In June 2016 Swiss Re in their sigma report highlighted the global insurance industry has $4.5 trillion in premiums, grew steadily in 2015 amidst moderate economic growth, and offered a mixed outlook with low-interest rates weighing on profitability.
Extraordinarily their report failed to refer to customers, innovation, technology, platforms or disruption! Even once!
The size of the insurance industry, its apparent indifference and data intensive nature has created the perfect conditions for new entrants, the urgent need for innovation and inevitability of disruption.
pwc reports 90% of insurance executives believe some part of their business is at risk from insurtech and 74% believe insurance will be one of the most disrupted industries.
Confirming the magnitude of this change Fujitsu reports more than half (52%) of 1180 business leaders surveyed across the world say their organisations will not exist by 2021.
Customer Sentiment and Behaviour
Customers want insurance companies to provide easy to use, unbundled, relevant products, affordable premiums, streamlined and transparent processes and reliable payments.
As recently emphasised by the Australian Prudential Regulation Authority (APRA) current poor performance, rising costs, refusal to pay claims and outdated definitions have resulted in low levels of customer confidence. The time for talk is done. The time for delivery and action is here.
While customers want insurers to honour their social contract to operate trust in the global insurance industry and business in Australia is less than 50%. Further exacerbating this dire position Australia Tax Office data shows a number of insurance companies operating in Australia, including Ansvar, Hannover Re, METLIFE, RACQ Operations, RACV, TransRe and XL Insurance paid no tax in the 2014-15 financial year.
And the gagging of Australian Securities and Investment Commission (ASIC) from naming those insurers which have the highest rates of rejected claims, and those that link remuneration with rejected claims.
Global and local demographic changes including ageing and increasingly casualised workforces in developed markets; the rise of the middle class and increasingly urbanised populations in emerging markets; the segue of the global workforce to millennials; and more than 3.5 billion now online have created new needs and service expectations of the insurance industry.
Also, the rise of online and social media have empowered customers with choice, information including price e.g. iSelect and value comparison websites e.g. Fluo, and influence allowing them to bypass traditional insurers, distributors and gatekeepers and buy insurance from others.
The collapse in traditional broadcast viewers and press circulation numbers has also necessitated a shift to mobile and online communications channels by insurance providers.
These trends require insurers to urgently redefine their culture, governance, business, products, services and engagement models.
The acceleration of innovation and an exponential rate of change
EY reports “two-thirds of what we consume today was not invented twenty-five years ago” and “the pace of change, obsolescence and renewal is still accelerating”.
Ubiquitous devices and sensors, hyper-connectivity, supercomputing, artificial intelligence and a mashup of social, mobile, data, analytic, cloud and automation are driving this exponential change.
New entrants and global platform providers e.g. Alibaba, Amazon, Apple, Facebook, Google, Microsoft are using these innovations and the associated explosion in data to redefine the customer experience, anticipate customers needs, and understand and price risk in real time.
Traditional insurance companies with margin pressures, legacy systems, heavy regulation and antiquated processes and traditional models of risk assessment can not compete with these savvy competitors and face a significant loss of market share.
New Entrants, Competitors and Collaborators
Accenture has estimated insurtech investment more than tripled from $800m in 2014 to more than $2.6bn in 2015 and another reports over 75 digitally born companies in Silicon Valley are in the process of redefining the rules and the infrastructure of the insurance industry.
Many new entrants focus on combining data, customers insights, analytics, and supercomputing to deliver low cost, usage and behaviour based products and pricing. For example, Trov has been backed by Suncorp to embrace digital disruption and provide a higher level of mobile service to Generation Y. Elsewhere, “watching-football-drinking-too-much”, “high heat”, insurance against flight delays have been offered by Zhongan in China.
Both health and life insurance companies have tapped into the data from wearable devices to offer enhanced services, e.g. Oscar Health Insurance partners with wearable-device company,
Misfit. They and others e.g. FitSens reward fit customers by automatically linking their biometric information to their health insurance. Similarly, Quantifyle allows users to generate personalised insurance policies by providing their wearable and other health data to insurance companies.
In the UK, where telematics-based motor insurance has been available for more than a decade, with very low levels of take up, Insure The Box now offers drivers lower premiums if the installed telematics show them to be less risky and they also use the data to disprove fraudulent claims. Similarly, IntelliTrac in Australia and Truemotion in the USA have developed software that automatically monitors and measures drivers’ data for insurers.
Despite privacy, data sovereignty and cyber security concerns by insurers Deloitte reports 63% of millennials are willing to share their data for more accurate premiums, and more are prepared to manage their insurance online with companies like FinanceFox
By way of defence against these new entrants and competitors Gartner predicts that 80% of life, property and casualty insurers worldwide will partner with or acquire insurtechs by the end of 2018 to secure their competitive positions. At the same time, some have already established in-house venture capital funds or innovation hubs.
Disruption in Insurance Products
Shortly whole categories of current insurance products will be upended. The World Economic Forum predicts that, within a decade, 10% of all cars on US roads will be driverless. And Munich Re, expects UK car insurance premiums to fall by 63 percent between 2016 and 2060 and profits from the product to fall by 80 percent over the same period.
Drones will make possible new forms of insurance e.g. drought while also being used to assess damage quickly, safely, and cheaply after accidents, floods and fires.
The application of location, satellite imagery and built environment data as provided by PSMA Australia, sensors, the Internet of Things, smart homes and smart cities will similarly transform home, property and business insurance.
Meanwhile, the sharing economy platforms e.g. Uber, Airbnb, Campify have both unlocked spare capacity and changed ownership models blurring the lines between personal and business use. Platforms have created the need for new types of insurance as offered by Cuvva (by the hour car insurance), Metro mile (insurance by the mile) and TURO where car owners lend their cars to others with insurance. The insuring party has already changed e.g. Uber provides default insurance for both hosts and guests, and in the future, insurance could be bundled with cars by manufacturers or managed by fleet owners e.g. Uber.
Disruption in Insurance Operations
Just as websites have replaced call centres and self-service claims reporting such as “estimate by photo” have created fast, seamless customer experiences automation, analytics, and robotics will further transform customer service and claims processes, enabling insurers to improve fraud detection, and cut loss adjustment costs.
At the same time, customers and new entrants are collaborating to bypass traditional agent and broker distribution channels with peer to peer platforms e.g. Bought by many, Friendsurance, Guevara and Lemonade combining social networks and insurance to pool risks and purchasing power to offer fast and low-cost products and service.
While it is true, many new entrants rely on established insurers for underwriting, claims and administration losing control of distribution is one of the big challenges for established insurers.
To combat disintermediation insurers have turned to online and automated tools, algorithms, and social media feedback, and machines that understand speech, like Amazon’s Echo and Google Assistant, and IBM’s Watson Virtual Agent to offer higher quality and lower cost service.
These changes herald the profound impacts of Bitcoin, and other digital currencies which could fundamentally transform all aspects of insurance. The World Economic Forum predicts that, within a decade, 10% of global gross domestic product (GDP) will be on blockchain technology, disintermediating established institutions, as new services and value exchanges are created directly on a blockchain. Gartner predicts by 2022 a blockchain-based business will be worth $10 billion and Australia is moving to become one of the first countries to regulate e-currencies.
Each of these trends heightens the vulnerability of insurance companies. Increasing the likelihood of further attacks like that on Anthem (the second largest health insurer in the USA) where an estimated 80 million customers and employees records were hacked in early 2015 and also the potential for the malevolent use of advanced AI.
The global insurance industry is facing a period of profound change. Insurers by their nature are cautious. This is no time to delay.
Insurers need a move quickly to embrace innovation and become agiler. To do so, they need a culture that fully understands the primacy of the customer, nature of technology change, and new competition models.
Barriers to entry are low. The primary role of insurers has been to quantify and manage risk, and for this, they charged a premium. Supercomputing, Artificial Intelligence, and big data allow new entrants to manage risk better and provide more highly valued products and services.
Insurers can no longer rely on their scale, depth of financial reserves, the shield of regulatory barriers or the lethargy of customer to hold off competition.