Tag Archives: property and casualty insurance

Insurance at a Tipping Point (Part 3)

This is the last in a series of three articles. The first is here. The second is here.

From the impact of analytics, digitization and more exacting customer expectations to the disruptive effect of regulation, geopolitical instability and two-speed global economic growth, the insurance marketplace will look very different in 2020. With the industry at a tipping point, the future belongs to businesses that can make sense of the gathering transformation and act strategically rather than simply reacting to events.

While some of the drivers of change in the insurance industry are common to all business lines, we believe that the impact will be seen in different ways and occur at different speeds. So what are the implications for each key insurance segment and how can businesses capitalize on them?

Property and casualty personal lines

  • A combination of automated underwriting and competition from aggregators and new entrants will drive down prices and accelerate the commoditization of motor, property and other core business lines. At the same time, new opportunities
 will continue to open up through new information-based models, both within traditional areas of insurance coverage and new fields, such as maintenance and concierge services. This “home intelligence” could pave the way for a broader range of concierge services built around a combination of customer knowledge and sensor technology.
  • Some customers might go further by giving the insurer – or information company, which might be a better description for this evolving business model – access to much of their personal data, which the company would use to tender for a range of personalized services on customers’ behalf.
  • Pressure on costs will make agency channels less economically viable and could lead to digital becoming increasingly dominant. But there will continue to be 
a strong role for agents in helping people to understand and manage what can often be complex protection needs. People may own more but have less time to manage the risks, be this damage, theft or breakdown, making the agent a valuable partner.
  • Opportunities for partnerships exist with travel companies and motor manufacturers, with insurance forming part of a bundled service. However, such partnerships could limit the insurer’s opportunities to build customer relationships and take advantage of policyholder data.
  • Data from car and equipment diagnostics, along with user behavior, will be exchanged with manufacturers and repairers, breaking down commercial boundaries and opening up further opportunities in design and maintenance. Further instances of this new ecosystem of information and assets include the integration of home sensor data with utilities’ and emergency services’ systems.
  • We estimate that the reduction 
in accident, personal injury and
other auto-related claims as advanced driver assistance systems (ADAS) technology becomes more widespread could reduce annual auto insurance losses in a developed market such as the U.S. by at least 10% by 2025. But the risk and claims profile would be more complex as the driver switches between self-driving (and hence driver liability) on the one side and ADAS driving (and hence product liability) on the other. While there 
are regulatory prohibitions on autonomous driving at present, it may eventually not just be permitted in many countries, but even be obligatory, especially in high-risk situations.
  • Revenue models will shift from premiums to premiums plus subscriptions in offerings such as maintenance, prevention and vehicle management.

Commercial lines

  • As the risk environment and client demands continue to evolve, commercial lines insurers have considerable growth opportunities in areas such as cyber risk and supply chain risk. Holistic analyses open the way for broader risk prevention and mitigation discussions with both agents and policyholders.
  • Alternative risk transfer will continue to develop and expand, moving beyond catastrophe into areas such as cyber and supply chain risk.
  • Advanced analytics that help to quantify exposure change patterns could help to mitigate the frequency of accidents, business interruption and other losses.
  • Given the potential for sharply rising losses and ever more complex loss drivers, there will be a growing need for coordinated risk management solutions that bring together a range of stakeholders, including corporations, insurance/reinsurance companies, capital markets and policymakers across the globe. For some of these risks, such as cyber risk, some form of risk facilitator, possibly the broker, will be needed to bring the parties together and lead the development of effective solutions.

Life, annuities and pensions

  • The focus of life coverage will shift from life benefits to promoting well-being and quality of life. This new model will combine digital data and partnerships with gyms, diet and fitness advisers and healthcare providers. Well-being benefits are likely to appeal to typically affluent segments that tend to focus on staying fit and healthy, including both younger and active older customers. For a sector that has had significant challenges attracting young, single, healthy individuals, this represents a great opportunity to expand the life market, as well as attract older customers who normally would think it is too late for them to purchase life products.
  • Advanced analytics will enhance
 the precision, customization and flexibility of financial planning and risk protection, paving the way for solutions that easily adapt to life changes and stretch beyond insurance to cover a comprehensive range of financial needs.
  • Sensor technology will lead to increasing integration between insurers and healthcare providers, marked by information exchange, better understanding of risks and costs and the potential to not only make cover for people with pre-existing conditions more accessible but also improve health and prolong life.
  • Life coverage will shift to shorter-term contracts. At present, typical life insurance contracts are for the long term. However, this is a deterrent
 to most customers today. Moreover, behavioral economics shows us 
that individuals are not particularly good at making long-term saving decisions, especially when there
 may be a high cost (i.e. surrender charges) to recover from a mistake. Therefore, individuals tend to delay purchasing or rationalize not having life insurance at all. With well-being benefits, contract durations can be much shorter – even only one year.

To help dramatize how the different markets may look, here are three possible scenarios:

Scenario One: Property and Casualty in 2025

All-’round prevention and protection

“I got a text in the morning saying there’s a potential fault with the boiler. But by the time I got home it was fixed,” says Akil Badem from Istanbul. “I don’t worry about breakdowns anymore, because I know that my insurer will have it all sorted out.”

Akil’s boiler, security and other home equipment are all connected to automated sensors that optimize performance and minimize fuel usage. The connected devices can also detect potential faults and, if they can’t be put right automatically, alert the nearest repair and maintenance team. No more breakdowns, no more waiting. The comprehensive coverage provided by market leader, There When You Need It, also takes care of all Akil’s transport requirements, including best-price bus and rail fares, a car when he needs one and insurance that automatically adjusts to how far he travels, his speed, the road type and other risks, and whether he or the automated driving system is in control of the car. “It’s just so easy. A couple of clicks on my mobile, and it’s all up and running. I can’t believe how people got along before,” he says.

Grace Nkomo, CEO of There When You Need It, says, “In 2015, we saw that everything was changing in our marketplace, be this how auto insurance is underwritten or the possibilities opened up by the Internet of Things. We knew that if we use the technology to change how we connect with and serve our customers, we could create an early-mover advantage that we’ve maintained ever since.”

Scenario Two: Life, Annuities and Pensions in 2025

Fit for the future

“I’ve never felt better,” says Karen O’Neil from Seattle. “Every time I go to the gym, the cost of my health insurance and life coverage comes down. My insurance company even got me a great deal on trainers.”

Karen’s lifestyle, health and financial planning coverage is designed to make it easier to stay healthy, manage her finances and plan for the future. A wearable sensor monitors key aspects of her health and alerts her to fitness advice and any medical issues that need following up. The healthcare and life insurance package includes tie-ups with gyms, well-being counselors and sports-wear providers, putting the emphasis on how to stay fit and healthy, as well as medical and life benefits when they’re needed. There is also a savings plan that puts aside any money left over from the rent, food and other spending and automatically adjusts investments to market movements and Karen’s investment goals. “At 29, I thought that these kind of schemes were for people a lot older and wealthier than me,” Karen says. “But my personalized package helps me to feel good now – and I know I can adjust as my needs change.”

Scenario Three: Commercial Insurance in 2025

Advanced risk detection averts cyber attack

Remote monitoring centers operated by a major insurance company have thwarted a coordinated attack on a retail group’s online network. Cyber gangs were planning to bring down the group’s server and then hack into the accounts of its millions of customers. The insurance company’s monitoring centers were able to not only detect the breaches but protect the server from damage and ensure business carried on as usual.

The cyber protection forms part of a comprehensive “business as usual” risk management package, which automatically anticipates and responds to any problems in supply, customer service and reputational integrity. The service is designed to zero in on any threats and take preemptive action. Advanced risk evaluation and pricing analytics enable the insurer to take account of multiple existing and emerging risk factors and determine a dynamic price based on the cost of reducing and mitigating the risks, as well as transferring the risks in alternative markets. Monitors continuously track real-time events (e.g. geo- political, technology, environmental and social events) around the world to build an accurate and evolving qualitative profile of the exposures facing clients and how they can be managed.

How to Design Your Strategy to Face the Future

For many – if not most – insurers, this changing market is likely to require a significant change in products and the redesign of long-established business models. This will not be easy. It’s important to develop a clear vision of where and how the business intends to compete.

For some, it could include a wholly new value proposition. For life insurers, this could include a broader and more compelling offering built around quality of life and well-being on the one hand and the targeting of untapped segments on the other. For P&C companies, this could include assessing opportunities to enhance data and risk monitoring and looking at how this information could apply to a broader range of risk-prevention and protection needs.

Having established strategic intent, it’s important to determine how to target individuals through different messages and channels, simplify product design and re-engineer distribution and product economics. Further considerations include how to reshape the underwriting process to capitalize on new analytics and sensor information, as well as steps to make the sales and policy administration process more straightforward and real-time.

Such is the speed of market developments that it’s virtually impossible to predict what customer demand will look like in a few years’ time. Old approaches to strategic planning and execution may be too slow to keep up with the pace of change. Instead, we propose a four-step LITE (Learn-Insight-Test-Enhance) approach to marketing, distribution, product design, new business, operations and servicing.

  • Learn your target segments’ needs
  • Build the models that can provide insight into customer needs
  • Test innovations with pilots to see whether they resonate with customers and refine the value proposition
  • Enhance and roll out the new value proposition for specific segments

Using this approach, developments that would have taken years can be brought to market in a matter of months, if not weeks, and then assessed, adapted, and discarded/expanded to meet changing market needs. The result will be a much faster and more responsive business, capable of keeping pace with customer demands and capitalizing on unfolding commercial opportunities.

In conclusion, the future should be bright for insurers. They have opportunities to engage more closely and become a much more valued and intrinsic part of people’s lives, be they individuals, families or businesses. Insurers will have more information upon which to base smart solutions and serve a broader range of needs.

The challenge is how to make sure insurers capitalize, as the marketplace will be much more open and potentially less loyal.

For the full report from which this article is excerpted, click here.

$1.2 Trillion Disruption in Personal Insurance

Most of us don't think much about insurance. That's by design, of course. Insurance is supposed to be a safety net that affords us the leisure of not thinking about it. Unless of course, we have to. That generally happens about once a year when we're reacquainted with our premium. Ouch. According to statisticians, most of us will also have to think about our insurance about once every seven to eight years when we'll encounter a loss of some sort. Another ouch.

My insurance is pretty confusing. I pay for coverage of my house – a fairly precise calculation based on its quality, size, age, materials, etc. I get a guarantee that, if I keep paying my premium, my home will be covered for its replacement costs. That's pretty reassuring. But then it gets a little weird. I get a “blanket” (insurance-speak is very comforting), which is really a formula that assumes that all the stuff I own is worth, um, somewhere around 50% to 70% of the value of my home. Huh? Maybe there's a bit of science to this, but surely there's a lot of guess…and, according to research, about 39% of the time the formula is just wrong. (As one insurance CEO recently confessed to me, most folks are probably 50% underinsured). The complications go on: If I own something really valuable, some bauble or collectible, well, that has to go on a list of things that are really valuable, and those things get their own coverage. Then, so my stuff continues to be well-protected, I have to re-estimate the value of those things from time to time, or employ an appraiser. What's more, if I buy something or donate something I own, or if any of my things goes down or up in value for whatever reason, my insurance doesn't change — because my provider doesn't know about these changes. And, if you've ever had a claim to file, the process starts with the assumption of fraud, with the burden of proof borne by the policyholder, because most people don't have an accurate accounting of their possessions and their value. Still another ouch.

So while I'm not supposed to be thinking about insurance, maybe I should be paying closer attention.  

Change is coming like a freight train, and its impact has the potential to shake one of the world's largest industries to its core. For a little perspective: The property and casualty insurance industry collected some $1.2 trillion (!) in premiums in 2012, (or about twice the annual GDP of Switzerland). 

At the core of the P/C insurance enterprise is (and I know I am simplifying here) the insurance-to-value ratio, which estimates whether there's enough capital reserved to insure the value of items insured —  if values go up, there'd better be enough money around in case of a loss. All good, right? Except that for as long as actuaries have been actuarying, the value side of that ratio has been a guess — especially for personal property (the stuff I own other than my home). So, if I forget to tell my insurer about something I bought, or if I no longer own that painting, watch, collectible, antique; or if the precious metal in my jewelry has increased…then what? Am I paying too much, or am I underinsured for the current value of the things I own? Of course, these massive companies make calculated allowances for the opacity…but these allowances also cost us policyholders indirectly in increased premiums, and the inefficiency costs the insurer in potential returns on capital. 

The coming changes can be summarized in terms of three trends. First is the expectation of the connected generations, now entering their most acquisitive years and set to inherit $30 trillion of personal wealth. Second is the connected availability of current data about the value of things. Third is the emergence of the personal digital locker for things.

Data, data! I want my data! — the expectation of the connected generations.

If they're anything, the connected generations are data-savvy and mobile. If you’ve shopped for just about anything with a Millennial recently, you’re familiar with their reliance on real-time data about products, local deals, on-line values and even local inventories. (I was with one of Google's brains, and he showed me how retailers are now sending Google local inventory data so now it can post availability and price of a searched-for item at a local store). Smartphone usage is nearly 90% for Gen Xers and Millennials, and data is mother's milk to the children of the connected generations who are being weaned on a diet rich with direct (disintermediated) access to comparisons, descriptions, opinions, crowd-sourced knowledge and even current values. The emerging generations rarely rely on the intermediation of experts (unless validated on a popular blog with a mass following) and are not likely to be satisfied with an indirect relationship with those affecting their financial health. Smartphones in hand, depending on data in the cloud, they will demand and receive visibility into the data shaping all their risk decisions.    

And here's where the insurance revolution will begin: A connected generation that is apt to disintermediate and has access to real-time info on just about any thing will demand that they insure only what they own (bye bye, blanket); that their insurance should track to real values, not formulaic guesses; and that they have the ability to reprice more frequently than once a year. 

The time is coming for variable-rate insurance that reflects changes in the values of items insured and is offered on a real-time basis for any item that the owner deems valuable. 

The price is wrong — the real-time valuation of everything.

Over the past few years, several data services have sprung up whose charters are similar: something like developing the world's largest collection of data about products — their descriptions, suggested retail price, current resale value, user manuals, photos and the like. No one has yet dominated, but it's early yet, and someone (or probably a few) will conquer the objective. Similarly, there are a few excellent companies that are collecting and indexing for speedy retrieval the information about every collectible that has been sold at auction for the past 15 years. I know something of these endeavors because our core product relies on the availability and accuracy of these data providers to collect the values (and other attributes) of the items people are putting into their Trovs (our moniker for the personal cloud for things). It is only a matter of time before we will be able to accurately assign a fair market value to most every thing — in real-time and without human intervention. This real-time value transparency will transform the way that insurance is priced, and how financial institutions view total wealth.

My stuff in the clouds — the automated collection and secure storage for the information about my things.

Within 12 to 24 months, connected consumers will embrace applications that will automatically (as much as possible) collect the information about all they own and store it in a secure, personal cloud-hosted locker. These “personal data lockers” will proliferate because of their convenience, because of real financial incentives from insurers and other service providers and because data-equipped consumers will have powerful new tools with which to drive bargains based on the data about everything they own. These new tools will pour fuel on the re-invention of insurance because all the information needed to provide new types of insurance products will be in the personal cloud-hosted data locker.

Progressively (pun noted, not intended) engineered insurance products that account for the connected generations' expectation of access to data, the abundance of data about products and collectibles and the active collection and accurate valuation of the things people own may turn the 300-year-old insurance industry on its head. Doubtless, the disruption will leave some carriers grappling for handholds and wondering how they could have insured against a different outcome.

This article first appeared in JetSet magazine.