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Boldly Insure Where No One Has Gone

Executive Summary

Space today has become big business that will only expand thanks to the excitement and focus driven by the likes of Bezos, Branson and Musk.

In the last decade, the space sector has seen over 50% growth in commercial space initiatives. The commercial portion of the space ecosystem saw $200 billion of investment in 1,500 companies.

The marketplace for space insurance today revolves around policies for physical assets, in particular satellite coverage. Coverage includes pre-launch testing and facility exposures, launch and orbital protection, as well as coverage for ground support services. For the nascent space tourism industry, the current practice is that all passengers sign a waiver of liability and assume full risk themselves. This is serving as a bridge until the insurance market can provide a solution.

An emerging insurance concern is that current policy language may not be contract-certain regarding space exposures. Even though there was never intent to provide space coverage, gray areas create Black Hole Risk. Agents, brokers, carriers and policyholders who may soon be participating in the space ecosystem must all pay attention.

Insurers need to prepare now for the exponential growth in this market segment and the growing needs of individual and corporate customers.

A Call to Action for the Insurance Industry

More crewed orbiters, payloads and satellites will launch, and space station construction is underway. By 2022, private citizen expeditions to the International Space Station (ISS) are planned, and in 2025 mobile space equipment will be launched. Space commercialization is not a theoretical concept, it is a reality. Insurance carriers must take the following steps now:

  • Review policies for Black Hole Risk.
  • Modify existing policies and procedures to ensure underwriting intent is clear for current products.
  • Review legislation to determine where commercial insurance may be needed.
  • Engage with and listen to the thousands of private entities providing infrastructure, distribution and application solutions for space as well as their brokers and agents to understand their future product needs.
  • Determine long-term capital planning to sustainably enter the marketspace.
  • Examine how participation in space insurance aligns with corporate environment, society and governance (ESG) goals.
  • Partner with experts in science, technology, engineering and mathematics (STEM) and health fields as well as reinsurers to build actuarial data and insurance models to create products.
  • Work with regulators to be at the forefront of shaping space insurance paradigms.
  • Educate and upskill underwriters, adjusters, brokers and other stakeholders for this new insurance ecosystem revolving around space commerce.

A Galactic Opportunity

The present insurance market generates $6.3 trillion in annual premiums (life & non-life) supporting a world economy of $94 trillion. The space economy is expected to reach $1 trillion by 2040, and the colonization of one million people in two centuries has been credibly proposed. With all the same insurance needs on Earth being required in a new ecosystem, the celestial insurance market could reach $67 billion GWP. This is a once-in-a-generation opportunity for the insurance industry, and preparation and leadership must occur now.

Introduction

Exploration is one of the loftier birthrights of humanity, and the desire to discover the uncharted, a driving motivation. Over time, we’ve emerged from the cave, crossed vast oceans and now we reach for the stars. The modern insurance industry has played a critical role in this bold and adventurous heritage. Since the humble beginnings in a small coffee shop in London, insurance has supported those willing to leave safe havens and venture into the tempestuous unknown.

66 years ago this month, the first space race began when the U.S. and the Soviet Union each announced, within four days of each other, their intentions to launch satellites into space. This month marks the beginning of the second space race. Instead of two national superpowers, we have witnessed two commercial superpowers, in Richard Branson and Jeff Bezos, who, in aiming for the stars, have ushered in the commercialization of space. Their celestial ambitions are accelerating the pace of innovation and a surge of growth in the private side of the space sector. As investment in the space industry proliferates, insurance professionals must prepare today for space and near-Earth insurance solutions.

The space economy is approximately $450 billion, according to the Space
Foundation. The sector incorporates infrastructure such as satellite and
rocket production; distribution, which includes Earth-based companies that
connect cosmic networks; and applications, which are services that support
enterprises reliant on satellite and other orbital systems.

There will be short-term, medium-term and long-term opportunities, which must be supported by carriers, reinsurers and brokers alike. Insurance, as an industry, has always enabled and supported innovation. The space industry will be at the epicenter of invention and advancement for decades to come. Though some of the necessary solutions can be built upon traditional coverages, avant garde approaches will also be required to mitigate more contemporary risks. This second space age will test the limits of the insurance industry, but as it has done since its founding the industry must rise to the occasion as humanity strives to expand existing limits and traverse the universe.

The Space Insurance Market Today

The marketplace for space insurance today revolves around policies for physical assets, in particular satellite coverage, which is predominantly dominated by a handful of European insurers. Coverage includes pre-launch testing and facility exposures, launch and orbital protection and coverage for ground support services. Additionally, other specialty coverages such as manufacturer’s warranties, broadcast service and other business interruption are also available. Lloyd’s of London estimates that the space insurance market is about $500 million annually for satellites and non-human cargo. With respect to pre-launch, it is estimated that only $10 million to $15 million in premiums are generated annually, indicating that the majority of risk and premium occurs post-launch, considering the value of a lost satellite can range from $200 million to $400 million.

Interestingly, space insurance is not triggered until launch. Prior to liftoff, the insured assets are earthbound and therefore covered under any inland marine policies in force. As with all current pre- or post-launch insurance, it is property-related, as human passengers have been minimal. Even in the case of NASA astronauts and payload specialists, their occupational injuries are covered by the TREAT Astronauts Act.

The current practice witnessed on the most recent flights is that all passengers must sign a contract agreeing they are fully liable for their own safety. This is serving as a bridge until the insurance market can provide a solution. According to the New York Times’ DealBook, both Jeff Bezos and Richard Branson flew into space without purchasing any liability insurance. Neither of the corporations provided comment or further detail.

See also: ITL FOCUS: Catastrophic Weather

Black Hole Risk

An interesting topic within the insurance industry the last several years has been the discussion around “silent cyber.” The term refers to the risk that policies that were not intended to cover cyber liability may in fact do so because the risk is not expressly excluded. In essence, there is a lack of contract certainty with respect to cyber liability. In this new space race, insurance companies may find their policies are not contract-certain regarding space exposures even though there was never an intent to provide such insurance. We call this situation Black Hole Risk, and it should not only be a concern for carriers but for policyholders who may soon be participating in the space ecosystem. Agents and brokers also need to consider Black Hole Risk, as policyholders who have claims denied will turn to their insurance advisers and question why they have no coverage. Insurance stakeholders should consider the following actions:

  • Review life insurance applications and policies to determine if space travel is expressly excluded.
  • Determine if the biological effects of space travel could be considered a pre-existing condition that would materially affect a health or workers’ compensation claim.
  • Ask if the worldwide coverage endorsement on a products liability policy includes space if a manufacturer’s component part product was used beyond the Karman line and a loss occurred. These are gray areas all participants within the insurance industry need to contemplate now.

The Regulatory Basis of Liability in Space

To prepare for the complexities of insuring commercial expansion in space, carriers must understand the regulations on which liability surrounding space exploration is based. Early international regulations for space exploration include the 1967 Outer Space Treaty and the 1972 Liability Convention for Damage Caused by Space Objects. The 1967 treaty contains two primary arms control provisions, including the agreement that no countries can use nuclear weapons or weapons of mass destruction in orbit or in outer space, as well as prohibiting the installment of any type of military base or related structure on any celestial body. In addition, the treaty outlines international liability for damage caused by objects launched into space and establishes jurisdiction and control as being tied to the state party that launched the object. The Liability Convention of 1972 expanded on this concept by clarifying the responsibility of the launching state and liability for compensation due to damage from space objects as well as outlining procedures for the settlement of damages.

However, there is no clear indication that the Liability Convention intended to include or even contemplated liability related to commercial passengers of space objects. The Liability Convention states that the launching country is liable without consideration of fault for damage on or to the surface of the Earth as well as to aircrafts in flight, and may be liable if found at fault for damages occurring elsewhere, such as to another space object. The liability for passengers traveling on the space object itself are not specifically represented in either of those scenarios. In addition, the launching state nationality and passenger state of citizenship may be different, which may affect the applicability of these liability standards. Further, when the Liability Convention was drafted, private sector companies were not in the market of independently conducting space launches or space flight, so the determination of the launching state was more obviously tied to a government entity or country, while today responsibility may be less clear. It is important to understand the ramifications and applicability of these regulations when considering policy language.

In the U.S., the commercial space transportation industry was once regulated by the Department of Transportation, but oversight was transferred to the Federal Aviation Administration (FAA) in 1995 with the formation of the Office of Commercial Space Transportation. The purpose of this organization is to provide regulation for the U.S. commercial space industry, maintain compliance with international regulations, protect public and national security and support commercial space activities within the private sector, lobby for changes in regulations and procedures and strengthen the space transportation industry in the U.S. As a regulatory body, the FAA sets financial responsibility requirements for commercial spaceflight in the U.S. (see, Licenses & Permits: Commercial Space Transportation (faa.gov) for details). The FAA requires that commercial launches are protected by third party liability and government property damage insurance, which provides coverage for injury to the public or damage to government property. The Commercial Space Launch Act Amendments of 1988 provide alternative methods to meet financial responsibility as well as government backing for third-party claims above the insurance requirements, up to $1.5 billion. The Space Act of 2015 affirms this government backstop but only until 2025.

The 2004 Commercial Space Amendments Act excludes regulation of onboard passengers and instead requires informed consent and a signed waiver of liability. However, as insurance professionals are aware, exculpatory agreements are not fool-proof, and negligence by an operating party may still result in a lawsuit. In the case of space travel, this has yet to be tested in the courts. Insurance providers have stated that regulators will soon require liability policies for trips into space. Data on such trips is limited, and this makes the current product difficult to underwrite and price. There is a historical death rate for space travel of around 3%, but the volume of persons in space is a small sample size (553) in comparison with the insurance underwriting and actuarial approaches for these liability policies, and a large portion of this sample population is from decades ago, so using the historical number might not adequately account for changes in technological improvements.

The U.S. government has been supportive of a robust commercial space industry, and several codes and acts are dedicated to furthering the future of commercial space exploration. Many other countries have their own form of space regulation, which are submitted to the U.N. and can be viewed online: Space Law: National Space Law Database.

Industry Outlook

The space industry’s immediate economic outlook remains speculative, yet optimistic. Opportunities exist, but there must be a willingness to plan and prepare now, for success years into the future. The U.S. Bureau of Economic Analysis wrote in December 2019 that the global space industry was $414.8 billion and employed 2.6 million workers in the U.S. in 2012. However, the space industry is not immune to the global effects of COVID-19. PricewaterhouseCoopers suggests that being “heavily tied to institutional budgets and overall wider public agendas, the space sector is expected to be impacted by changing government priorities and agendas.”

According to Morgan Stanley, “the global space industry could generate revenue of more than $1 trillion or more in 2040, up from $350 billion, currently.” The company also suggests that there is a growing partnership between public entities and private interests. Combining the forces of public institutions with private investment could result in more public interest that would push humanity deeper into space.

The word “unknown” is used to describe space not only in terms of science and understanding, but also with regard to the economic portion of the equation. The overall outlook is unknown, but many are predicting that untold riches can, and will, be made in outer space.

The extraordinary profits could be from any number of different outcomes, but there is a growing optimism about space mining. The space mining industry is currently not producing any economic gains. However, the market could grow to astronomical proportions if there is a feasible and practical mechanism to bring back elements from outer space to Earth that have the energy capacity to power all of New York City, or a new element that could cure cancer. Physics World published an article that outlined the ability to mine space by arguing that “legally, nobody can own an asteroid, but the US Space Act of 2015 allows companies to own the materials they mine from bodies in space.” Some companies are ready now to use satellites to find mining deposits undiscovered on Earth, according to an article written for the Wharton School of Business. But the same article indicates that “for decades, relatively easy access to space and the big profits to go with it have dangled elusively just over the horizon,” thus adding to the unpredictable future economic outlook overall in the space industry.

See also: Digital Revolution Reaches Underwriting

While these initiatives are not fully commercialized yet, they are not just theoretical either, and the insurance industry needs to begin addressing these very real needs. During the July 11 broadcast of the Virgin Galactic flight on Bloomberg TV, commentators provided the following insights:

  • 2018 saw 2,000 satellites in orbit, which will be 100,000 in 15 years
  • All data centers will be in space, and internet and cell cover will be uninterrupted worldwide 24/7 in 15 years
  • 600 to 700 people have already paid $200,000 for suborbital Virgin Galactic flights, which are scheduled to take off in 2022
  • Axiom plans to have all-inclusive 10-day space excursions to the International Space Station in 2022 for citizen astronauts

Insurance as a Space Facilitator

Insurance professionals must prepare today for needed space and low-orbit insurance solutions. New insurance products will enable continuous innovation within this evolving market, providing a safety net for costly assets and precious lives. However, for the insurance industry to support human expansion into space, it will need supportive partnerships, regulatory clarity and sensitivity to environmental and social issues.

Payload Share

As this world looks beyond its limits for new resources, the insurance industry can play a pivotal role in facilitating these complex expeditions. As rare earth resources become more scarce and the mining industry continues to pollute the air and land while using dangerous chemicals in its process, we are entering an unsustainable cycle. Asteroid mining could bring to Earth nearly unlimited resources relative to what is available here and do so in a more environmentally viable manner. Asteroid mining is not possible today, but as space travel technology continues to evolve and the cost becomes cheaper, we have the opportunity to turn this into a reality. This is where the insurance industry has the opportunity to partner. These projects will obviously be quite large and expensive, especially initially, so a new product or payment mechanism can be created. Aside from just a large premium on the front end, which could potentially hinder these efforts, insurers could instead use a payload share as part of the compensation for transferring these risks. Coverage limits for failure would be provided, but upon successful mission the insurers would receive a percentage of the value of the haul in lieu of or in combination with premium. Such an arrangement would align interests and aid the space mining industry in creating a safer and more sustainable environment.

Enhanced Satellite Coverage

Current single satellite launch coverage has a policy period from launch vehicle separation to establishment of intended orbit plus one year. In-orbit coverage protects the asset typically for up to 15 years. With newer satellites that can have life expectancies of 18 years or more, there may be an increasing need for extended life coverage. Additionally, satellites will be launched with increased frequency as part of a constellation of orbiters. Multiple satellites may be launched together or separately over a period. New coverage will be needed to cover not just the individual satellites but the operation as a network as well as the elongated period required to position the constellation as single satellites are added to the ecosystem.

Space Debris Abatement Coverage

As activity in both low-Earth orbit (LEO) and geospatial equatorial orbit (GEO) increases, more space debris will accumulate. As on Earth, it should be expected that commercial enterprises will be liable for space pollution. It is estimated that there are already over 750,000 pieces of space junk in orbit. Coverage for pollution legal liability or contractor’s liability insurance to support abatement companies will be needed. The European Space Agency (ESA) has already signed the first contract with ClearSpace to develop the Space Claw, a debris removal space vehicle that is expected to launch in 2025. Japan’s answer to space junk is to develop wooden satellites, which would burn up on re-entry. This poses additional insurance considerations, as the outer limits are developed, regarding the possible myriad of building material and composite options that could be used and their lifespan before failure.

Space Technology Wraps, Warranties, Construction Bonds and Product Liability

Terrestrial off-shore space sports, stellar space stations, galactic resorts, O’Neill cylinders, and colonies on the Moon and Mars, in addition to mining asteroids for minerals, water and other natural resources, will require incredible levels of ingenuity and resultant technology to develop this infrastructure. Performance bonds for technology installations and construction developments will be crucial. Extended warranty coverage on both the life of the technology as well as its optimal operational efficiencies will be sought-after protections, too.

Even less technology focused, more traditional companies may need new protections soon. Consumer products manufacturer Procter & Gamble announced in July 2021 a partnership with NASA to develop fully degradable Tide brand detergent that can be used on extended duration trips to the Moon and Mars. We will see more of this innovation from non-space focused corporations, and new products consumed in new environments will require for-the-moment coverage.

Space Catastrophe Annuity Program

While we are experiencing heady days after two successful crewed launches by Virgin Galactic and Blue Origin, inevitably there will be setbacks and tragedy. Should such events occur too early in the days of this new space age investment, interest could wane. Consideration should be given to developing a long-term, public-private insurance partnership to share in the cost of a space catastrophe. Sharing of risk between governments and commercial partners would ensure the sustainability of the drive to space. As mentioned, the SPACE Act of 2015 provides a loss back-stop for catastrophic launch events, but with a sunset provision in 2025. A longer-term concept was developed in the 1950s to encourage the growth of the nuclear industry. A space cat annuity program modeled off the Price-Anderson Nuclear Industries Indemnity Act of 1957 could serve as a more sustainable solution.

Space Tourism Travel and Accident Coverage

With space tourism quickly becoming a reality, there will soon be a market for space travel and accident coverage. As of July 9, 2021, it has been reported that approximately 600 people have reserved tickets for future space flights with Virgin Galactic. The numbers will likely increase as successful trips are completed, competition increases and prices start to decline.

Short space flights may not result in some of the more debilitating long-term effects of extended space travel, but the launch process itself creates a unique experience for the human body that could result in death or injury. Astronauts train extensively for space travel, but tourists will not be able to dedicate the same amount of time and effort to prepare. In addition, during an emergency in space it is unlikely that the vessel will have adequate medical equipment or the freedom of movement to provide medical attention to passengers in distress. In the event of a medical emergency in flight, extraction from the landing site may need to be arranged if it is remote or not near a medical facility. It is also possible that a space vessel could veer off course due to emergency, and unexpected travel may be required to return a passenger to the planned landing location. These items may be addressed with space tourism travel and accident coverage.

Reviewing a risk for insurability will rely heavily on knowledgeable underwriters who understand the mechanics of space flight, regulatory requirements and medical considerations for the screening and training of passengers. Due to the complex and specialized nature of space travel, insurers should seek partnerships with external experts who can guide underwriting requirements and train future space insurance experts to have a holistic view of the risks at hand.

Citizen Astronaut Life, Accident and Health Coverage

Additional insurance considerations include Citizen Astronaut Life, Accident and Health coverage, which pose interesting hurdles as, in many cases, coverages particular to these exposures are largely being constructed or non-existent. Which is not to say that they are not carefully being considered or sought after. For example, NASA has “called for responses from the industry for its plans for a liability framework for privately funded missions to the ISS. NASA’s plans include requiring private astronauts to buy life insurance.” There are also questions raised about which coverage types apply with regard to space tourism and whether space tourism falls under aviation or space insurance. This is particularly important in the case of death, as rules surrounding airline responsibilities have had rules and precedents established in the case of passenger fatality. The same cannot be said of space tourism.

As government employees, NASA is able to grant certain benefits and coverages to its astronauts, including FEGLI (Federal Employees’ Group Life Insurance); however, the same is not necessarily the case with private or citizen astronauts. Carriers have historically shied away from providing coverages to those in high-risk professions, and in many cases even list specific excluded professions. In the U.S. private sector, workers’ compensation coverage is required in most cases. Companies may soon have employees traveling into orbit to help with space infrastructure development, which would be a new exposure not currently contemplated in underwriting.

Similarly, accident and health policies are largely provided by employers to employees in the case of sickness, accidental injury or accidental death. With space tourism, a new version of these policies may be needed to more specifically address space-specific exposures.

Satellite-Supported Data Centers

With cyber risk being one of the most prevalent risks on the minds of top executives through the global economy, everyone from the C-Suite to the regulators to the end customer is wondering how companies are going to be protecting their data. Companies today are already looking at data centers in orbit, by building servers into satellites. These companies will be providing services to the entire commercial space industry, which will be supporting trips to the Moon, Mars and beyond. The concept of “Space Infrastructure as a Service” or satellite Internet of Things are terms with which all insurance professionals looking into space insurance should begin to familiarize themselves.

Satellite Enhanced Cat and Climate Modeling

Back on Earth, satellite imagery has long been a part of catastrophe modeling. As the number of satellites launched into space skyrockets and the technology on each satellite continuously improves, insurers will have access to a much greater availability of observational data. Insurers will be able to use this data to more quickly and accurately assess loss in affected areas. The greater coverage being provided by the great number of satellites will allow for markets to be opened up that were previously untapped or incorrectly underwritten or modeled. With more consistent, higher-quality data, insurers will be able to insure the entire globe better. If the costs get to an extremely affordable level, do we see insurers or CAT modelers launching their own proprietary satellites into orbit that allow for further differentiation within the property insurance market?

See also: A Quarantine Dispatch on the Insurtech Trio

Partnerships

Massive undertakings such as these certainly require work and collaboration from various groups, including industry trade associations, reinsurers and commercial partnerships.

As far as trade associations, there are numerous organizations engaged. The American Astronautical Society compiled a substantial list that contemplated various sub-categories such as international federations, institutes and professional associations, international space agencies, international space education organizations and U.N. organizations. This demonstrates that there is significant engagement on a global scale.

Regarding reinsurers, many large carriers are currently participating. A few notable companies include AXA XL, Hannover Re and Munich Re. Additionally, there are space products coming out of Lloyds of London, which are backed by as many as 18 syndicates, including Brit and Hiscox.

Commercial partnerships are also playing a critical role in driving space activities forward. Currently, there are three primary players in this space: SpaceX, Virgin, and Blue Origin. Backed by iconic billionaires Elon Musk, Jeff Bezos and Sir Richard Branson, these organizations have already committed to continuing their missions. Interest and demand in this area continue to grow. Richard Branson recently said that, in addition to the keystone organizations already mentioned, there is room for 20 space-tourism-centered organizations to compete for space-tourism passengers.

Finally, these partnerships depend on the support and participation of scientists and academics, without whom none of these accomplishments or goals could be accomplished.

Regulatory Outlook

In the regulatory environment, we can expect some big changes as the U.S. and other countries see greater opportunities for the commercialization of space. We believe that more clarification will emerge regarding liability and standards of care for civilians traveling on spacecraft. There will be more definition around liability stemming from launch site location/control and clarification in regard to questions on whether citizenship plays a role in liability determination. The U.N.’s Office for Outer Space Affairs will continue to advocate for the peaceful use of space and will continue supporting their core guidelines, including:

  1. Setting policy and regulatory framework for space activity
  2. Promoting the safety of space operations
  3. Encouraging international cooperation, capacity-building and awareness
  4. Promoting scientific and technical research and development

Environmental Considerations

This new space age coincides with an increased focus on environmental, social and governance (ESG) issues. As commercial enterprises push into space endeavors, their insurance partners need to consider how they align their support of policyholders with their own corporate ESG values.

The most obvious issue in this area is the pollution of space. As mentioned, a problem with space junk already exists. Carriers can promote environmental safety by supporting the innovations of space debris abatement technologies. Space initiatives also provide the opportunity to mitigate climate change here on Earth. Space mining has the potential to eliminate the need to extract fossil fuels from the Earth as well as create additional supplies of water. On CNN, during the Blue Origin launch broadcast, Adam Frank of the University of Rochester commented that space mining could allow for one million people to live in space in the next 200 years. These advancements would reduce global warming, and with more jobs and new places to live could also address income inequality and overpopulation. Insurance companies that back these industries would be doing so aligned with their ESG aspirations.

Conversely, however, an exponential commercialization of the outer limits would have more satellite constellations in orbit, more space traffic and a higher likelihood for collision, creating more junk in space and possibly debris falling to Earth. We also must recognize that, while colonization of space could be attainable in the next century, in the meantime, with billionaires speeding to the Karman line, there is the potential for a widening of inequities.

Insurance carriers therefore not only have to weigh the financial aspects of risk vs. reward when deciding if they want to deploy capacity in support of this new space age, but also how their method for choosing whom to support aligns with their corporate values.

Key to striking this balance is a robust governance framework. As discussed, partnering with stakeholders from investors, customers and regulators, to technology experts, reinsurers and in many cases government agencies on national security matters is critical as insurance companies decide to enter this industry sphere.

Conclusion

There is no way to know what will eventually come out of this new great space race. Throughout the history of NASA, many products have been discovered or invented that have become extremely commercially viable. These items include; camera phones, scratch-resistant lenses, CAT scans and radiography, LED lights, athletic shoes, non-detonation land mine removal techniques, water purification systems, the dust buster, ear thermometers, home insulation, jaws of life extraction tools, wireless headsets, memory foam, freeze dried food, adjustable smoke detectors, baby formula, artificial limbs, the computer mouse and the portable computer. While NASA did not set out to create likely commercially successful products, the research and ingenuity required to propel humankind into the unknown and unexplored made all of these examples possible.

This is a once-in-a-generation opportunity for the insurance industry to provide a social good to an entirely new celestial biosphere. Since its early days, the industry has supported innovation, provided security and defused and distributed risk so human endeavors are achievable. The time is now for the insurance industry to prepare and show leadership in this New Age of Space.

Future of P&C Tech Comes Into Focus

In a 2017 report titled “Drones: Reporting for Work,” Goldman Sachs estimated the addressable market opportunity for drones globally between 2016 and 2020 to be $100 billion, of which the insurance claims drone market was estimated to be $1.4 billion.

And the report did not address the wider opportunities in personal and commercial property insurance: underwriting, pricing, risk prevention, traditional and virtual claims management, fraud detection and product marketing. The report also didn’t cover the use of images from satellites and fixed-wing aircraft, including streaming video.

Whatever the actual size of the total insurance market opportunity, the impact of aerial and drone images in insurance will be enormous.

Industry observers are just beginning to recognize the transformation in property insurance underwriting and claims that is emerging through advanced analytics, artificial intelligence and machine learning tied to neural networks and integrated with data from aerial and drone images.

Property claims investigation costs the industry an average of about 11% of premiums – automated inspection can reduce that expense substantially. And automated property inspection cycle times can average two to three days, compared with 10 to 15 days using traditional methods – lowering costs and increasing customer satisfaction.

Providers will transform the property insurance industry through the convergence of these sources of better images, expanding numbers and types of connected home technologies, customer self-service and aggregated property risk data (historic and real-time).

Follow the money

Venture and private equity investment activity in emerging technologies is a good indicator of potential growth opportunities – these professionals typically engage subject matter experts and conduct deep market research and diligence in a highly disciplined and proven evaluation process prior to investing. Since 2012, almost $2 billion has been invested in more than 370 drone company deals, and the current run rate is more than $500 million in announced deals annually, according to CB Insights research, which states that ”19 of the 24 smart money venture investors have backed at least one drone company since 2012.”

See also: How Technology Drives a ‘New Normal’  

Within just the past two months, four such insurance-related transactions were announced;

  • Nationwide Ventures made an investment in Betterview, a machine learning insurtech startup focused on analyzing data from drones, satellite and other aerial imagery for commercial and residential property insurers and reinsurers. This follows a September 2017 seed round funding of $2 million.
  • DroneDeploy, the world’s largest commercial drone platform, raised $25 million of Series C venture capital, bringing total funding to $56 million.
  • Cape Analytics raised $17 million to grow its AI and aerial imagery platform for insurance companies, led by XL Innovate.
  • Clearlake Capital Group acquired a significant interest in EagleView Technologies alongside Vista Equity Partners, which had purchased EagleView in 2015. (Vista also owns the majority of Solera, parent of property and auto insurance claims services and information providers Enservio and Audatex.)

In 2017, Genpact, a global professional services and insurance claims solutions provider, acquired OnSource, which provides 24/7/365 full service on-demand drone property inspection claims and settlement services across the U.S. Earlier that year, Genpact acquired BrightClaim and National Vendor, providers of integrated claims solutions to the U.S. property insurance market

In 2016, Airware, a global enterprise drone analytics company, closed a Series C round of $30 million to bring its total funding to $110 million. Early in 2016, Verisk Analytics formed the Geomni business unit to specialize in image sourcing and analysis and has since acquired a number of U.S.-based aerial survey companies and their aircraft fleets. Verisk also owns Xactware, the dominant industry provider of property insurance claims solutions and third party products. The Geomni fleet is expected to include more than 125 fixed-wing aircraft and helicopters by the end of 2018, operating from 15 hubs located throughout the U.S. Verisk expects to invest approximately $100 million in Geomni through 2018.

Competition and differentiation

The space has attracted a large number of participants in the past two years, and there are no signs of slowing. Competitors are taking innovative paths to differentiation, including: drone manufacturing, drone operating software for use by field staff and contractors, ground-based roof and wall measurement technologies and full-service, virtual property inspection and property damage reports using drones.

Insurance industry adoption and barriers

The insurance industry’s use of images from satellite and fixed-wing aircraft is fairly well-established, particularly in catastrophe response planning and claims. The North American property/casualty insurance industry has been cautious and conservative in its testing and adoption of drone use for property claims and in using aerial images for underwriting.

Until recently, FAA rules had made it onerous for carriers and industry vendors to obtain licenses and permission to use drones for property inspections. However, after extensive industry lobbying efforts, assisted by more pro-business policies, that obstacle has eased significantly, and several carriers have trained staff and hired contractors to use drones for property claims inspections. Obstacles remain, including restrictions on use near airfield perimeters and outside of operators’ line of sight.

Carriers are split into two roughly equal camps (by market share) on more recently introduced third party services that provide virtual property inspections: those that do not believe that drone image and damage identification technology is sufficiently accurate as yet to manage claims leakage as effectively as their own staff field adjusters – and those that do. Both groups acknowledge that drones are not appropriate for all property claims. Furthermore, customer satisfaction and therefore retention is thought to be higher when insurance company staff visit the property and the homeowner in person.

The future of property insurance

For claims, virtual methods of inspection will include not only drones but claims reporting that involves customers. Claim self-service, including smartphone images and video, which has seen impressive adoption and results in auto claims, is beginning to penetrate property insurance claims, particularly for reporting home interior and exterior wall damage. New, accurate 3D smartphone image measurement technology combined with higher image resolution and the expected expanded availability of much faster 5G wireless broadband will drive adoption.

See also: Secret to Finding Top Technology Talent  

Other methods of property inspection, particularly following extreme wind or hail events and catastrophes, will most certainly incorporate the use of drones, whether operated by insurance staff, managed repair network contractors or third-party inspection services. Also, autonomous drones performing roof inspections not requiring an operator on site may be expected soon.

Finally, on the property underwriting side, we expect high-resolution geospatial image data from multiple sources, artificial intelligence and machine learning to transform that process. Real-time feeds of comprehensive property attributes such as measurements and condition of roofs and other property on the target site will enable instant and more accurate pricing, quoting and binding/renewal of property insurance.

Aerial imagery, mobile technologies, artificial intelligence and computer vision will continue to transform property insurance products and processes, leading to better pricing accuracy, more profitable operations and, above all, better customer experience for policyholders.

Transforming Claims for the Digital Era

As insurers undertake digital transformation programs, many rightly turn to the claims function. Claims is a very good candidate for such initiatives because of its importance to the relationship between customers and their insurers. Claimants and insurers both want speedy and fair resolution, based on clear lanes of direct and personalized service. A data-driven, analytics-enabled claims process can satisfy the objectives of all parties.

Continuous improvement to customer experience in claims is critical to any strategy. After all, claims are a real “moment of truth” for insurers, with meaningful impacts on outcomes and customer loyalty. Insurers that craft the right strategies and deploy the right mix of digital technologies will be able to turn their claims operations into a source of competitive advantage, market differentiation and brand perception. While advanced technologies such as robotic process automation (RPA) and artificial intelligence (AI) are very much part of the long-term transformation story, there is much insurers can do that will generate immediate benefits.

What matters to claimants — and how to deliver

EY’s insurance consumer research confirms that speed, efficiency and transparency are among the most important characteristics of a quality claims experience. Better data and analysis can help streamline steps in the claims process, setting the foundation for an enhanced experience. Those analytics also set the foundation for the future where many claims will be resolved via “no-touch” processes.

See also: 4 Ways That Digital Fuels Growth  

Insurers seeking to automate their claims processes or to achieve straight-through processing for basic claims have multiple options, including:

  • Advanced telematics data (including video imagery) can be instantaneously captured during an automobile accident and downloaded from the cloud to automatically trigger a first notification of loss (FNOL) entry. Underwriters can “score” the data to determine the extent of loss relative to the automobile’s current value.
  • Drones and satellites can survey damage and collect information about property damage to initiate claims before a homeowner makes contact.
  • Via intuitive apps or other interfaces, insureds can submit photos of damage to their homes or vehicles to initiate the claims process, provided there is no sign of fraudulent behavior (which analytics programs can evaluate).
  • Property and casualty (P&C) insurers may use historical repair data to dramatically decrease estimating times for different types of vehicles and homes. They may also better manage repair costs and quality based on deeper analysis of these data sets.
  • AI may be used in combination with social media and other data to scan claims for the likelihood of fraudulent behavior.

Insurers also have good options when it comes to personalizing service, which include:

  • Voice analytics that can assess customer sentiment during phone calls, with appropriate classification and prioritization of resolution.
  • Behavioral analytics that can be applied to model likely customer needs and identify high-value policyholders or those likely to dispute a claim.
  • Analyses of customer records that can identify claimants facing renewal as well as good candidates for purchasing additional products.

A redesigned claims experience can pay immediate dividends (e.g., lower processing costs, improving claims resolutions or higher renewal rates). In all of them, insurers can engage at key points during the claims life cycle, with accurate and consistent information delivered on a timely and transparent basis. At the same time, claims teams can focus on high-value interactions, high-risk claims and other exceptions.

The path toward a better claims experience

No matter where insurers fall on the maturity curve today, there is much they can do to transform the claims process. The path to success begins with a series of well-thought-out steps designed to produce useful learning and incremental value. Huge investments in new technology or large teams of data scientists are not required for substantial improvements. Organizational and cultural factors are also part of the claims transformation equation.

Insurers should endeavor to integrate third-party data (such as medical claims, consumer credit and weather data) with existing records. They also have the opportunity to pilot the use of automated notifications via chatbots and to encourage customers to submit photos of damage. While taking these initial tactical steps, they can begin building the business case for, and perhaps even pilot, more advanced capabilities, such as “no-touch” claims handling for specific products, regions, claims types or payments.

Insurers in the intermediate phases of their digital transformation journey should consider expanding automated claims handling to more claims types and larger amounts, broaden their use of chatbots for communication and seek to integrate more external data sources. They can also deploy drones as “adjusters” and establish analytics Centers of Excellence in claims.

More mature organizations will look to leverage new data storage and management technologies as the basis for advanced analytics and real-time visualization. They may also strengthen antifraud efforts by implementing machine learning. The most forward-looking insurers may build out data science teams to probe large and diverse data sets stored in analytics ecosystems. Similarly, they may expand claims volumes handled via RPA-enabled straight-through processing and evaluate medical treatments or repair effectiveness against leading practices.

See also: Digital Transformation: How the CEO Thinks  

As claims organizations become more digital, the benefits of additional data and more effective analytics should extend beyond the customer experience. Machine learning and visualization techniques can help assess and predict claims risk with greater accuracy and certainty. They also provide a consistent claims handling approach relative to unbiased reserving, litigation, subrogation and other claims processes.

It is worth noting that technology enhancements alone will not produce a claims organization for the digital era. A cultural willingness to embrace change also matters. Many insurers must overcome risk-averse cultures to encourage experimentation and “fast failures” in the spirit of learning what works best for their culture and customers.

How do they do that? Test-and-learn approaches are a good start for insurers with limited digital capabilities. Pilot programs for automated claims processing and bot-driven notification systems are an ideal place for many organizations to start.

Customer experience is everywhere

In the digital era, where customers have been trained to expect real-time access to data and personalized service, the stakes for the claimant customer experience have been raised. Insurers must learn to deliver what customers want and expect — and deliver it efficiently, accurately and quickly. Digital transformation makes it possible, while offering insurers significant upside in terms of lower costs, increased customer loyalty and reduced risk of fraud.

It’s Time to Accelerate Digital Change

For global insurers, digital transformation and disruptive innovation have gone from being vague futuristic concepts to immediate action items on senior leaders’ strategic agendas. New competitive threats, continuing cost pressures, aging technology, increasing regulatory requirements and generally lackluster financial performance are among the forces that demand significant change and entirely new business models.

Other external developments — the steady progress toward driverless cars, the rapid emergence of the Internet of Things (IoT) and profound demographic shifts — are placing further pressure on insurers. A common fear is that new market entrants will do to insurance what Uber has done to ride hailing, Amazon has done to retail and robo advisers are doing to investment and wealth management.

Yes, “digital transformation” has become an overused term beloved by industry analysts, consultants and pundits in the business press. Yes, it can mean different things to different companies. However, nearly every insurer on the planet — no matter its size, structure or particular circumstances — should undertake digital transformation immediately. This is true because of ever-rising consumer expectations and the insurance sector’s lagging position in terms of embracing digital.

The good news is that many early adopters and fast followers have already demonstrated the potential to generate value by embedding digital capabilities deeply and directly into their business models. Even successful pilot programs have been of limited scope. By addressing narrowly defined problems or one specific part of the business, they have delivered limited value. Formidable cultural barriers also remain; most insurers are simply not accustomed or equipped to move at the speed of digital. Similarly, few, if any, insurers have the talent or workforce they need to thrive in the industry’s next era.

Because the value proposition for digital transformation programs reaches every dimension of the business, it can drive breakthrough performance both internally (through increased efficiency and process automation) and externally (through increased speed to market and richer consumer and agent experiences). Therefore, insurers must move boldly to devise enterprise-scale digital strategies (even if they are composed of many linked functional processes and applications) and “industrialize” their digital capabilities — that is, deploy them at scale across the business.

This paper will explore a range of specific use cases that can produce the breakthrough performance gains and ROI insurers need.

From core transformation to digital transformation

Recognizing the need to innovate and the limitations of existing technology, many insurers undertook core transformation programs. These investments were meant to help insurers set foot in the digital age, yet represented a very first step or foundation so insurers could use basic digital communications, paperless documents, online data entry, mobile apps and the like. These were necessary steps, as the latest EY insurance consumer research shows that more than 80% of customers are willing to use digital and remote contact channels (including web chat, email, mobile apps, video or phone) in place of interacting with insurers via agents or brokers.

More advanced technologies, which can enable major efficiency gains and cost improvements for basic service tasks, also require stronger and more flexible core systems. Chatbot technology, for instance, can deliver considerable value in stand-alone deployments (i.e., without being fully integrated with core claims platforms). However, the full ROI cannot be achieved without integration.

For many insurers, core transformation programs are still underway, even as insurers recognize a need to do more. Linking digital transformation programs to core transformation can help insurers use resources more effectively and strengthen the business case. Waiting for core transformation programs to be completed and then taking up the digital transformation would likely result in many missed performance improvement and innovation opportunities, as well as higher implementation costs.

One key challenge is the industry’s lack of standardized methodologies and metrics to assess digital maturity. With unclear visibility, insurance leaders will have a difficult time knowing where to prioritize investments or recognizing the most compelling parts of the business case for digital transformation.

But, because digital transformation is a long journey, most insurers are best served by a phased or progressive approach. This is not to suggest that culturally risk-averse insurers be even more cautious. Rather, it is to acknowledge that complete digital transformation at one go can’t be managed; there are simply too many contingencies, dependencies and risks that must be accounted for.

See also: The Key to Digital Innovation Success  

Insurers must be focused and bold within their progressive approach to digital transformation, as it is the way to generate quick wins and create near-term value that can be invested in the next steps. Each step along the digital maturity curve enables future gains. Rather than waiting to be disrupted, truly digital insurers move boldly, testing and learning in pursuit of innovation and redesigning operations, engaging customers in new ways and seeking out new partners.

Digital transformation across the insurance value chain: a path to maturity and value creation

Digital transformation delivers tangible and intangible value across the insurance value chain, with specific benefits in six key areas:

It’s important to emphasize speed and agility as essential attributes of the digital insurer. Even the most innovative firms must move quickly if they are to fully capitalize on their innovations — a concept that applies across the entire value chain. The idea is to launch microservices faster and embrace modernized technology where possible. For instance, deploying cloud infrastructures will enable some parts of the business to scale up and scale down faster, without disrupting other parts of the business with “big dig” implementations.

The dependencies and limitations of legacy technology are also worth reiterating. Insurers that can integrate process innovations and new tools with existing systems — and do so efficiently and without introducing operational risk — will gain a sustainable competitive advantage.

The following digital transformation scorecards reflect how the benefits apply to different technologies and initiatives.

Omni-channel

Today’s consumers are naturally omni-channel, researching products online, recommending and talking about them with friends and contacts on social media and then buying them via mobile apps or at brick-and-mortar retail locations. Basically, they want a wide range of options — text, email, web chat, phone and sometimes in-person. A better omni-channel environment may also enable insurers to place new products in front of potential customers sooner and more directly than in the past.

Insurers must look beyond merely supporting multiple channels and find the means to allow customers to move seamlessly between channels, or even within channels (such as when they move from chatting with a bot to chatting with a human agent). It is difficult to overstate how challenging it is to create the capabilities (both technological and organizational) to recognize customers and what they are seeking to do, without forcing them to re-enter their passwords or repeat their questions.

There are many other subtleties to master, including context. For example, a customer trying to connect via social media to voice concerns is not likely to respond well to a default ad or up-sell offering. Omni-channel is increasingly a baseline capability that insurers must establish to achieve digital maturity.

Big data analytics

The application of advanced analytical techniques to large and ever-expanding data sets is also foundational for digital insurers. For instance, predictive analytics can identify suitable products for customers in particular regions and demographic cohorts that go far beyond the rudimentary cross-selling and up-selling approaches used by many insurers. Big data analytics also hold the key for creating personalized user experiences.

Analytics that “listen” to customer inputs and recognize patterns can identify opportunities for new products that can be launched quickly to seize market openings. Deep analysis of the customer base may make clear which distribution channels (including individual agents and brokers) are the best fit for certain types of leads, leading to increased sales productivity.

The back-office value proposition for big data analytics can also be built on superior recognition of fraudulent claims, which are estimated to be around 10% of all submitted claims, with an impact of approximately $40 billion in the U.S. alone. Reducing that number is an example of how digital transformation efforts can be self-funding. Plus, the analytics capabilities established in anti-fraud units can be extended into other areas of the business.

Big data is also reshaping the risk and compliance space in important ways. As insurers move toward more precise risk evaluations (including the use of data from social channels), they must also be cognizant of shifting regulations regarding data security and consumer privacy. It won’t be easy ground to navigate.

Internet of Things (IoT)

The onset of smart homes gives insurers a unique opportunity to adopt more advanced and effective risk mitigation techniques. For instance, intelligent sensors can monitor the flow of water running through pipes to protect against losses caused by a broken water pipe. Similar technology can be used to monitor for fire or flood conditions or break-ins at both private homes and commercial properties.

The IoT clearly illustrates the new competitive fronts and partnership opportunities for insurers; leading technology and consumer electronics providers have a head start in engaging consumers via smart appliances and thermostats. Consumers, therefore, may not wish to share the same or additional data with their insurers. Insurers may also be confronted by the data capture and management challenges related to IoT and other connected devices.

Telematics

Sometimes grouped with IoT, data from sensors and telematics devices have applications across the full range of insurance lines:

  • Real-time driver behavior data for automotive insurance
  • Smart appliances — including thermostats and security alarms — within homeowners insurance
  • Fitness trackers for life and health insurance
  • Warehouse monitors and fleet management in commercial insurance

The data streams from these devices are invaluable for more precise underwriting and more responsive claims management, as well as product innovation. Telematics data provides the foundation for usage-based insurance (UBI), which is sometimes called “pay-as-you-drive” or “pay-as-you-live.” Premium pricing could be based on actual usage and driving habits, with discounts linked to miles driven, slow or moderate speeds and safe braking patterns, for instance.

Consider, too, how in-vehicle devices enable a fully automated claims process:

  • Telematics data registers an automobile accident and automatically triggers a first notice of loss (FNOL) entry.
  • Claims information is updated through text-based interactions with drivers or fleet managers.
  • Claimants could be offered the opportunity to close claims in 60 minutes or less.

Such data could also be used to combat claims fraud, with analysis of the links between severity of the medical condition and the impact of the accident. Some insurers are already realizing the benefits of safe driving discounts and more effective fraud prevention. These telematics-driven processes will likely become standard operating procedure for all insurers in the near future.

Voice biometrics and analysis

Audio and voice data may be the most unstructured data of all, but it too offers considerable potential value to those insurers that can learn to harness it. A first step is to use voice biometrics to identify customers when they call into contact centers, saving customers the inconvenience of entering policy numbers and passwords, information that may not be readily at hand.

Other insurers seeking to better understand their customers may convert analog voice data from call center interactions into digital formats that can be scanned and analyzed to identify customer emotions and adjust service delivery or renewal and cross-selling offers accordingly. The manual quality control process checks for less than 1% of the recordings, which is insufficient. Through automation, the entire recording can be assessed to identify improvement areas.

See also: 4 Rules for Digital Transformation  

Drones and satellites

Early-adopting insurers are already using drones and satellites to handle critical tasks in underwriting and claims. In commercial insurance, for instance, drones can conduct site inspections, capturing thermal imagery of facilities or work sites. Their reviews can be as specific as looking for roof cracks, old or damaged boilers and other physical plan defects that can pose claims risks.

Within homeowners lines, satellites can capture data to analyze roofs, chimneys and surrounding terrain so that insurers can determine which homeowner they want to add to underwrite, as well as calculate competitive and profitable premiums. When linked to digital communications tools, drone and satellite data can even trigger notifications to customers of new price options or policy adjustments.

Within claims, drones and satellites can handle many tasks previously handled by human adjustors across all lines of business. Such remote assessments can reduce claims processing time by a considerable degree. This method is particularly effective in situations such as after floods, fires and natural disasters, where direct assessment is not possible.

While many transformation programs that use drones and satellites remain in the experimental stages due to operational challenges, it is possible that they can improve the efficiency and accuracy of underwriting and claims information gathering by 40%.

Blockchain

Blockchain provides a foundation for entirely new business models and product offerings, such as peer-to-peer insurance, thanks to its ability to provide virtual assistance for quoting, claims handling and other tasks. It also provides a new level of information transparency, accuracy and currency, with easier access for all parties and stakeholders in an insurance contract. With higher levels of autonomy and attribution, blockchain’s architectural properties provide a strong digital foundation to drive use of mobile-to-mobile transactions and swifter, secure payment models, improved data transparency and reduced risk of duplication or exposure management.

Insurance companies are interested in converting selected policies from an existing book to a peer-to-peer market. A blockchain network is developed as a mechanism for integrating this peer-to-peer market with a distributed transaction ledger, transparent auditability and “smart” executable policy.

E-aggregators are another emerging business model that is likely to gain traction, because it is appealing to both insurers and the customers. Insurers can offer better pricing due to reduced commissions compared with a traditional agent-based distribution model, while customers gain freedom to compare different policies based on better information. Of course, e-aggregators (whether fully independent or built through an existing technology platform) will require a sophisticated and robust digital platform for gathering information from different insurance companies to present it to consumers in the context of a clear, intuitive experience. It is also important for insurance companies to transfer information to e-aggregators rapidly; otherwise, there is the risk they will miss out on sales opportunities. This is why blockchain is the right technology for connecting e-aggregators and insurers.

To see the full report from EY, click here.

A New World Full of Opportunity

The primary drivers of disruption in insurance – notably, fintech (and more specifically, insurtech) – are coming from outside the industry. However, while the pace of change and market disruption has been daunting for most incumbents, the growing presence of insurtech companies is not a threat, but rather is creating real opportunities for the industry.

We see a combination of market and organizational priorities that open the door for these new opportunities.

  • External opportunities primarily relate to social and technological trends and pertain to the shift in customer needs and expectations (which digital technology has facilitated). Insurers have been taking action in these areas to stay relevant in the market and at least maintain their market position. For many companies, focusing on these opportunities remains critical, but this is not enough for them to gain a truly competitive advantage.
  • Internal opportunities relate to using technology to enhance operations and business function execution. For example, some insurers have used artificial intelligence (AI) technology to enhance internal operations, which has improved efficiencies and automated existing customer-facing, underwriting and claims processes.

To take full advantage of these opportunities, insurers need to determine their innovation needs and make meaningful connections with innovators. Doing so will help them balance their innovation mix – in other words, where they can make incremental innovations (the ones that keep them in the game) and where they can strive for real breakthroughs with disruptive and radical innovation (the ones that position them as market leaders).

An effective enterprise innovation model (EIM) will take into account the different ways to meet an organization’s various needs and help it make innovative breakthroughs. The model or combination of models that is most suitable for an organization will depend on its innovation appetite, the type of partnerships it desires and the capabilities it needs. EIMs feature three primary approaches to support corporate strategy:

  • Partner – Innovation centers (also known as hubs or labs) are the most common of the three EIM approaches. Their main purpose is to connect insurers to the InsurTech ecosystem and create new channels for bringing an outside-in view of innovation to the business units.
  • Build – Incubators are a common and effective way to build innovative capabilities and accelerate change. They can be internal, but most companies have preferred to establish them externally and then bring their ideas back into the company.
  • Buy – In this case, an insurer typically will establish a strategic corporate ventures division that sources ideas from outside the company. The company provides funding and support for equity, while the venture explores, identifies and evaluates solutions, and participates in new ventures.

Companies can select elements from each of the above models based on their need for external innovation, the availability of talent, their ability to execute and the amount of investment the organization is willing to commit.

See also: Innovation — or Just Innovative Thinking?  

Insurance leaders’ innovation agenda should include:

  • Scenario planning – What are potential future scenarios and their implications?
  • Real-time monitoring and analysis of the insurtech landscape – What’s out there that can help us now, and what do we want that may not exist yet?
  • Determining how to promote enterprise innovation, including which combination of approaches will most effectively accelerate and enable execution – What’s the best approach for us to stimulate and take advantage of innovation?
  • Augmenting the organization with new and different types of talent – Where are the innovators we need, and how can we best attract and employ them?
  • Cyber security and regulation – Are we prepared for the operational challenges that new technology can present, and have we and our real and potential partners considered the compliance ramifications of what we’re doing or considering?

Typical Exploration Topics

Some of the typical exploration topics across lines of business are:

  • Personal lines: usage-based insurance, shared and on-demand economies, peer-to-peer, direct-to-consumer, ADAS & autonomous cars.
  • Commercial lines: direct to small business, drones and satellite imagery, internet of things, alternative risk transfer, emerging risks.
  • Life and retirement: robo-advice, personalized insurance, medical advances, automated underwriting, decreasing morbidity and mortality risk.

Opportunities for insurers

As part of PwC’s Future of Insurance initiative, we have interviewed many industry executives and identified six key insurtech business opportunities. We see a combination of market and organizational priorities, which open the door for both external and internal opportunities.

External opportunities primarily relate to social and technological trends and pertain to the shift in customer needs and expectations (which digital technology has facilitated). Insurers have been taking action in these areas to stay relevant in the market and at least maintain their market position. For many companies, focusing on these opportunities remains critical, but this is not enough for them to gain a truly competitive advantage.

External opportunities:

  • Are mainly driven by customer expectations and needs and enabled by technology.
  • Offer front runners the opportunity to gain market relevance and position themselves.
  • Also offer fast followers opportunity because value propositions can be quickly replicated.

Internal opportunities relate to using technology to enhance operations and business function execution. For example, some insurers have used artificial intelligence (AI) technology to enhance internal operations, which has improved efficiencies and automated existing customer-facing, underwriting and claims processes.

Internal opportunities are:

  • Mainly driven by technological advancements.
  • A source of competitive advantage but demand deeper change.
  • An opportunity to set the foundation for how the company understands and manages risk.

To take full advantage of these opportunities, insurers need to determine their innovation needs and make meaningful connections with innovators. Doing so will help them balance their innovation mix – in other words, where they can make incremental innovations (the ones that keep them in the game) and where they can strive for real breakthroughs with disruptive and radical innovation (the ones that position them as market leaders).

See also: 10 Predictions for Insurtech in 2017  

Some examples of change are:

  • Incremental: Omni-channel integration, leveraging mobile and social media solutions and experiences to follow existing trends in customer and partner interaction;
  • Disruptive: Usage-based and personalized insurance that leverages technology and data to develop new risk models based on behavioral factors. This also has the potential to drive radical change.
  • Radical: Crop insurance, where data from different sources (such as weather and soil sensors) is leveraged to optimize and predict yield. As a result of this deterministic model, claims are paid up-front at harvest time.

There is no single perfect innovation mix. It depends on a company’s strategic goals and willingness to invest. Insurers should take into account current insurtech trends and determine long-term potential market scenarios based in part on current indicators and emerging trends. A short-term view will not foster the change that leads to breakthrough innovation.

As a starting point, the following questions can help you evaluate how prepared your organization is to drive innovation.

  • Corporate structure
    • Which parts of your organization drive innovation? Does the push for innovation occur at the corporate or business unit level (or both)?
    • How is the board engaged on decisions about the organization’s innovation mix?
    • What is the organization doing to make innovation a part of its culture?
    • What are the main challenges your organization faces when driving innovation?

  • Strategy, ideation and design
    • How does your organization become familiar with new trends and their implications?
    • To what extent has your organization used an “outside-in” view to inform your innovation model?
    • Which potential future scenarios have you identified and shared across the organization?
    • To what extent have you aligned your innovation portfolio strategy with potential future scenarios?
    • How does your organization approach ideation through execution?
    • Which capabilities are you leveraging to enable and accelerate the execution of new ideas?
  • External participation
    • What investments has your organization made in innovation?
    • In which areas is your organization participating (e.g., autonomous cars, connected economies, shared economies)
    • What structures (potentially in specific locations) has your organization created to support external participation?
    • To what extent has your organization managed to attract talent and partners?

Fast prototyping is key to quickly creating minimally viable products/solutions (MVP) and bringing ideas to life. Early stage start-ups develop and deploy full functioning prototypes in near-real time and go-to-market with solutions that are designed to evolve with market feedback. In this scenario, the development cycle is shortened, which allows startups to quickly deliver solutions and tailor future releases based on usage trends and feedback and to accommodate more diverse needs.

Incumbents can follow the same approach and align appropriate capabilities and resources to develop their own prototypes. They also can partner with existing startups that have a minimally viable product (MVP) to help them to move to the next stage, scaling. For this, they have to take into consideration several factors, including operational capacity, cyber risk and regulation (among others) to deploy the MVP in an “open” market. As opposed to controlled pilots or proofs of concept that are controlled environments, this “open” market is driven by demand. Lack of proper resources and the inability to scale the startup will severely compromise or actually prevent successful innovation.

See also: 7 Predictions for IoT Impact on Insurance  

The ways to accomplish all of this vary based on how the organization plans to source new opportunities and ideas, how it plans on executing innovation and how it plans to deploy new products and services. The following graphic provides examples of enterprise innovation operating models by primary function.

Final thoughts

In a fast-paced digital age, insurers are balancing insurtech opportunities with the challenge of altering long-standing business processes. While most insurers have embraced change to support incremental innovation, bigger breakthroughs are necessary to compete with the new technologies and business models that are disrupting the industry.

This article was written by Stephen O’Hearn, Jamie Yoder and Javier Baixas.