New technology, higher customer expectations and digital disruptors are pushing the insurance industry towards the digital future. In this digital future, new products and services will emerge. This article gives you some pointers as to what the future might hold for the development of new products and services in the industry.
INSURANCE INDUSTRY DISRUPTION: KEY DRIVERS OF CHANGE
The insurance industry is set to undergo a radical digital transformation process. In five to ten years, the industry will be completely changed. According to the Institute of International Finance’s report “Innovation in Insurance: How Technology is Changing the Industry”, there are three underlying drivers of change which propels the insurance industry into the digital era:
Technology: According to Professor Klaus Schwab, founder and executive chairman of the World Economic Forum, we are living in the Fourth Industrial Revolution. Characterised by emerging technology breakthroughs, including artificial intelligence (AI), robotics and the Internet of Things (IoT), the present-day technological revolution is disrupting industry after industry. The insurance industry is no exception.
Customer expectations: How consumers behave today, is radically different than how they consumed goods and services just ten years ago. The widespread dissemination of information through the Internet has shifted the power from the service-provider to the customer. Self-service portals have become expected, social media is a valid arena for customer communications, and a new generation of tech-savvy millennials are driving customer expectations up. For insurers, this is a challenge as insurance companies generally rank low in trustworthiness, as reported by accountancy Ernst & Young.
Digital disruptors: Technology-driven, new market entrants are set on disrupting the insurance industry. These so-called InsurTechs are leveraging new technology to cater to the changing customer expectations and needs or to improve existing business processes for improved efficiency. Even tech giants like Google, Amazon or Apple may become contenders on the insurance marketplace, as one survey done by Scratch shows that 73 percent of millennials will be more excited to purchase financial services from one of these rather than their existing service provider.
Although we cannot be entirely sure what the future holds for the insurance industry, these drivers will become significant contributing factors in the development of new products and services within the industry. What these products and services might be, is the focus of the remainder of this article.
TELEMATICS, DYNAMIC PRICING AND THE CAR INSURANCE MARKET
We live in a hyper-connected world where billions of devices are connected to each other through the Internet. Gartner expects that 8,4 billion connected “things” will be in use in 2017 and as much as 20,8 billion by 2020. For insurers, this connected IoT-enabled era promises opportunities for developing new products based on streams of data flowing to and from customers’ wearables, smart homes and connected cars.
Telematics-based car insurance, for instance, has already gotten a head start in the IoT-game. By installing and taking advantage of telematics devices, insurance carriers can gather behavioural data on driving to offer customised insurance policies and better loyalty schemes to customers. The insurance company Cuvva, for instance, leverages telematics data to provide a complete digital experience for their end users, through their pay-as-you-go car insurance.
BI Intelligence expects 381 million connected cars to be on the road in 2020, making dynamically priced car insurance a trend to keep an eye on for the future. However, the car industry is set to undergo further technological transformations. Ford, for instance, plans to roll out driverless cars without steering wheels and pedals by 2021, and Tesla is set to make their cars autonomous within 2018. The safety benefits are significant. According to McKinsey, autonomous vehicles bear the potential of reducing car accidents by up to 90 percent. For insurers, however, this translates into falling premium prices.
SMART HOMES AND DATA-DRIVEN PROPERTY INSURANCE
Advanced technology is also making its way into our home. The smart home market, households equipped with sensors and devices that can communicate with each other and can be remotely controlled through one central point, is expected to be worth 137.91 billion USD by 2023. These smart home sensors and monitoring systems give both homeowners and insurers data on and the ability to control major risks in the household.
Smart homes will impact the entire insurance value chain for carriers. According to Cognizant, smart homes will shift insurers’ selling proposition to how losses can be prevented or mitigated. Risk selection will improve, claims cost will be reduced and insurers will be able to provide targeted offerings to their customers.
One insurance company who is already offering smart home insurance is PURE. They offer insurance discounts to customers who install temperature monitoring systems, as these systems help avoid frozen pipes and other temperature-related issues and damages.
WEARABLES, VALUE-ADDED SERVICES AND THE HEALTH INSURANCE MARKETPLACE
It’s not only our cars and homes that will be connected, we as humans will become connected too, as we put on our smartwatches, fitness trackers and other wearable technology. These smart, electronic devices that can be worn on the body as implants or accessories is a fast-growing area of consumer technology.
Just as IoT enable management and reduction of risks in households and on the roads, so does wearables enable policyholders to manage and reduce their own risks, for instance by medicating high blood pressure. Insurers should be prepared for falling premium income levels as a consequence of the reduction in level of risks.
However, the data wearable technology generates, may be leveraged by insurers to provide new and refined products and services. FitSense, for instance, uses data from apps and devices to create rich customer profiles that allow insurers to personalise their products and services. As “The Future of General Insurance Report 2016” notes, a data-driven world will change the focus from fighting over offering the cheapest cover to provide the most compelling value-added services and IoT incentives.
New, tech-driven start-ups are shaking up the traditional insurance distribution model as they leverage the opportunities inherent in the concepts of sharing services and pay-per-usage. The UK-based InsurTech Trov, for instance, offers an alternative solution for the mobile generation by giving them access to an on-demand platform that generates real-time prices for different insurable items. Their mobile app allows people to insure what they want when they want for as long as they want.
According to Ernst & Young, this form of usage-based insurance has the potential to reduce claims cost by 40 percent, reduce policy administration by 50 percent, reduce acquisition cost substantially and more effectively price policies. Unsurprisingly, it is the tech-savvy millennial generation driving the adoption of this insurance model, as 93 percent of millennials in the US would buy a usage-based insurance policy if the rates didn’t rise.
LOOKING FORWARD: KNOWN UNKNOWNS
The massive adoption of IoT-devices threatens to undermine existing insurance models. However, new risks will likely emerge. Just imagine how global warming might impact existing natural damage insurance pools. Perharps there will come a day where it is possible to get insured against the consequences of global warming? This means insurers should spend time on identifying unknown needs and risks that require new insurance products and services. This will be critical to surviving in an industry that is bound to be disrupted.
If you’d like to read more about what the future holds for the insurance industry and how you can prepare to handle the changes, feel free to download our e-book “The Insurance Industry 2025: A Digital Transformation Roadmap”.