Blog. The future of insurance. Part 2 of the series ‘Disruption and new business models’
We live in a fascinating and rapidly changing world. Together, technologies such as robots, artificial intelligence, the Internet of Things, self-driving vehicles, 3D/4D printing, solar energy, nanotechnology, biotechnology and quantum computing are initiating a 4th Industrial Revolution. We are witnessing new products, new methods of production and new business models across all industries. This is Part 2 of the series Disruption and new business models, discussing the future of insurance.
Rewarding good behaviour: “pay-as-you-do”
Sensors are being placed everywhere, and at a rapid rate. The Internet of Things is expanding fast, with an expected 50 billion devices connected by 2020. We place boxes in cars which record our driving habits; those who keep to the speed limit, brake gently and slow down before curves are rewarded with lower car insurance premiums. Such practice is already available in the Netherlands via Fairzekering, Voorop from Nationale Nederlanden and the ANWB.
A smart home experiences less damage. Not only through the installation of fire alarms, but also via devices such as CCTV and washing machine sensors which alert the owner to maintenance issues before water damage occurs. And an increasing number of people now wear watches or other wearable technology which measure personal fitness and health levels. All very useful data when it comes to setting insurance coverage and premiums based on each client’s unique behaviour.
The Vitality programme from Discovery – a health and life insurer – available in countries such as South Africa, the USA and the UK, takes this ‘pay-as-you-live’ principle a step further. Those members who actively participate in sports and eat healthily are not only rewarded with fitness centre and medical check-up discounts, but also benefit from train and flight ticket price reductions. Consumers seem to be prepared to give up some aspects of personal privacy for financial gain.
New customer propositions based on peer-to-peer principles
The sharing economy has experienced great success in a wide range of sectors. In the financial sector, we have witnessed the arrival of peer-to-peer lending: platforms offering loans from private individuals without going through a bank. In the world of insurance, the peer-to-peer principle is more complicated, as the pay-out received after a house fire, for example, is so many times greater than the premium paid. You need a large group of clients and a solid balance sheet of an insurance company in order to offer such cover.
The German insurance broker, Friendsurance, solves this problem by making a distinction between large and small claims. Only large claims go through the insurer, and these receive 60% of the premium. The remaining 40% is pooled and used to cover small claims. At the year’s end, any remaining money is paid out to the insured parties. Furthermore, insurance is taken out against the early emptying of this pooled account so that clients are never required to pay extra on their existing premiums.
In the Netherlands, we have the Broodfondsen (Bread funds). This is a form of disability insurance supported by and for the self-employed. Groups of business owners (minimum 20, maximum 50) help each other with donations in cases of employment disability. These Bread funds are structured as associations, not insurance companies.
Creating trust through transparent premium spending
A few months ago, Lemonade.com was launched with great fanfare in the United States. In their own words they experienced an ‘Aha!’ moment when they realised that unpaid claims result in higher insurance company profits. They wanted to gain client trust through income transparency, specifically 20% of premium value, the remaining sums being used for claims payments, reinsurance, taxes and charity donations.
In the Netherlands, InShared (part of the Achmea group) has been doing this for years. Both Lemonade and InShared emphasise the importance of solidarity and make an explicit appeal to their clients not to hand in fraudulent claims.
Virtual advisors and intermediaries
Many consumers find insurance a complicated business and ask advice from, for example, an insurance broker. It has taken a long time for direct-to-consumer insurance sales to become popular, even for the simple protection of a car or a home. Since advisory costs for income and life insurance must be separately invoiced, fewer consumers seek advice. If this is the effect of advisory cost transparency, consumers apparently do not consider the advice worth the cost.
Virtual advisors or chatbots offer a solution; the best of both worlds. Virtual advisors are cheaper than human advisors and more reliable than a DIY search. An artificial intelligence (AI) robot can contain more information than a human with many years of in-field experience and is available 24/7. Robo-advisors are made possible thanks to a combination of machine learning and cognitive technology which can understand, read, speak and write using natural language. Most use English, at present.
One example from the United States is Evia, from the comparison site Insurify. You send a photo of your number plate initiating a text conversation with Evia. Evia collects all necessary information, puts together a proposal and purchases the insurance policy for you. As well as IBM Watson, Amazon Echo and Facebook M, there are a large number of start-ups offering this type of ‘intelligent assistance’.
Many consumers struggle when it comes to an overall view of their insurance portfolio, especially when they have policies from various insurance companies. The Swiss app, Knip, and the German GetSafe not only offer a complete overview of your policies, but also automatically inform you of gaps in insurance coverage, as well as cost-saving opportunities.
Customer services improvements and lower costs go hand in hand
The time it takes to process new insurance applications, changes to existing policies and insurance claims could be drastically reduced. By this, I don’t mean from 5 days to 24 hours, but instantly. Customer expectations regarding their choice of insurance company are determined through their experiences with the Apple Store, Bol.com, Booking.com and all the other online companies which already offer instant service.
Such a product, as demanded by clients, can only be achieved through process digitization and automation. Many insurers still use batch processing, which has become too slow for today’s requirements. Robotic process automation (RPA) not only speeds things up to the tempo clients have come to expect, but also saves on costs. A double benefit.
Virtual assistants, such as Nienke from Nationale Nederlanden and Maud from Ohra can be used to answer simple questions. We also come across more websites with online application forms. If there is an automated underwriting protocol behind this form, an insurance policy can be offered instantaneously. And the aforementioned Lemonade claims the world record ‘payment of an insurance claim’, namely 3 seconds, thanks to the use of artificial intelligence.
The promise of blockchain
Much has been said within the insurance sector about blockchain, with a range of initiatives already underway. Everledger, for example, uses blockchain to determine the owners of diamonds and precious stones. And international database for works of art could also be made possible using blockchain technology in order to precisely pinpoint a current legal owner.
In 2016 the (re)insurers Allianz, Aegon, Munich Re, Swiss Re and Zurich worked together to set up the B3i (Blockchain Insurance Industry Initiative) project with the aim to research possibilities in blockchain application. This group aims to set up specific standards, ensuring consistent methods of information exchange between parties. This would simplify automated claim settlements involving multiple insurers. It would also make it possible to discover fraudulent claims at an earlier date, as use of blockchain technology makes claiming from multiple insurers for the same event a thing of the past.
It is too early to speak of a major breakthrough in blockchain technology. Furthermore, although all these initiatives could make use of blockchain technology, it is not essential to their development.
The key to profitable insurance is data-analysis
The insurer’s profitability depends on the accuracy of their assessment of risks and the claims costs forecast. Actuaries assess risk events and event frequencies. Various models exist for property, casualty, life and health insurance.
The amount of available data is increasing significantly, meaning risks can now be calculated more precisely. New variables are being discovered which give further insight as regards damage cause and effect. Life insurance models formerly based on two data points (such as age and gender)can now use four (income and address, for example), meaning insurance companies can focus their marketing efforts on specific, profitable market segments. And thanks to new software tools, such as No-SQL and Hadoop, we are now able to integrate unstructured data into the analysis as well.
Old and new insurance types
Should cars become self-driving, there will no longer be a need for driver liability insurance. Liability will lie with the car manufacturer. We have already discussed this in the previous blog about the future of mobility.
A new form of insurance is cyber insurance, offering cover for events including hacking, ransomware (digital blackmail) and identity fraud. Often, prevention and incident management take priority over compensation for losses. Cyber insurance is not common, even though damages caused by this form of attack can be huge.
Drones also need to be insured. There are 2.5 million flying around in the US alone. And how should one insure against risks related to biotechnology, nanotechnology and artificial intelligence when they perform in ways they were never meant to perform?
The fact that we are all living longer is an important one, especially for pension providers. Lifespan is not only increased through improvements in healthcare, but also through new technologies which make our environment less dangerous. Self-driving cars reduce the number of car accidents, smart homes are safer. We will come back to healthcare developments in detail in a later blog.
No change without impact
The changes we have discussed affect every aspect of the insurance value chain. For consumers, this is great news; lower premiums, a higher quality of customer services and (almost) free advice for all are just around the corner.
For the insurance sector, however, the consequences of these changes are disruptive and all point towards a similar outcome. It is inevitable that the sector will shrink. There will be significantly less employment opportunities in the insurance sector than before.