There is a monster lurking beneath the insurance companies. For now, it lies dormant, having already been satiated by enormous feasts of industry. But soon it will soon grow hungry again and may turn its voracious appetite and overwhelming power on the insurance industry. I am speaking, of course, about Apple.
The tech giant is one of the biggest potential competitors of insurers, having the capital, ingenuity and distribution to become a major player in the industry. And this monster moves frighteningly quickly. Within a matter of months, Apple could release a top-notch life insurance product coupled with an enticing marketing campaign, effecting disaster for major insurance companies.
Picture the following scenario: Apple execs, eyeing their unholy pool of liquid capital, begin brainstorming, “How to use it?” Stagnation must be prevented, growth is the mantra, the motive. “The phone and computer markets are nigh entirely tapped! Not much growth to be had there. We must look… elsewhere.” And then, an idea! Insurance! And the more they turn this idea over, the more practicable it appears, until they have a detailed plan, a proof of concept, laying out exactly the methods and means and growth timeline, and everything else required to break into insurance.
The plan, fitting very neatly within Apple’s modus operandi, is to galvanize some of their best and brightest into creating a sophisticated machine learning program for underwriting. Even the execs can see that machine learning software has potential for revolutionizing underwriting, it being a chancy, complex business. Not only would the software handle variables with an incredible efficiency, it would be able to identify new markers of mortality with relative ease. The program would also be able to draw from the huge amount of existing user data. Apple Health Kit alone could be a treasure trove of data plundered for mortality tables. And how much more does Apple have than that?! Location tracking, financial information… our whole lives are stored on our phones! One reels at the sheer amount of underwriting power this machine learning program would have.
While the underwriting software is being developed, the marketing team goes to work setting up all the pieces they will need to successfully move into insurance. They set their developers to work building the app on which the insurance products will be purveyed and managed, directly embedded in iOS, just like Health Kit and other apps. Then, the team produces a slick commercial, as Apple is known to do, introducing their newest product, “Apple Life.” Apple Life is “life insurance as it should be,” i.e. hassle-free, cheaper, personalized and guaranteed by more cash reserves than any insurance company has.
Now, there’s just one more step before going public: getting the paper, as they say in the industry, meaning making legally compliant products. While Apple would have no problem doing this itself, the quickest route would be to engage insurers and reinsurers that have already paved the way in all 50 states; they would be amenable to such a partnership, to say the least. Once the deal’s done, and the app is developed, and all teams are prepared to take this thing live, the execs pause, and they smile the kind of smile that comes when one knows he’s won for sure and that no one else does. Smugly satisfied, they release the app, queue the oh-so seductive marketing campaign, and voila! the public is smitten. Life insurance for all!
Yet, perhaps after pondering a little more, the execs may realize there is an even quicker, deadlier way to realize Apple Life. They propose, “Why spend months on end developing proprietary underwriting software, when we could simply assemble the most effective underwriting practices of existing MGUs and put our distribution power behind it, the one thing they have always lacked?”
And then, “Why not, instead of building our own life insurance app, engage an insurtech?”
Knowing Apple, they would probably buy one to keep everything in-house, only making sure that the insurtech acquired has a viable product for them to release.
The execs gloat, “Ah this plan is so much easier, so much quicker than the first. All we’re really doing now is draping our brand over products others develop for us. And, with our distribution power, not to mention our vast, unholy pool of liquid capital, these products will be a smashing success, without the time and hassle of us building them from scratch.”
A clever plan, isn’t it? Apple would be able to execute this likely within the matter of a few months, which should put the fear of… something into life insurers. Maybe extinction. All Apple really needs to do is leverage its $260 billion in cash to hire the right people, then throw their brand and distribution power behind what those people provide. It’s that simple. And it’s clearly not just Apple that could do this— Amazon, Google, Microsoft, etc. are equally scary monsters looming far too near to the insurance industry.
So what can life insurers do to prevent against this kind of scenario? Simple. Tap the talent before Apple does. Contract or buy a good insurtech, so you, life insurer, can release the hip, new life insurance product first.
Insurance is the industry most affected by disruptive change, according to the percentage of CEOs who are extremely concerned about the threats to their growth prospects from the speed of technological change, changing customer behavior and competition from new market entrants.
Insurers know they need to innovate to remain competitive. In fact, 67% of insurance respondents to PwC’s 2017 CEO Survey see creativity and innovation as very important to their organizations, ahead of other financial services sectors and the CEO Survey population as a whole. And, insurance CEOs noted that the area they would most like to strengthen to capitalize on growth opportunities is digital and technological capabilities, followed by customer experience (reflecting the connections between the two).
However, the industry’s traditional conservatism and the dizzying pace of technological change has made it difficult to change. As a result, most insurers are looking outside the industry – typically in the insurtech space (e.g., drones, sensors, internet of things (IoT)) – for the best ways to improve their systems, processes and products. And there is no doubt that industry stakeholders think insurtech has real promise: Annual investment in insurtech startups has increased fivefold over the past three years, with cumulative funding reaching $3.4 billion since 2010, based on the companies that PwC’s DeNovo platform follows.
To facilitate a diverse approach to identifying opportunities and potential partners from different industries and specialty areas, an enterprise innovation model (EIM) is table stakes. An EIM facilitates:
New product and service development: Being active in insurtech can help insurers discover emerging coverage needs and risks that require new insurance products and services. As a result, they can improve their product portfolio strategy and design of new risk models.
Market exploration and discovery: Prescient insurers actively monitor new trends and innovations, and some have even established a presence in innovation hotspots (e.g., Silicon Valley) where they can directly learn about the latest developments in real-time and initiate innovation programs.
Partnerships that drive new solutions: Exploration typically leads to the development of potential use cases that address specific business challenges. Insurers can partner with startups to build pilots to test and deploy in the market.
Contributions to insurtech’s growth and development: As we describe below, venture capital and incubator programs can play an important role in key innovation efforts. Established insurers that clearly identify areas of need and opportunity can work with startups to develop appropriate solutions.
Most insurers are looking outside the industry for the best ways to improve their systems, processes and products.
Maintaining awareness, influencing the market and identifying the right partners
To ensure an organization’s innovation efforts are in sync with – or even driving – the latest developments in the market, an EIM needs a formalized yet agile process for identifying and incorporating best practices.
Dedicated assessment of insurtech advancements can allow insurers to identify and promote best practices and key technologies. Moreover, maintaining a close connection with the insurtech market can help a company develop its external knowledge and relationships with innovators. Through this process, insurers can identify potential partners that can help them understand evolving technologies and their applications, and even contribute to developing the capabilities they desire.
With a deeper understanding of the market, capabilities and key players, insurers can be better positioned to facilitate innovation, ideation and design. While some fintech companies already have compelling insurance applications, insurers have a great opportunity to identify and design new potential use cases.
Fast prototyping is key to quickly creating minimally viable products (MVP) and bringing ideas to life. Early-stage startups develop and deploy full-functioning prototypes in near real time and go to market with solutions that evolve with market feedback. 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. Established insurers can follow the same approach or can partner with existing startups that have a MVP to help them to move to the next stage, scaling.
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 EIMs by primary function.
The innovation center
The innovation center (also named “lab” or “hub”) is a structure at a corporate level that bridges external innovation with business unit needs and innovation opportunities. It relies on internal subject matter experts and innovation champions to ignite and drive innovation initiatives at a business unit level. With this model, innovative new products and services go to market under the company’s brand.
The innovation hub provides an outside-in view while promoting innovation internally. With this model, the company dedicates a team to constantly monitor trends and market activity, build and maintain relationships with key insurtech players, identify potential future scenarios and determine new partnership opportunities.
The hub should be managed through business units to effectively innovate (i.e., building prototypes and scaling models). Execution is a key success factor, and we recommend insurers consider complementary innovation models to help promote positive outcomes.
Regardless of the model they use, we recommend that insurers of all sizes consider developing an innovation center and create an external connection based on potential future scenarios.
An incubator can drive innovation from idea to end product by identifying new opportunities and developing related solutions. Although it does require a significant investment of both money and resources, it has proven especially effective in addressing complex problems and devising new approaches to them.
Although the incubator can be internal, external structures typically create unique development environments and attract necessary talent. Via an external approach, ideas come mostly from outside the company and a panel of internal or external innovation specialists provide high-level guidance and approval for the innovation the company is seeking through the incubator.
Although the incubator initially drives innovation, business units typically become involved during the development process. They have an important role, especially when planning to deploy new solutions within the organization. The incubator can wind up as a start-up that can go to the market under its own name.
One of the main strengths of the incubator model is that it facilitates execution. It holds an idea until a prototype is developed and a minimally viable product is available. The gradual involvement of business units during the process enables the model to adequately scale. Upon adoption by its future owner, the incubator and business units can address any related challenges related to operating capacity, cyber risk, regulation and other issues.
Strategic venture capital (SVC)
The SVC model offers the opportunity to participate via stake or acquisition in relevant insurtech-related players. This is a way to influence and shape the development of specific startups (e.g. pushing them to solve specific problems) and acquire key capabilities and talent, and as a way to derive value from strategic investments.
In the SVC model, the company establishes a new ventures division, which sources ideas from the outside. The company provides funding and support for equity, while a SVC from this new structure explores, identities and evaluates solutions and markets new ventures under its own brand. The funds thatSVC invests in a startup help new players augment their capabilities and scale their business model. This could lead to potential market joint ventures, acquisitions or other deals to monetize the initial investment.
Established insurers with SVC arms are usually leaders in specific market segments and therefore leverage their experience and knowledge to select key ventures. To become more active with insurtech, these structures can be linked to innovation centers, thereby allowing companies to connect ventures with business units.
Instead of choosing one model over the other, we propose one that combines key elements from each. Companies can select elements 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.
EIM operating options
EIM operating characteristics
Bridging the cultural divide
Complicating the need to innovate is the fact that an insurer’s culture often influences an external company’s decision about partnering with it. In fact, according to our 2016 Global
FinTech Survey, more than half of fintechs see differences in management and culture as a key challenge in working with insurers. Insurers also realize this, and 45% of insurance companies agree that this is a major challenge.
Accordingly, insurers will need to assess the availability and compatibility of existing resources and determine how and where they can find what may not currently be available. By clearly articulating the organization’s needs, defining explicit roles and establishing a model for enterprise innovation, an insurer can address any underlying concerns it may have about partnerships.
While insurers can create internal structures to support innovation, most of them will have to enlist external resources in one way or another. In fact, we expect many talented professionals without insurance-specific skills will be the ones who wind up driving innovation.
Attracting and developing innovators
Insurers can create internal structures to support innovation, but – as EIMs stipulate – success ultimately depends on having the right talent. And, most insurers will have to enlist external resources – ones who have an entrepreneurial mindset and who are well-connected to insurtech – in one way or another.
How does a company attract and retain this kind of talent? There are four primary ways:
Acquire the new talent from start-ups. This works well if the acquired company keeps running its business under its own start-up rules, away from the acquirer’s bureaucracy. Otherwise, if there is too much acquirer interference, then retention will be a challenge in a market that covets innovators.
Attract the talent directly from the market. This option typically requires a new mindset from the hiring company in terms of business role, work environment and even location. Establishing a presence in relevant innovation hotspots will help make an offer more attractive, facilitate external connections and demonstrate the insurer’s commitment to letting innovators be free to innovate.
Partner with startups, technology vendors, universities, researchers and other proven innovators. This option represents a major opportunity because it enables the insurer to create the connections to and formal partnerships with new talent. However, while identifying desired capabilities is relatively easy, there will need to be strong alignment of purpose between the organization and the new partners for the relationship to work. In this case, the Innovation Hub should be the most helpful model.
Grow the talent. This option is probably the least disruptive because it doesn’t require external changes. Large organizations have the opportunity to discover talent within their structures. But, the organization will have to ascertain and leverage the mentality and professional background of employees in many different ways. Gamification, internal collaboration groups and other resources can help in the search for potential in-house innovators, but most companies will need a more sophisticated staffing model to develop this talent (e.g., having specific development plans and offering “external” experiences in projects and with partners).
Complementing these options is the insurance industry leadership’s advocacy of new methods to foster change in employee skill sets. According to insurance respondents to PwC’s 2017 CEO Survey,
61% are exploring the benefits of humans and machines working together (considerably higher than any other FS sector), and
49% are considering the impact of artificial intelligence on future skills needs (also considerably higher than any other FS sector).
In response to this rapidly changing environment, incumbent insurers are approaching insurtech in various ways, prominently through joint partnerships or startup programs. But whatever strategy an organization pursues, insurtech’s main impact will be new business models that create challenges for market players and other industry stakeholders (e.g., regulators). In this environment, insurers will need to move away from trying to control all parts of their value chain and customer experience through traditional business models, and instead move toward leveraging their trusted relationships with customers and their extensive access to client data.
For many traditional insurers, this approach will require a fundamental shift in identity and purpose. The new norm will involve turning away from a linear product push approach, to a customer-centric model in which insurers are facilitators of a service that enables clients to acquire advice and interact with all relevant actors through multiple channels. By focusing on incorporating new technologies into their own architecture, traditional insurers can prepare themselves to play a central role in the new world in which they will operate at the center of customer activity and maintain strong positions even as innovations alter the marketplace.
To effectively develop these new business models and capabilities and establish mutually beneficial insurtech relationships, established insurers will need to start with a well-thought-out innovation strategy that incorporates the following:
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, partnering via innovation centers (or hubs), building capabilities via incubators and buying capabilities via a strategic ventures division. Companies can select elements from each of these 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.
Even though insurers can create the internal structures that support innovation, most of them will have to enlist external resources in one way or another. Accordingly, they will need to assess the availability and compatibility of existing talent and determine how and where they can find what may not currently be available. Much like with enterprise innovation models, there are certain ways (often in combination) that insurers can locate and obtain the resources they need, including acquiring it, trying to attract it, partnering and growing it internally.
The most successful small commercial carriers have been able to establish highly profitable books of business by cherry picking low-complexity risks that can be efficiently underwritten and processed. These carriers monitor and adjust underwriting decisions at a portfolio level to ensure underwriting discipline and profitability.
There has been a focus on building advanced, agent-facing technology, primarily through proprietary portals. This technology streamlines the acquisition and, in some cases, servicing of this highly profitable business to provide incentives to agents to increase their submission flow.
However, this strategy has not led to any single dominant carrier in the $60 billion to $90 billion U.S. small commercial insurance market, and increasing competition is threatening the historically comfortable position of market leaders.
Several fundamental characteristics of the U.S. small commercial insurance market (e.g., higher retention, lower price volatility, large number of uninsured and underinsured business owners) and renewed optimism in small-business growth have led existing carriers to sharpen their focus on small commercial. In addition, several insurtech startups have entered the market with solutions for underserved customer segments. And, the relatively benign Cat environment has fueled further competition from various types of capital providers (e.g., hedge funds, pension funds, foreign investors, capital markets) looking to diversify their investment portfolio with uncorrelated insurance assets.
At the same time, recent pricing pressures and slow organic growth have led many distributors to leverage their positions to improve their placement yield through higher compensation. Limited organic growth opportunities also have led to a broad consolidation of distributors, with an increasingly large number of private equity-backed brokers looking for short-term gains and opportunities to reduce systemic inefficiency. Moreover, mid-market, publicly traded and bank-owned players have effected similar consolidation and focus on operational efficiency.
Serial acquirers have sometimes inherited some large books of small commercial business that are expensive to service. To lower costs and simplify operations, these intermediaries have reduced the number of carriers they do business with and abandoned servicing. Distributors increasingly favor markets with broad risk appetite, easy processes for placing new business and minimal servicing requirements.
The carriers that will succeed in this rapidly changing landscape will approach the market with an agency perspective and focus on agency economics in addition to their own performance goals. This requires evaluating opportunities to drive economic value across the whole value chain. By shifting their focus from maximizing profitable growth in terms of direct premiums written on their books to maximizing profitable premium under management (both theirs and their distributors), leading carriers can avoid the race to the bottom on price and to the ceiling on commissions.
Stretching the limits of automation
The obvious starting point is to extend the limits of what can be acquired, underwritten and serviced through a relatively automated model. The “Main Street” small commercial segment, which consists of small, low-complexity businesses with straightforward insurance needs was the first segment that carriers automated. Today, distributors can request, quote and bind “Main Street” business policies in near real time from several carriers that have successfully identified classes of business that have a lower loss ratio and require limited to no underwriting ”touch.” These carriers have established strict guidelines and knock-out criteria for the types of businesses that can pass through, leaving tougher classes to second-tier carriers or non-admitted markets. As access to information currently not captured in traditional apps and artificial intelligence becomes more prevalent, carriers can judiciously loosen restrictions on the risks that need manual review and accordingly increase automation.
Confirming underwriting classification and fit with appetite is a common reason for manual underwriting review, and is especially likely for more complex or hazardous classes. Most carriers don’t want to insure general stores that sell firearms or landscapers who climb trees. Referral underwriters must verify the classification and gather additional information by reviewing company websites, or even reaching back out to the agent or customer. Fortunately, third-party data and analytics now can provide this information. This is leading to new risk segmentations and redefining where money can be made.
Historically, distributors have (potentially unknowingly) placed the majority of their simple, easy-to-place risks with a few large carriers that can digitally “set and forget” this book. Distributors have struggled to place more complex risks across myriad markets. Classes that are not within the appetite of standard carriers are much more expensive for distributors to place and service. This is especially problematic on smaller accounts. As distributors reassess their portfolios and look to streamline their markets, they will increasingly start using their “Main Street” small commercial book as a lever for carriers to also write their complex small book. Accordingly, carriers must offer solutions for tougher classes, both to meet distributor and customer needs and to increase their own revenue opportunities.
Eliminating unnecessary hand-offs
There are many hand-offs between the customer, agent and carrier throughout the lifetime of a policy. This creates operational friction that increases costs and compromises the customer and agent experience. In many cases, carriers are in a better position to efficiently and effectively handle the transactions that distributors currently perform or initiate.
When it comes to acquisition, real-time quote and bind for low-complexity risks is already table stakes. However, carriers usually require a significant amount of information from the customer and agent to facilitate this process. Current apps are extremely cumbersome to populate, and a new streamlined application process will constitute a fundamental change to the economics of acquiring new business. Imagine being able to enter just four pieces of information about a business (e.g., business name, business address and owner’s name and DOB) and receiving a real-time quote with the option to immediately purchase and electronically receive policy documents. The transaction can even be facilitated via direct integration between the distributor’s agency management system and carrier systems to avoid redundant data entry. Furthermore, imagine this approach being implemented with no impact on underwriting quality or manual back-end processing requirements for the carrier.
Leveraging internal data from prior quotes and policies, integrating external structured data feeds and mining a business’ website and social media presence can provide carriers with enough information to determine a business’ operations, applicable class codes, property details, employment, payroll and other key risk characteristics to underwrite and price low-complexity risks. In cases where more information is needed, dynamic question sets with user-friendly inputs can augment the application process without sacrificing underwriting quality. And if the agent wants to negotiate on coverage, terms and conditions or pricing, there can be options for requesting underwriting review, supported on the carrier side by advanced routing that passes the request to the appropriate underwriter based on expertise and agency relationship. These investments are an obvious way for carriers to improve data accessibility, consistency and quality for underwriting analysis, and also increase underwriter productivity. Distributors also benefit from these carriers’ increased efficiency and ease-of-doing business and are more likely to send business their way.
Servicing can be another drain on agency resources. The amount of paperwork and transaction flow for small commercial accounts (e.g., requests for certificates, new employees or drivers) is often disproportionate to the amount of premium that they generate. As a result, it is common for carriers to offer service center capabilities. Larger agencies that are looking to streamline their operations most often use these services; in fact, they are often a key factor when agencies look to transfer their book to a new carrier. These capabilities are also appealing to smaller agency owners who may not want to hire an additional customer service representative (CSR) to manage the renewal book.
Carriers are typically in a better position to service the book on behalf of the agent because they own the master policy, billing and claims information, have the authority to process changes and have the expertise to address any customer questions or concerns. They also have the scale needed to optimize the process and manage capacity, which they can even leverage to offer servicing and other back-office capabilities for an agent’s entire portfolio (even that written with other carriers), completely eliminating the need for a CSR. Furthermore, seamlessly servicing the business that transfers to another player’s balance sheet can enable another important strategic aspiration: helping new capital providers enter the small commercial insurance game.
Renting underwriting acumen
As we mentioned, alternative risk-bearing capacity is proliferating. Various categories of capital providers may have an appetite for different risk profiles (e.g., high-volatility, long-tail risks). Some of them may enjoy a higher net investment income ROE and therefore can afford lower underwriting profitability thresholds. However, they still need an underwriter and “A”-rated paper. Currently active fronting arrangements are already providing a more direct link between capital and (currently mostly short-tail) primary risk. Small commercial carriers could “rent” their underwriting expertise via similar fronting ventures and significantly “write” more, including classes of business with a higher loss ratio that may still be attractive to certain capital providers. This would be an effective way to artificially broaden underwriting appetite, leading to improved ease of doing business for distributors. Risk placement of small, complex risks can pose challenges for agents who have to procure and maintain a significant number of appointments, each of which may require distinct and inefficient acquisition and servicing processes. By underwriting risks on behalf of another party, a carrier could earn additional revenue for fronting the business while offering a valuable service to their distribution partners.
A carrier that offers services in these three areas could become the one-stop shop for placing small to mid-sized risks for distributors. And if that carrier could continue to offer a competitive compensation package, it would have an outstanding value proposition. Value-added offerings could be part of a strategic compensation package that drives desired agency behavior – for example free servicing on year 1 business if they meet new-business growth goals, or broadened appetite and placement services if they maintain profitability standards. Ultimately, it may be able to fundamentally restructure the economics of providing insurance and ancillary protection services, with tangible benefits to all constituents.
By thinking like a distributor and identifying opportunities across the insurance ecosystem to drive value, a carrier can compete on ease of doing business rather than price – changing the playing field to protect margins and drive profitable growth. This goal would have been difficult to achieve a few years ago, but recent technology advances have made it possible.
Just a decade ago, “insurance” and “innovation” seemed mutually exclusive. Insurance products and the business overall hadn’t changed much over the previous century and the likelihood of insurers – which, by their very nature, are risk-averse – changing anytime soon seemed unlikely to many both inside and outside the industry.
However, over the past decade, there have been dramatic changes in the world that insurers cover and in the data and technology available to them. The result is that insurance companies have opportunities to explore new revenue models and improve profitability in ways that did not exist even just a few years ago.
The most prominent changes and their effects on revenue models include:
1. Consumers, social media, and data – The ability to connect, communicate with and observe insureds and potential insureds in real time or near real time has opened up new possibilities for insurers to understand their customers’ needs, pain points and desires. Many carriers have started to rethink their customer experience so they can “listen” directly to their customers instead of being solely reliant on their distribution channels.
Revenue model implications –Insurers are using technology and data tools to explore opportunities to provide complementary products and services to insureds. These tools enhance carriers’ understanding of customer needs and enable them to address these needs seamlessly via direct and indirect channels.
Profitability implications – Insurers are rethinking their business processes and customer journeys to identify “leakage areas” and “moments of truth” when profits are hurt by 1) frustrated customers choosing to leave or 2) missed opportunities to expose customers to products and services that meet their needs.
2. Insurtech – While the fintech boom has subsided somewhat elsewhere in financial services, insurtech is still growing. Traditionally, one of the biggest hindrances to many insurers in getting new products or new product enhancements to market was their own technology and data environment, and the belief that they alone had to build any new technology from scratch. However, the rapid rate of technological change and insurtech capabilities has led many carriers to look externally to enhance their capabilities and test new products and delivery models for their products. This underlies the promise that insurtech offers for established players – in fact, we think the opportunities that insurtech presents outweigh the threats many incumbents perceive.
Revenue model implications – Insurers are increasing their investments in, partnerships with and acquisitions of insurtech companies to more quickly bring new products and services to market, especially ones that better match pricing to a more accurate understanding of the risk or actual use of the insurance (including on-demand and usage-based insurance models).
Profitability implications – As a result of technological disruption, insurers are rethinking their value-chains and leveraging insurtech and other technology systems to improve operational areas that have historically been inefficient in terms of cost, time and use of human capital.
3. Internet of Things (IoT) – Although IoT technically is part of nsurtech, the impact of device networking is creating unique risk management – even risk avoidance – opportunities for insurers. From commercial and personal line P&C to life/health and group, IoT opens up opportunities for carriers to move from simply computing the probability of risks and then reacting to them as they occur to being able to monitor potential risks and prevent their occurrence.
Revenue model implications – Insurers are exploring how IoT can open up product and service opportunities. In the P&C space, insurers have the option of partnering with IoT companies to provide IoT solutions as part of their product offering in both B-to-B and B-to C. In life/health and group, we expect insurers to continue to test how devices can reinforce healthy lifestyles and open up opportunities for insurers to make life and health truly about “life and health” and not just death and sickness.
Profitability implications – Insurers are leveraging IoT to reduce claims frequency and severity. We expect new insurance models will test and explore ways to share these benefits with the customers – for example, by using behavioral economics techniques to provide incentives and reinforce positive decision-making and lifestyle choices.
4. Bionic Advice – There is currently a lot of talk about robots and machines replacing humans. However, at least for now, the real opportunities are not in finding the “perfect algorithms” that completely automate advice. Rather, they’re in machines enhancing the effectiveness of advisers and other distribution channels. And, the insurance industry appears to be prepared; in our recent annual CEO Survey, 61% of insurance CEOs said their companies are exploring the benefits of humans and machines working together.
Numerous studies have confirmed that customers prefer the flexibility of interacting with insurance companies via the channels of their choosing – and this still often includes human ones. The real benefit of robo-advisers and AI is that they can automate basic advice but provide immediate, detailed information specific to a given customer that an adviser then can use to inform her product and planning suggestions. In addition, robotics and AI increasingly provide insurers the opportunity to capture information and refine their understanding of and recommendations for their customers throughout the sales and customer lifecycle processes.
Revenue model implications –Insurers are exploring bionic advice models to increase revenue by better matching products and customer needs and by creating new product bundles based on an enhanced understanding of customer segments.
Profitability implications – Insurers have lost out on many sales opportunities over the years – not because they had disinterested customers but because they or the channel partner never really understood customer needs. Many carriers realize this and are exploring how to deploy bionic advice models to automate customer follow-up, either in real time (e.g., while talking to an adviser) or at specific intervals (e.g., annual review, life event, etc.). The goal is to help carriers be more relevant to customers and, by offering appropriate products and service bundles, increase the products per household and boost “stickiness.”
In the case of the scenarios we describe here and others that could emerge, we see some consistent patterns:
New revenue models will result from the opportunity to leverage data, technology, social medial platforms and mobile devices that lead to the creation of new products, services and pricing strategies.
Insurtech is not just about new products and services. Insurance companies will continue to take advantage of emerging technologies and data to enhance their internal operating models. This, in turn, will enable them to market new products and services faster and to sell and service them more efficiently.
Insurance companies will continue to explore how to leverage peer-to-peer models and behavioral economics to drive new pricing strategies, growth and profitability.
Insurance CEOs are acutely aware of the disruption and change facing their industry. Keeping pace isn’t just a matter of adopting new technology. It’s also about being innovative and developing the customer intimacy needed to meet fast-shifting market expectations, while sustaining an unrelenting focus on reducing costs.
Disruption and change
Insurance CEOs’ concerns over regulation, the pace of technological change, shifting customer behavior and competition from new market entrants have continued to rise from their already high levels. In fact, no other industry group of CEOs is as “extremely concerned” about the threats to growth in these four areas.
Incremental innovation and marginal cost savings won’t be enough to sustain profitability and growth in this disrupted marketplace. The good news is that many insurers are embracing innovation. Two-thirds of insurance CEOs see creativity and innovation as very important to their organizations, ahead of other financial services sectors. They’re also ahead of the curve in exploring the possibilities of artificial intelligence and humans and machines working together.
Innovation and growth
86% of insurance CEOs believe technology will completely reshape competition in the industry or have a significant impact over the next five years. The gathering transformation is already evident in areas ranging from robo-advice to pay-as-you-go and sensor-based coverage.
Cutting-edge customer interaction and data analytics have enabled insurtech businesses to set the pace in the marketplace. However, rather than being just a threat, collaboration with insurtech businesses can help more established insurers to make the leap from incremental to breakthrough innovation. This includes improving insurers’ ability to analyze the huge amounts of data at their disposal, which can lead to better customer understanding, higher win rates and more informed underwriting. Partnership with insurtech can help insurers improve processes, increase efficiencies and reduce costs.
Data, digitization and trust
While digitization and data proliferation are now central elements of the insurance business, they bring increased cyber risk. More than eight out of 10 insurance CEOs (81%) are “somewhat” or “extremely” concerned about the impact on their growth prospects, on a par with banking and capital markets (82%).
Given the volume of medical, financial and other sensitive policyholder information that insurers hold, breaches could lead to a loss of trust that would be extremely difficult to restore. More than seven out of 10 insurance CEOs (72%) believe that it’s harder to sustain trust in this digitized world, though they also see the management of data as a competitive differentiator.
Grappling with regulation
A massive 95% of insurance CEOs are at least “somewhat concerned” about the potential impact of over-regulation on their growth prospects, and 67% are “extremely concerned.”
The need to implement so many regulatory reforms across so many areas has inevitably tied up management’s time and made reporting more cumbersome. Compliance demands and costs also continue to rise, straining operational infrastructure and holding back returns. However, these are the unavoidable realities of today’s marketplace. Insurers that are able to build the changes into business as usual can gain a critical edge. And pressure on returns means the “second line” now has to pay its way as part of an approach that shifts the focus beyond compliance to sharpening competitive advantage.