last year, talk of “disruption” has turned to talk of “collaboration” as the insurance community is realizing the fastest way forward is through partnerships. A more mature conversation is happening. Insurers are realizing the benefit — and speed — of leveraging what insurtechs have to offer. Once labeled “disrupters,” insurtechs are now “enablers.” Fact is, the vast majority of insurtechs aren’t looking to oust incumbents. They’re looking to find a niche where they can succeed and leverage the sheer scale of their more established partners. As a recent InsurTech Bytes podcast observed, “Partnership is the way forward. Enablers are leading disruptors across the insurance sector, presenting an exciting opportunity for insurers to drive forward their digital transformation. Insurtech has developed (largely) with a view toward partnership rather than disruption.”

New digital opportunities are opening up more choice for consumers and businesses alike — think Internet of Things (IOT), vehicle telematics and, especially, advanced data and analytics. As customer expectations grow, an insurer’s data and analytics will need to keep pace in an effort to drive competitive differentiation. This includes the ability to hasten and streamline the quote process, more accurately price risk and mitigate and respond to claims. Insurers recognize data and analytics as a leading insurtech priority and, like other digital transformation priorities, are looking to either VC opportunities or partner integrations to accomplish this. In fact, in a KPMG survey of insurance executives, 25% of respondents said they already had a VC unit set up to make investments in technology companies. And 37% said a VC unit was in the works. Likewise, these same insurers are looking for partnerships to help accelerate transformation; three-quarters of respondents said they “will partner to gain access to new technology infrastructure.

Still, while some insurers are clearly making plays toward making insurtech investments a priority, others are still on the bench. Only 39% of insurers believe they are harnessing digital technologies successfully. And one in five property and casualty (P&C) insurers do not apply advanced analytics for any function. This last statistic is mind-blowing when you consider how intrinsic data and analytics is to insurance. So, what is holding a large percentage of insurers back from embracing digital transformation?

The gap between knowing and doing

In a recent column, Denise Garth talks about the gap between “knowing and doing.” She writes, “Even though most companies know they should respond to key internal and external challenges to create promising growth opportunities — and more importantly to ensure survival — many are still only thinking about doing something, at best. Why is there a gap between knowing and doing?”

The gap exists because the list of challenges is long: legacy systems and processes, lack of budget and downright risk aversion. Understanding where to start with digital transformation, and how, is critical for insurers that recognize the need to digitally transform. But the goal shouldn’t just be transformation. It should be to succeed — to lead and compete in ways that produce profitability, efficiency and innovation. However you measure success, integrating insurtech — whether IOT, blockchain or advanced data and analytics — should achieve those goals.

But where to start?

First, “see over the horizon”

Without doubt, insurtech is an epic climb. It’s not a bump in the road, it’s a mountain that will shape the future of the industry. If we’re to succeed, we must start climbing — only by doing can we compete and start shaping what’s next. However, you first must climb to the top and, as Jon Bidwell, former Chubb chief innovation officer and now SVP and underwriting transformation leader at QBE North America, put it, “see over the horizon.”

See also: 5 Insurtech Trends for the Rest of 2017  

SpatialKey is insurtech, and even we’re not immune from the need to digitally evolve. We’ve been providing geospatial insurance analytics since 2011, and we’re constantly evolving our own platform and product offerings to include the latest technology. Our role as an insight hub is to help shorten and accelerate the transformation that’s necessary for insurers to remain competitive. But, at the same time, our insurance clients are recognizing that not all digital transformation has to be hard. Technology integrations can be swift and painless with the right partner.

What is hard about insurtech is making the right choices, making the right investments, prioritizing the right transformation initiatives, collaborating with the right partners. It’s all a risk — but not as big a risk as doing nothing. There is no option to stay on the bench. No one knows what’s over the next horizon, but we all have an opportunity to shape it.

5 Insurtech Trends for the Rest of 2017

Interest in insurtech grew substantially during 2016. Many traditional insurance companies have been hampered by legacy IT systems and regulatory transformation programs which means there have been limited funds to invest in innovation. This has left the industry somewhat behind others in the financial services sector, making the industry ripe for disruption. – KPMG – The Pulse of Fintech Q4 2016 Report.

Insurtech is an industry that is growing very quickly. In fact, between 2017 and 2020, the insurtech field is projected to grow 10% every single year. This growth is being fueled by the fact that insurance technology is rapidly improving, and the technology has tremendous benefits for insurers and policyholders alike.

As the insurtech industry grows, some key trends have started to emerge. These trends will affect how the insurance industry as a whole progresses in the coming decade.

Here are five of the top insurtech trends to watch out for in the remainder of 2017.

Strong Investment

In 2014, insurtech investment was $800 million. By 2015, this number surged to $2.6 billion.

Because insurtech is undergoing strong growth, and it is still a very new sector, there will most likely be many more investment opportunities.

In fact, KPMG notes that it expects investment interest in insurtech to remain “hot” throughout all areas of the world in 2017.

See also: 10 Trends at Heart of Insurtech Revolution  

Privacy

Many new insurtech companies rely on customer data to provide key insights that can help insurers. While being able to analyze data can be extremely beneficial from an insurer’s standpoint, many customers are likely to continue to be wary about giving away any private information.

To address this concern, insurtech startups are enhancing privacy features and security. This is particularly true as the insurtech sector begins to intersect with the health industry.

Heavier IoT Use

The internet of things, or IoT, is being used more and more in insurtech. In fact, in 2016, the IoT and AI combined accounted for 44%  of all insurtech investments.

This is because insurance companies thrive on data, and the IoT provides opportunities for many brand new types of data to be collected. The IoT also has the potential to be useful in a wide range of insurance niches. For example, it can be useful in auto insurance, health insurance and home insurance.

Artificial Intelligence

As AI and machine learning technology develop, they continue to become more and more useful in many different industries. Insurtech is no exception.

In fact, many insurtech companies are now starting to use AI and machine learning to advance their data gathering and analytics protocols. One company, Fokuku Mutual Life Insurance, even replaced 34 workers with AI.

Throughout 2017, AI is likely to continue growing into a stronger force in the insurtech world as it helps to make companies more efficient and streamlined.

See also: Top 10 Insurtech Trends for 2017  

Cost-Saving Solutions

Through digitization and automation, many processes and functions of insurance companies are becoming cheaper and more efficient. For example, one solution called CynoClaim, by Outshared, is enabling 60% of claims to be managed automatically. Now that’s impressive!

Such solutions can result in dramatic cost savings for businesses in the insurance industry. Because there is so much to gain from solutions like this, it is very likely that insurtech cost-saving solutions will continue to be invested in for the rest of 2017.

Through these insurtech trends, the insurance world is undergoing a disruptive modernization. The old ways of conducting business in the insurance industry are being replaced with digital and consumer-centered practices.

Technology is the key that has unlocked all of these changes. For the remainder of 2017 and beyond, insurance is likely to become better, cheaper and more precise.

It is a very exciting time for all of us in the insurance and insurtech industries!

Is There Risk in Embracing Insurtech?

As insurers rush headlong into the digital scramble, they should keep in mind the proverbial iceberg. Not all the risks involved are strictly tied to the innovation itself. Certain ones are below the water level.

Insurers actively participating in the digital revolution have done so in a variety of ways: 1) innovation labs, 2) insurtech accelerators with external partners, 3) investments in insurtech companies, 4) purchases of insurtech companies. These are reasonable approaches for staying current and competitive. However, there are some caveats that should be heeded.

Focus Risk

Insurance is not a simple business. Machines cannot be set to produce thousands of identical items, a sale is not final and competition is never at a low ebb. It is a complex business that relies on actuarial forecasting, capital models, complicated and multi-layered contracts, in many cases, and astute claims handling. Thus, companies must remain focused on the functions and metrics fundamental to the business, if they are to achieve good results.

Over the years, the insurance industry has adapted to paradigm shifts of all types, for example: 1) automation of internal operations, 2) agent/broker electronic interface, 3) paperless environments, 4) increased transparency with regulators and 5) product development responsive to new risks such as cyber or supply chain disruption. Now, creating new ways to interact with stakeholders digitally and developing products that are fit for purpose in a digital world should be within the capability bounds of these same insurers.

The caution is that insurers should not get so focused on their digital initiatives they lose proper sight of the basics of the business: underwriting, claims, actuarial, finance, customer service. Equally, insurers cannot lose sight of other disruptive forces in the environment such as climate change, terrorism and cyber threats.

See also: Insurtech: Unstoppable Momentum  

A piece appearing on AIR Wordwide’s website written by Bill Churney asks “Have You Lost Focus On Managing Catastrophe Risk?” He alludes to the fact that catastrophes have been light these past 10 years, which may cause inattention, and that many new insurance staffers were not working when Katrina, Andrew or Hugo hit, thus have no personal experience to tap for handling sizable events. A lack of focus on managing catastrophe risk could be critically detrimental for companies. And although there is nothing concrete to suggest that insurers have lost such focus, the question underscores the possibility of attention deficits. The need for continuous and careful attention to the rudimentary aspects of the business cannot be dismissed, even if they may not seem as exciting or timely as digital inventions.

Within memory, there have been companies that allowed themselves to lose necessary focus. Some got so focused on mergers and acquisitions that core functions were not managed properly while the emphasis was on cross sales and economies of scale. Some got so intent on improving customer relations that business imperatives were ignored in favor of appeasing the customer, and some got so diversified that senior management did not have the bandwidth to manage the whole enterprise.

How can the 2016 results at AIG be explained? Could the more recent focus on divestitures, staff changes and cuts, a drive to return dividends to shareholders and the CEO’s reported concentration on technology have caused it to lose its once unparalleled focus on profitable underwriting, rigorous claims handling and product innovation.

Investment Risk

With investments pouring into insurtech, it raises the question: What is left for anything else? Despite fintech investments starting to slow, KPMG reports, “There was a dramatic increase in interest in insurtech in Q3’16, and the trend is expected to continue. The U.S. was the top country in Q3’16 with 10 insurtech deals, valued at $104.7 million in total.”

These numbers do not capture the many millions of dollars that insurers are investing in insurtech activities internally, of-course. As mentioned above, they are spending money to create dedicated innovation labs and accelerator programs and to launch other types of speculative insurtech projects. Many older projects have become operational, including new business unit or company startups, the introduction of bots on company websites, telematics in vehicles, digitized claims handling…and the list goes on.

How does an insurer know when an investment in insurtech is enough or too much, thereby negating other necessary investments required by functions such as underwriting, claims or actuarial?

The caution is not about doing an ROI (return on investment) analysis for a specific project. It is about doing an ROI analysis for the portfolio of projects that are vying for funding vis-a-vis the need to keep the company solvent while maintaining progress with the digital strategy. The larger the insurer, the more used it is to managing multiple priorities and projects. For mid-size to small insurers, this skill may be less developed, and they may face even greater risk of getting out of balance.

Growth Risk

Insurance is one of the few industries for which growth can be just as risky as no growth. Industry pundits have long claimed that new business performs about three points worse than policies already on the books. The difference between a company at a combined ratio of 99 compared with 102 can be quite significant. The causes for this phenomenon have to do with such factors as: 1) the potential for adverse selection, 2) the reason customers choose to change carriers and 3) the costs associated with putting new business on the books. These are not the only ones. It is harder for actuaries to predict the loss patterns for groups of customers for whom there is no history in the company’s database.

See also: Infrastructure: Risks and Opportunities  

If the reason for investing in insurtech is to increase new business written, insurers should be cautious about how much and what kind of new business they will write because of their insurtech enhancements. To the extent that insurtech enables insurers to hold on to existing business, the outcome is less risky.

For example, it remains to be seen whether drivers who want to buy insurance by the mile are a better or worse risk pool than other drivers, whether those involved in the sharing economy, such as renting rooms in their homes, are more or less prone to loss than homeowners who do not rent rooms. Are small businesses that are willing to buy their coverage on-line likely to file a higher number of claims or a lower number compared with small businesses who use an agent? Do insurance buyers who are attracted to peer-to-peer providers have loss experiences at a different rate than those who are not attracted to such a model?

Conclusion

The march toward more digitization in the insurance industry will and must go forward. At the same time, insurers should be wise enough to realize and address underlying risks inherent in this type of aggressive campaign to modernize.