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New Power Shift in P&C Insurance

P&C insurance carriers have witnessed a lot of changes in the past decade, but few have been as surprising as the shift of power currently taking place across the industry.

According to Dennis Chookaszian, the former CEO and chair of CNA, carriers maintain only 40% of profits today, representing a drop of 20 to 25 points from the 1960s. An equal share now goes to the distribution system, as carriers line up to acquire and maintain more customers.

What’s behind this shift in profitability can’t be summed up in a single word, but increasing competition, new market entrants, improving technology, changing customer expectations and continued consumer price sensitivity all play a role.

To remain competitive, carriers will need to gain more control over distribution, a goal that even Chookaszian admits will not be easy to achieve.

Why the Power-Shift Toward Distribution

In the mid-part of the last decade, insurance carriers required two primary competencies to operate: data and capital. Because neither was easy to acquire, competition was less robust, and incumbent carriers found greater profitability, taking in roughly two-thirds of insurance transaction profits.

Today, data is everywhere, and through the use of analytics, simpler than ever to understand and use. Capital is also easier to acquire, as is evidenced by the growing number of insurtech players in the industry. According to Willis Towers Watson, $2.3 billion was invested in new insurance tech companies in 2017.

According to Chookaszian, the core competency for insurers now lies in distribution and control of the customer.

“It’s become so competitive that the carriers basically are always out looking for new accounts,” Chookaszian says.

That means higher commissions are paid to agents as carriers battle it out for market share, resulting in shrinking margins.

“Given the shift in profitability to distribution, the carriers that will be better off will try to regain some control over distribution,” Chookaszian says.

Admittedly, that is not an easy thing to do. The agent enterprise is part and parcel of most insurance operations. Directly selling insurance to consumers will require insurers to set up their own distribution systems, while still supporting their vast networks of independent or captive agent forces.

See also: The Future of P&C Distribution  

Distribution Goes Digital

When Benjamin Franklin started the first successful U.S.-based insurance company in 1752, he was dealing with a localized Philadelphia population, but, by the end of the 18th century, citizens were moving westward, making it necessary for insurers to expand their distribution networks.

The Hartford made the first foray into direct distribution by offering insurance through the mail, but few consumers of the time were willing to give up the personal services of an agent when it came to purchasing something as critical as insurance. Carriers of the time faced a similar dilemma as carriers do today: how to acquire customers in a changing marketplace.

According to the J.D. Power 2018 US. Insurance Shopping Study, insurers are aggressively courting customers with new options and amenities as auto insurance rates remain stagnant and the number of consumers seeking coverage declines.

“We’re entering an era of consumer-centric insurance that will likely be marked by a surge in new digital offerings and serious efforts by insurers to improve the auto insurance shopping experience,” says Tom Super, director of the property and casualty insurance practice at J.D. Power.

This shift is happening across all lines of coverage, even small commercial.

While citizens on the new 17th-century frontier may have been hesitant to buy coverage without the guidance of an agent, many 21st-century buyers have no such qualms. Nearly half of consumers responding to a survey conducted by Clearsurance said that they would purchase an insurance policy online, while 65% believe this will be the primary channel for purchasing coverage within the next five years.

According to research conducted by Accenture, consumers are open to a number of new possibilities when it comes to buying the policies they need:

Power in the form of profits may have shifted to distribution, but consumers are making a power play of their own, demanding greater service and amenities and taking their business to the carrier most capable of meeting preferences and price points. In a world of shifting power, creating an active, online distribution channel puts more of the profit back into the carrier’s bottom line and allows it to attract more customers in three distinct ways.

Cutting Transaction Costs

According to a report from the Geneva Association, the leading international insurance think tank for strategically important insurance and risk management issues, 40% of P&C premiums are absorbed by transaction costs, leading to inflated policy pricing that drives away potential customers. PwC pegs distribution as a heavy culprit, reporting that 30% of the cost of an insurance product is eaten up in distribution.

On the other hand, Bain predicts that insurers could cut the cost of acquisition by as much as 43% through digitalization. Underwriting expenses could drop as much as 53%.

Reducing these costs allows insurers to present a more attractively priced product to consumers, an important consideration given that 50% of customers base their loyalty with an insurer on price.

To understand how costs are reduced through digital distribution, it helps to understand how a leading digital distribution platform works to raise efficiency. According to PwC, up to 80% of the underwriting process can be consumed by administrative tasks that require manual workarounds, such as re-entering information into multiple systems.

Much of this re-inputting of data is due to the siloed nature of insurers’ administration systems. Digital distribution platforms create a layer between the front-end online storefront, where customers enter application data, and the back-end systems used to store information.

As consumers enter their personal details into the online application, all back-end systems are populated automatically, eliminating the need for manual work-arounds. Everyone across the organization has the same view of the customer and access to any information that has been provided.

Digital platforms are also masters of straight-through processing, automating the quote-to-issue lifecycle and reducing the need for manual underwriting. By automatically quoting, binding and issuing routine policies, insurers reduce costs and also provide a more “informed basis for pricing and loss evaluation,” according to PwC.

As costs drop, insurers are also able to more competitively price insurance coverage. Lower prices win more customers allowing insurers to take back some of the profitability of distribution.

Improving Customer Experiences

When it comes to insurer-insured relationships, there is a gap between what consumers want and what insurers provide. Consumers rate the following points as very important aspects of the insurance buying experience:

  • Clear and easy information on policies
  • Access to information whenever it is needed
  • Ability to compare rates and switch plans
  • A wide range of services

But few consumers agree their insurer is meeting these expectations:

27% see clear and easy information on policies

29% report access to information whenever they need it

21% say there is the ability to compare rates and switch plans

24% see a wide range of services

The customer experience is becoming a key differentiator across the insurance industry. McKinsey reports two to four times higher growth and 30% higher profitability for insurers that provide best-in-class customer service, but here’s the rub. Only the top quartile of carriers fall into this category.

Becoming a customer experience leader requires insurers to understand that the separate functions associated with policy sales and distribution appear as a single journey to consumers. They expect to quote, bind and issue multiple policies through a single application, using as many channels as they feel necessary to get the job done.

While 80% of consumers touch a digital channel at least once during an insurance transaction, 45% of auto insurance shoppers use multiple channels when making a purchase. They expect to be recognized across these channels, picking up in one where they left off in another.

The multiple back-end systems employed by most insurers present a strategic dilemma here, as well as in the area of cost containment. Without transparency between channels, consumers are forced to restart a transaction every time they change their engagement method.

“It amounts to a great deal of frustration for the consumer,” says Tom Hammond, president U.S. operations, BOLT. “You start an application online and then call the customer-facing call center, and they can’t see what you did through the online storefront.”

Hammond explains that digital distribution needs to be omni-channel distribution, seamlessly integrated with a single view of the customer. It’s the only way to meet consumer experience expectations now and into the future.

Thanks to advances in analytics and artificial intelligence, the amount of data that is available to carriers has grown significantly, and consumers expect that information to be leveraged for their benefit. Eighty percent of consumers want personalized offers and pricing from their insurers.

Progressive is one of the 22% of carriers currently making strides to offer personalized, real-time digital services, having recently released HomeQuote Explorer. From an app or computer, consumers can enter information once and receive side-by-side comparisons from multiple homeowners insurance providers. According to the company, they leverage a network of home insurers to make sure customers can find the coverage they need at a comfortable price.

Oliver Lauer, head of architecture/head of IT innovation at Zurich, believes these collaborative networks are an integral part of the digital future of insurance.

“Digital innovation means you have to develop your insurance company to an open and digitally enabled platform that can interface with everybody every time in real time – from customers to brokers, to other insurers, but also to fintechs and insurtechs,” Lauer says.

Using a digitally enabled market network, insurers can fill product gaps and even meet customer needs when they don’t have an appetite for the risk. The premise is simple. By offering coverage from other insurers, they maintain the customer relationship and reap the rewards of loyalty.

As society changes and consumer needs evolve, the ability to personalize bundled coverage to the needs of the individual will become increasingly important. Consumers are now looking for coverage to mitigate risk in previously unheard-of areas, such as cyber security, identity theft and even activities related to legalized marijuana.

When an insurer is unable to provide the coverage a customer needs, it risks forfeiting that relationship, and any other policies bundled with it, to another carrier. But when the carrier takes part in a market network, it can bundle the appropriate coverage from another insurer with its own products, personalizing the coverage to better fit the needs of the customer.

See also: Key Strategic Initiatives in P&C  

Digital platforms offering market networks also set the stage for insurers to offer ancillary services, such as roadside assistance, that make their insurance products more attractive to consumers. We see this happening with increasing frequency as carriers seek to improve the customer experience and lift their acquisition efforts.

DMC Insurance, a provider of commercial transportation insurance solutions, recently announced a partnership with BlackBerry Radar. The venture would provide transportation companies with real-time data on vehicle location, as well as cargo-related information, such as temperature, humidity, door status and load state. Information like this will help companies better manage risk.

In the personal lines market, insurers are partnering to offer services that enhance the life of their customers. Allstate’s partnership with OpenBay allows consumers to review repair shops and schedule an appointment from an app. Allianz is helping home owners safeguard properties by partnering with Panasonic on sensors that monitor home functions and report issues. Customers can even schedule repairs through the service.

Digital Distribution Benefits All

J.D. Power reveals that digital insurers are winning the intense battle for market share in the insurance industry, starting a shift that could help level the profitability field between distributors and carriers. In a recent insurance shopper survey, overall satisfaction was six points higher for digital insurers over those that sell through independent agents. This lead grows to 12 points when compared with carriers with exclusive agents.

According to research by IDC, digital succeeds on the strength of its data. The ability to collect and analyze the vast stores of data available through these interactions, including such variables as the time of day the consumer shopped for coverage, the channel the consumer used, and stores of information collected from third-parties as part of the automated application process, provides the key to improved customer service.

“By analyzing this data, insurers can understand each customer’s lifestyle, behaviors and preferences in order to engage with them at the right time and place, offer personalized service and offers and more,” says Andy Hirst, vice president of banking solutions, SAP Banking Industry Business Unit.

As insurers create omni-channel engagement, they’re strengthening distribution from every angle, giving consumers the option to quote coverage online when it’s most convenient for them, and then buy it right then and there or to seamlessly call an agent to discuss their options and their risk.

Customer experience is rapidly becoming the foundation of success in the industry, and digital distribution provides the first link in building that base of core customer satisfaction. By providing consumers with multiple channels of engagement and the ability to meet more of their needs at any time, day or night, carriers are taking back the lead on profitability.

Global Trend Map No. 18: Europe (Part 2)

In Part I of our profile for Europe, we reviewed our statistics for the region, which we gathered in the course of our Global Trend Map (download the full thing here), and outlined a number of qualitative themes, exploring the first two of these:

  1. Growth opportunities in a relatively saturated market
  2. The European consumer and Europe’s early adopter status
  3. How European insurers can deliver on their customer promise with new tech
  4. Dynamic, real-time insurance and IoT
  5. Progress on developing connected insurance models across the continent

Here we explore themes three to five in discussion with two in-region influencers:

  • Switzerland-based venture capitalist Spiros Margaris, VC (InsureScan.net, moneymeets and kapilendo)
  • Charlotte Halkett, former general manager of communications at U.K.-based telematics provider Insure The Box (now MD of Buzzvault at Buzzmove)

Delivering on the Customer Promise

In Part I, we posited that Europe holds a slight innovation lead over our other major regions, finding this borne out in the more disrupted distribution landscape (with affiliate, aggregator and direct-to-customer channels all relatively well established).

However, embracing innovative distribution methods is only part of the story for European insurers seeking to engage digitally savvy and ever-more-demanding consumers; another key aspect is to incorporate a greater level of personalization into products.

“The consumer is used to a really personal experience now, and that is exactly the same as when they’re buying a pair of shoes online,” comments Charlotte Halkett, formerly of Insure the Box (and now at Buzzmove). “They’re used to being able to get something if they want it, where they want it and at the cost they want, including complete information like the exact half hour it’s going to turn up in their house and what color it is.

“That’s the same for the £1,000 insurance they’re going to buy, they want to have that real personalized experience to get the cover they want, how they want it, and to be able to influence the price that they’re going to pay. The big, overwhelming message is that the insurance industry is going to need to be flexible and innovative, because consumers are becoming ever-more-demanding, and the base level of their expectations is rising all the time.”

Personalization in insurance extends from offering positive customer service across channels to customizing policy prices on an individual basis (UBI). Halkett believes that the U.K. market in particular has been a leader in this sense:

“The complexity of pricing has always been at the cutting edge in the U.K.,” she says. “From developing general linearized modeling through to telematics, the initial development has occurred within the U.K. And it’s partly to do with this being a worldwide center of insurance, that’s true, but it’s also to do with the consumer. It’s very consumer-led: consumers are very willing to adopt, consumers are very willing to try new things.”

Halkett believes that the U.K. has served as a guinea pig for in-car telematics and that the models developed here can benefit a wide range of insurance markets. This impression fits in with our product-development stats for Europe overall: Auto was indeed one of the lines respondents identified as driving the most product innovation in the region, the other being health (see our earlier post on product development). We explore UBI models, especially as they relate to the auto line, as our next theme.

“It is important to listen to your customers and speak their language in order to influence your top and bottom line. If you want to satisfy your customers, you have to know what they want and need, what they’re saying about you, and how they feel about your products, services and brand.” — Monika Schulze, global head of marketing at Zurich Insurance

All these customer initiatives, if they are to be more than just good intentions, require far-reaching back-office transformation; investment is required in new technologies and solid digital capabilities (such as analytics), and these in turn need to be grounded in well-conceived strategies if they are to truly take root and flourish at an organizational level. Let’s look now at what European insurers are doing practically to deliver on their customer promises.

Encouragingly, a large majority of European respondents acknowledged having formal digital, mobile and cross-platform strategies, so digitization appears to be well underway among European (re)insurers, consistent with our other regions (see our earlier post on digital innovation). We also found a strong increase in analytics focus/investment among our European respondents, as well as a reasonable level of coordination of analytics across their organizations (see our earlier post on analytics and AI).

Analytical and machine-learning models have plenty to get their teeth into with what customer data has been captured directly by insurers, but they can additionally be supplied with external data from third parties. We found this practice to be widespread in Europe, as indeed were formal data-governance strategies.

“The one who is doing similar business to you should be considered as a chance and not as a risk – being connected via Open APIs based on your open insurance ecosystem. You will win because your processes and technologies are faster, cheaper and more customer-oriented than others, because you are open.” — Oliver Lauer, formerly head of architecture/head of IT innovation at Zurich

One major hurdle for the implementation of more data-driven, customer-centric systems is the presence of legacy, and this is just as present in Europe as anywhere else. Legacy systems came in second place among the internal challenges for Europe (in line with the global trend), and was additionally identified by our European contributors Halkett and Margaris as a serious challenge for the region. Margaris highlights a couple of particular pain points as far as legacy systems go:

“If you have legacy systems, it’s difficult to put cutting-edge technology on top of them,” he says. “Legacy systems make it so much harder for incumbents to innovate and to comply with regulations.”

Taking Insurance into the Real World, Real-Time

In Part I of our profile on Europe, we tentatively identified Europe as an early adopter, and we saw this tendency manifested in the prevalence of new-age distribution channels and personalized, customer-centric products.

Here, we extend this line of inquiry by turning to the vanguard of personalization in insurance, namely the Internet of Things, and exploring the progress it has made within European insurance. IoT is the final frontier of customer-centricity in the sense that it takes insurance into the real world on a real-time basis, placing the customer literally, and not just figuratively, at the center.

If Europe is marginally further along the journey of customer-driven disruption than our other regions, as we have suggested, then we would expect IoT to be marginally ahead, as well. And while the technology is making strides the world over, our stats do place Europe above trend on the IoT-for-insurance adoption curve, at least in terms of current platform implementation (more details in our dedicated Internet of Things section), and the pre-eminence of the continent in this field is borne out by much of our broader research.

While Internet of Things was not a priority area that Europe led on in our insurer priorities section (it came second behind Asia-Pacific), Europe did achieve top spot for mobile, customer-centricity and claims – which form a constellation very auspicious for IoT-enabled business models and innovation.

Margaris tends to agree on the importance of IoT for European insurers, and Halkett, as we have already mentioned, credits the U.K. market as having fostered the development of in-car telematics.

“The IoT development (expected to reach $20.8 billion by 2020, according to Gartner Inc forecast) should help a new insurance to emerge, increasing customer-centricity and decreasing costs. An example of IoT impact on insurance is wearable tech, a passive way to monitor health and wellbeing, in real time and for everything. By identifying those who seem to be looking after themselves, insurers can drive premiums down for them.” — Minh Q Tran, general partner at AXA Strategic Ventures

The real opportunity consists not just in personalized experience à la retail but in personalized pricing, so that the price customers pay reflects their real-world usage as captured by connected devices.

It is thus that personalization and premium-price reductions actually go hand in hand; rather than requiring two strategic thrusts, they can be part of one IoT-enabled customer-centric approach. These two Ps – price and personalization – are the two main advantages enjoyed by insurtechs, so insurers looking to the future, and to future-proof themselves, should definitely be taking an interest in IoT.

See also: Global Trend Map No. 15: Products  

While still only a minority of insurers in Europe have a strategy on usage-based insurance (UBI), this is in line with our other key regions; we expect to see this percentage rise dramatically across the board over the coming years. Auto, home and health are the leading lines across all our regions in terms of the expected IoT benefits, though the benefits of sensor networks in other lines should not be ignored.

Auto is an example of a line that has already been extensively transformed by IoT in the form of telematics. This area is home to solutions of varying sophistication, from smartphone apps to “black boxes” built into cars. Depending on the richness of data coming from in-car sensors, a variety of insurance use cases and business models are enabled.

The one that most immediately jumps to mind is UBI, incorporating dynamic pricing and driving behavior modifications. By making customers’ premiums dependent on how they drive, insurers both encourage better driving (which is good for everybody) and lower the cost of premiums, which helps to get more people, more affordably, on the road.

“The joy of all insurance is the same: the financial desire of the insurance company is completely aligned with customers’ needs. So nobody wants to have crashes! The consumer doesn’t want to have crashes, and the insurance company would like to reduce the risk on their books,” Halkett says. “With telematics, you really get to do that; it’s not only that you get to understand the risk of the individual consumer, it’s that you get to influence that risk, so the risk that you write does not have to be the risk that you keep.”

Even if premium prices remain the same, a premium with the potential for reduction is an infinitely more saleable proposition than the fixed-price alternative. And it is not solely up to drivers to educate themselves – insurers can take a much broader tutelary role by communicating tips and advice on a continuing basis. In this way, companies like Insure The Box are much more than just providers of telematics.

“We take customers, and then we make them safer drivers,” Halkett says, “and we do that via communications, online portals and via direct messages to the consumers, all the time rewarding safer driving behaviors.”

From language courses to money-saving apps, gamification has proven itself time and time again to be a powerful force for bringing about positive outcomes, and the case with telematics is no different. The key is to engage the customer via whichever touchpoints are the most natural and offer the highest level of trust and engagement.

Insurers should not therefore conceive IoT solely in terms of inbound traffic (data traveling from customer devices to their back office) but also as a means of achieving higher engagement for their outbound messaging (from insurers to customers). Halkett points out the potential of connected home devices, such as the voice-enabled Amazon Alexa, for initiating contact with consumers in a world where “mobile” refers to much more than portable telephones.

“Automated data capture through IoT does not just help insurers preempt claims, it also helps mitigate losses and improve customer service when claim events do occur, by rooting out fraudulent or inflated claims and enabling faster turnaround of legitimate ones. Provided customer privacy concerns form part of the discussion, there is no reason why connected claims cannot be a win-win for everyone.” — Mariana Dumont, head of new projects at Insurance Nexus

Beyond facilitating UBI models and continuous customer engagement, IoT solutions also give insurers detailed insight into what is actually happening on the ground on a second-by-second basis. Admittedly, this requires a lot of data and sophisticated models and, in telematics for example, is certainly a lot more than just detecting high G-forces.

Indeed, Halkett recounts an example from the early days of Insure The Box, where a spike in G-forces triggered an accident alert but actually turned out to be nothing more than the forceful slamming of one of the car doors. Nowadays, though, the company can reliably detect the telltale signs of accidents and other claim events from the incoming stream of black-box data in real time and react accordingly. With motor accidents, speed is of the essence, so being able to dispatch an ambulance instantaneously to the scene can be the difference between life and death: the ultimate in claims loss mitigation.

This data is also useful in the inverse case, where insurers want to demonstrate that an accident has not in fact occurred (and that, therefore, an associated claim is fraudulent).

The business case for IoT in claims is self-evident; as we recall from our Internet of Things post, a majority of our respondents selected claims as one of the areas best-placed to benefit from IoT. Further still, in our stats on claims, a majority of respondents believed that IoT would affect the claims department, and a majority also acknowledged having a high level of focus on claims loss mitigation.

The immediate access that IoT gives to data, which does not have to be sought out and gathered but simply ends up in insurers’ back-end systems as a matter of course, is driving the development of automated, or straight-through, claims-handling. We found a reasonable incidence of automated claims-handling among our European respondents, whose claims departments also expressed a strong focus on customer experience.

In the context of continually expanding horizons, we asked ourselves what the next stage of dynamic real-time insurance might be. Continuing this section’s particular focus on the auto line, we of course cannot ignore the amount of chatter around autonomous driving and what it means for the insurance industry.

While some believe that autonomous driving may eliminate the auto line, the truth of the matter is that human error is not the sole source of catastrophic events on the road.

“You don’t just eliminate all risks by making your vehicles autonomous,” Halkett points out.

“And that’s before you even start to think about what you’d need to do to have an entirely autonomous ecosystem. The environment is going to have to have so many significant changes before it can support current autonomous functionality, and the journey between now and 100% autonomous – even if that does happen, and it’s not certain it will – is not straightforward at all, and there will be lots of different forms of mobility between now and then.”

Halkett underlines rural and city driving as two key hurdles to be overcome on the way to full autonomy. For now and the immediate future, she believes there is food for thought enough in the intermediate stages between today’s conventional cars and the putative point of total autonomy in the future:

“We’re going to have multiple different vehicles, some with ADAS systems, some with minor help for driving in there and some with barely more than a glorified cruise control, up to fully autonomous vehicles, all on the road at the same time with drivers behind the wheel with very differing levels of experience and expectations for that driving, too.

“And what they are going to want from their insurance is a seamless product that just covers them for whatever they’re going to do – that is the reality of what the insurance industry is facing over the next 10-20 years.”

Instead of focusing exclusively on different degrees of autonomy within what is essentially a private ownership paradigm, Halkett believes insurers should also be looking laterally, at emerging mobility formats:

“I would be looking at things like ride-sharing, things like shared ownership and different forms of vehicles, before we ever got to the point of complete autonomy,” she concludes.

Driving Connected Insurance Models Across the Continent

Our exploration of Insurance IoT and telematics has so far leaned toward the U.K. But what sort of progress have new-age insurance models made across the continent as a whole?

Another country that currently boasts plenty of IoT buzz is Italy. Our influencer Matteo Carbone, of the Connected Insurance Observatory, draws attention to the telematics leadership shown by the Italian market, citing the nation’s 2.4 million connected cars (as of the start of 2016), compared with 3.3 million in the U.S. and 0.6 million in the U.K.

However, to compare IoT progress in blanket fashion across different national markets and insurance lines can be like comparing apples and oranges with pears and plums, given the uncategorizable variety of the problems IoT solves and the sheer number of different business models it enables.

In Italy, for example, telematics boxes have been mandatory in all new cars for several years now, as a result of legislation aimed at reducing fraudulent whiplash claims. Such legislation does not currently exist in the U.K., but, as we have pointed out, the U.K. telematics market could be considered a front-runner in other respects.

“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.” — Matteo Carbone, founder and director at Connected Insurance Observatory

Leaving aside the question of who leads and who trails, one thing is certain: that IoT-based solutions for insurance, both within the auto line and beyond, are only going to become more prevalent as the unit cost of sensors comes down and the demonstrable savings from the technology rise further.

“The cost of technology is coming down all the time, and customer understanding is going up,” Halkett says. “So the business model becomes easier and easier for a wider portion of the market. Consumers in other countries will more readily adopt these sorts of technology-led products, and insurance markets are becoming more sophisticated, as well.”

To continue with our auto focus, we can see how the advantages of in-car telematics – whether we are talking road safety, lower premiums or counter-fraud – are advantages for people of every age in every market, so there is no fundamental limit on the applicability of the technology.

“At some point in time, everyone is going to get connected. People will feel more empowered as they have a greater control on preventing risk events. This will be the origin of the new business model. In some countries, insurers don’t have a high level of trust because they are establishing conditions and changing prices, and the relationship is only one way. This is going to change, because in the future clients will have their data as an asset.” — Cecilia Sevillano, head of partnerships, Smart Homes, at Swiss Re

This is not to say that the specific use cases will be the same everywhere. Halkett believes that the technology will bring about a bigger quantum leap, from a road-safety and world-health point of view, in those countries where infrastructure currently lags.

“I think when you stand back and start looking at the benefits of telematics, there’s an awful lot that could be used in different markets for very different reasons,” she says.

“For example, if you look at the accident alert service and it tells you when someone has had a serious road accident – that would be so useful in rural areas in poorer countries which perhaps do not have the same infrastructure or the same emergency services as we do in the U.K. And to have that pinpointed alert would be even more valuable in countries where not everyone has a mobile phone and hospitals are perhaps less accessible.”

This is a classic case of high-end technology bringing the full benefits of insurance to the lower-end market, a recurring theme across our other regional profiles, as well; underdeveloped markets, especially when they lack the burden of legacy systems, have a chance to catch up with and even leapfrog more established markets.

Margaris believes that this will be the case, not just for IoT adoption but for innovation more generally, in those parts of Europe that are currently less developed.

“The truth of the matter is that in less affluent countries you will see a faster adoption of insurtech because it’s cheaper and more personalized than what the incumbent insurance players offer,” he says. “Furthermore, I believe that the richer the countries, the less there is a need by consumers to adopt the cheaper business models that are offered by fintech and insurtech startups. So, therefore, I would say, the more developed the country, the longer it will take for innovative technology and business models to be adopted.”

Looking beyond Europe for other emerging markets with leapfrogging potential, Margaris points to Africa as a ready-made example, referring specifically to mobile technology:

“Look at Africa, where with a normal phone – not even a smartphone – you can already transfer money, you can do anything,” he comments. “Because with low incomes, you will find a greater need for innovation.”

This forms an unfavorable contrast with some established markets, and Margaris sees his native Switzerland as a case in point:

“In Switzerland, where I live, there is a lesser need for innovative business models because people have enough money. Not everyone is well-off, of course, but in general, there’s such a comfort level that people say, the status quo works well, so we don’t need to go for fintech or insurtech solutions that are or might be cheaper or better.”

Margaris picks out insurtech and AI as two growth areas towards which sizeable investments are currently flowing, with London and Berlin being the premier European hubs. As for how the insurer-insurtech confrontation will play out, he points to the case of fintech – which has a couple of years’ lead on insurtech – as a likely indicator of how things will go here as well.

See also: Global Trend Map No. 16: Regions  

“If we look at fintech, which is in a more advanced phase than insurtech, you see a clear trend of cooperation, meaning partnership or outright buying by incumbents. I think this will also happen to the insurtech space,” he explains.

While this prognosis (cooperation winning out over competition) is generally positive for insurers, Margaris believes that in some ways insurers have it more difficult than banks:

“Banking has the same issues, but banks are much more experienced with customer interaction on a daily basis, while, with insurance, usually you talk to an insurance agency once a year, like when you have a claim. So legacy technology and the insurtech industry as a whole is worrisome for the insurance industry, but it’s also an opportunity.”

“Insurtech will offer new ways to harness IoT potential, with use of AI and machine learning. Through partnerships with these startups, incumbents can definitely accelerate their modernization. And this is a win-win situation as insurtechs have technological expertise and, in return, insurance leaders can provide them the one resource which they lack: money.” — Minh Q Tran, general partner at AXA Strategic Ventures

This compromise between incumbents and new entrants, at least for now, stems from the fact that neither has all the ingredients to win outright. While we pointed out the two trump cards of insurtechs in Part I our our Europe profile (price and personalization), let’s now examine the advantages enjoyed by incumbent insurers.

“Insurers have the customers, they have the money and they have the brand,” Margaris says. “They can adapt quickly and say: OK, let’s take the cutting-edge technology, and we can make it happen.”

He gives the pharma industry by way of an analogy:

“The pharma industry spends billions on R&D and innovation. At the end, most of them – the big pharma players – who have much more experience in this field of innovation, they buy biotech companies and integrate. Because what the big guys do well is selling and distribution. If you give an insurance company a great product, they know how to make the most out of the potential. Incumbents and insurtech startups have to play to each other’s strengths.’

Halkett agrees that traditional insurers have plenty to offer as part of any insurance model of the future, in particular the sheer volume of data, insights and expertise that they have at their disposal. However, she questions whether today’s incumbents are structured in such a way as to make the most out of these assets.

There may need to be a move away from a centralized model toward more of an ecosystem play, with the insurer overseeing different components of a technology stack. Insure the Box is itself an example of this, being owned as it is by Aioi Nissay Dowa Insurance Europe, which is the ultimate bearer of risk and also has a long-standing partnership with automotive OEM Toyota.

“The insurtech discussion all too often centers on the premise that shiny new startups will win at the expense of the tired old incumbents. Many see the battleground between them being at the distribution end of the customer journey. For me, the insurtech opportunity extends all the way along the value chain.” — Nick Martin, fund manager at Polar Capital Global Insurance Fund

At the end of the day, it is not a case of either/or with the partnership and insurtech-domination models, and we are likely to see some insurtechs eventually make it big alongside insurer-insurtech tie-ups.

“It will happen. We’ve seen the Googles, Amazons, Facebooks of this world, and we’ll see the same thing occur in insurtech, whereby some will become huge players. However, I believe we will see more partnerships or acquisitions because it’s very hard to scale,” Margaris concludes.

As ever, you can read ahead straight away and gain access to all our global trends, key themes and regional profiles, by downloading your complimentary copy of the full Trend Map whenever you like.

Global Trend Map No. 15: Products

Following on from last week’s post on Regulation, it is time for our final ‘Key Theme’, on Product Development, after which we move on to our Regional Profiles. Product development is the bread and butter of the insurance industry – the question is not whether to build products but rather which products will best serve the needs of today’s increasingly demanding insurance customers.

What has become clear across this content series is that product development can no longer occur in silos, with one function creating products for another function to sell. Insurers are determined to make every moving part of their business serve the customer, and what this means in concrete terms is that every division of the business has a contribution to make toward the creation of customer-centric products.

The line between product developers and product salespeople, as in so many industries, is therefore becoming blurry. In this sense, Product Development is the central node into which feed all our other ‘Key Themes’ (Analytics & AI, Digital Innovation, IoT, Marketing & Customer-Centricity, Distribution, Claims, Fraud, Cybersecurity, Investment Management and Regulation). And all the indicators suggest that insurers are only just beginning to tap the opportunities for technology-driven product creation.

“The biggest problem these days is, although everybody is talking about Digitisation and Disruption and are modernising their core systems with huge investments in order to support these new trends, the underlying products are not yet ‘digital ready’ – even new ones.” — Oliver Lauer, former Head of Architecture / Head of IT Innovation at Zurich

In this installment, we start by looking at where innovation is occurring (by insurance line and insurance department) before considering some of the broad trends in product development – from bundling and upselling to diversification and Usage-Based Insurance (UBI). The following stats and perspectives are taken from our Global Trend Map; a full breakdown of our survey respondents, and details of our methodology, are included as part of the full report, which you can download for free at any time.

So first up: which departments is product innovation currently coming from? …

The three highest-scoring departments were Underwriting (with 70% of respondents naming it), Pricing (55%) and Marketing (54%). Other areas that warrant mention were Actuarial (51%) and Distribution (36%). We noted in our earlier post on Marketing & Customer-Centricity that the roots of today’s consumer-led disruption are in the rise and ease-of-use of new distribution channels – so insurers that leave Distribution outside of their product discussions do so at their peril!

See also: Next for Insurtech: Product Diversity  

Which insurance lines are driving the greatest degree of product innovation?

In addition to seeing product as department-driven, we also investigated the extent to which it is line-driven. The chart below shows Auto (voted by 56% of respondents), Home (45%) and Health (41%) to be the three lines experiencing the most product innovation (according to carriers taking our survey). This is corroborated anecdotally by the sheer number of in-market IoT products we see across these fields, from in-car telematics through to smart-home controllers and connected-health armbands.

Life and Commercial are relative laggards in this regard, although we do believe there is ample opportunity in both these areas. This may follow the same pattern we identified with IoT (itself an abundant source of product innovation), where we saw platform implementation in Commercial currently trailing but quickly drawing level with other lines (see our earlier post on IoT). Regional trends for this question warrant some high-level comment:

Health is a substantial driver of product development for carriers in Asia-Pacific and Europe. In North America, however, it appears relatively insignificant

  1. Life appears tagged to Health in terms of how it trends regionally and is consistently the least innovative of the lines#
  2. P&C/General, Commercial and Home insurance are relatively consistent across our different geographies
  3. Auto is ahead among carriers in Europe and Asia-Pacific compared to North America

The relative prominence of the different lines, as well as the broad regional tendencies outlined above, remain the same when we widen our scope beyond carriers to consider the industry as a whole.

“The biggest risk the insurance industry faces when it comes to innovation is not taking enough risk. True innovation requires experimentation, which most of the time results in failure. Insurance organisations are built to eliminate failure from their culture. Without failure, you can have no innovation. CEOs demand a positive Return on Investment (ROI), they now need to seek out and understand what it means to have a positive Return on Risk (ROR).” — Steve Anderson, President at The Anderson Network

Human hand pointing at touchscreen in working environment at meeting

Key trends in the development of products

It’s clear from this section so far that product development is a strategic priority for a diverse spread of departments and lines. But how are insurers actually going about product development on the ground? Let us now present our trends on a number of product approaches that we identified among our carrier respondents: product diversification, Usage-Based Insurance (UBI) and product bundling/upselling.

“You don’t really have to invent new products in my eyes, you just have to make the existing ones easier and more ‘digital native’. Today’s products have been and are still created for non-digitals. And this situation not only makes new customer-facing digital processes complicated, it also makes core replacements and automation more complicated and expensive than necessary.” — Oliver Lauer, former Head of Architecture / Head of IT Innovation at Zurich

i) Product Diversification

The pace of change in the insurance sector is picking up, and many ecosystem players are quickening their iterations both on new and existing products in a bid to stay relevant.

76% of (re)insurers are pursuing product diversification as part of their organisations’ growth strategies…

This move towards diversification is not limited to any one kind of insurance market but is driving insurance growth all around the world.

It is naturally very important for insurers looking to break into totally new markets, as is the case in many developing economies, where traditional insurance products may be inappropriate for lower-income demographics (microinsurance being a case in point).

In mature markets, growth will come primarily from addressing existing demographics with more tailored products to fill in under-penetrated lines and segments; there is also the perennial threat that existing customers, tired of products that are suboptimal, will churn to competitors and new entrants who can offer better-suited ones. Whatever the market conditions, by trialling multiple products, insurers can both broaden their appeal and arrive at optimal products more quickly.

ii) Usage-Based Insurance (UBI)

The emerging generation of insurance products differ from those that have gone before in several key ways. One is the on-demand or usage-based component of new products – so that, rather than having idle and inflexible policies that subject the policyholder to the Tyranny of Averages, consumers can enjoy insurance-as-a-service.

32% of insurer respondents have a Usage-Based Insurance (UBI) strategy…

This trend towards Usage-Based Insurance (UBI) is a global one, and there was no significant regional variation across our three key regions. More information about UBI models can be found in our earlier Internet of Things section and in our section on Europe in the upcoming Regional Profiles.

“Most of the innovation in product development will happen where smart connected devices drive new business models based on behavioural data. I particularly expect improvements in pricing. UBI is a bigger game changer than covering events that are not insured today. In any case, there will be a huge need to understand, measure and manage rational and irrational behaviour.” — Andreas Staub, Managing Partner at FehrAdvice

iii) Product Bundling and Upselling

A key trend we have witnessed in other B2C industries, like Amazon and Netflix, is the rise of the recommendation engine. This is not just a core component of the customer experience but also an important enabler of new business, insofar as it lets companies push new products to customers that they are actually likely to want and to find useful. We also see this in insurance, in the form of data-driven product bundling and upselling.

47% of insurers have a strategy to bundle and upsell products based on customer lifestyle analytics…

Insurance has always had relatively few customer touchpoints, and even though insurers are now seeking to increase that number, insurance remains a product that is sold rather than bought. Taking full advantage of every selling interaction they have is therefore the surest way for insurers to increase their customers’ lifetime value.

Bundling and upselling products is – like diversification – a strategy with strong applications regardless of what sort of insurance market you are operating in. Whether your focus is to chase new customers or to retain existing business, it is better to reap maximum reward on each customer from the outset than to re-engage them (perhaps unsuccessfully) later on.

“The cost of customer acquisition is a critical metric for marketing efforts. Lifetime customer value also helps us know how much we should be spending to acquire as well as how we should expand our share of wallet within the products we offer.” — Michael Shostak, SVP and Chief Marketing Officer at Economical Insurance

See also: Insurance Product Development (Excerpt, Part 3)  

There are obviously many aspects of product development beyond diversification, UBI and bundling/upselling which we were not able to investigate directly. For this reason, we asked our carrier respondents to indicate additional product-development talking points in open text. Two key points that emerged across their comments were:

  1. The need to increase the service element of products, to keep up with evolving consumer needs and to drive customer retention
  2. The problem of constrained development resources, especially in expert personnel and IT

Now that we have worked our way through all our Key Themes, it’s time to move on to our Seven Regional Profiles, exploring on a geographical basis the stats and perspectives presented in the series so far. If you’d like to access all our Regional Profiles straightaway, then please feel free to skip ahead and download the full Trend Map here (it’s free!).