Insurance on the brink of disruption - what does it mean to us?!

It is about time we start focusing on the insurance industry which has permeated our lives as a critical force in providing risk protection to our cars, life, businesses, properties, etc and where are we headed?! - What what does it mean to consumers? What are value drivers insurance firms can adopt to align with the disruption wave?

Insurers have long relied upon their complex traditional business models as entry barriers insulating them from disruption and allowing them to getaway with modest to no changes in the way they operate for decades!

We have now officially entered into an era where consumer preferences have overruled pre-existing business models and have forced businesses to either rapidly adapt to their growing need for new experiences or become extinct.

There are primarily 3 categories of insurance - Life & Health (L&H), Property & Casualty (P&C) and Commercial Insurance

Lets take a closer look at some of these themes across types and emerging trends:

Risk Pooling:

This is a fundamental construct of the insurance business where massive capital reserves are assembled and grouped to provide protection against risks. This is not easy to replicate for new entrants which allowed traditional players to remain untouched.

This model is now threatened in couple of different ways through capital markets:

• This model is now threatened with the rising prominence of 'cat' (catastrophe) bonds and ILS (Insurance linked securities) in the capital markets ($30B in 2016) which provide primary carriers and commercial policyholders alternate risk mitigation strategies.
• Hedge fund managers are investing into creating reinsurance entities with significant capital which have better investment strategies on the premiums than the traditional reinsurance firms. This alternate capital market is expected to increase to 20% of the global reinsurance funds (Est $600B) by 2018.

Product Complexity:

Insurers have long relied on complex, opaque and often misunderstood product offerings which allowed a number of traditional agents and brokers to act as intermediaries. This resulted in consumers being positioned further away from being able to make the right choices in protecting themselves.

The net commissions paid out to intermediaries in recent years crossed $100B annually accounting for an average of 10% on net premiums collected across just L&H and P&C customers!

The scenario is now changing with the advent of social brokers, direct-selling, online aggregators and peer-to-peer networks:

• Lemonade is an online peer-to-peer insurance network which brings like minded or family/friends to come together and create a pool which allows them refunds on their premiums when they don't report a loss that year. This model is also aimed at reducing the number of fraudulent claims (estimated to be ~80B annually)
• Websites like autoinsurance.com act as an aggregator platform for comparing rates and coverages across different insurers providing more opportunities for consumers to shop online for insurance just like anything else in the digital era.
• Social brokers like BBM create affinity groups based on risk profiles and negotiate better coverage rates with carriers based on a more consistent risk model leading to lower premiums than the traditional model which covers various risk categories.
• Many direct sales initiatives have been launched like Mass Mutual's term life insurance online, Progressive Direct's P&C coverage and Berkshire Hathaway's online sale of workers' comp liability and other policies for SMBs which are all geared towards connecting directly with their customers!

Underwriting Data & Skills:

Insurers have traditionally relied on their unfettered and protected access to data analytics capabilities required to underwrite and price risks which allowed them to protect their business.

We are now seeing more advanced tools being designed and developed by technology startups (InsurTechs) bringing in real-time data from Internet of Things (IoT), social media, credit card histories, and other digital records providing more accurate predictions to protect and prevent loss disrupting those models:

• Telematics are helping auto insurers to monitor driver behavior with associated data and determine their risk profile with premium discounts being offered to signup and much lower premiums if they are deemed less risky.
• IOT devices installed on key equipment in a factory transmits data for an analytics platform to reliably predict device failure before it happens potentially saving millions due to downtime.
• Some L&H insurers are using fitness devices like Fitbit to monitor health patterns of consumers and providing discounts on their premiums for positive behavior promoting healthy living.

This is a fundamental shift towards preventing risk than insuring against it. There are many more such examples where Insurers of the future will play more of a risk avoidance role and less of a risk mitigation one further diminishing the value of the underwriting process.

Parting Thoughts:

• With the onset of self-driving cars the whole concept of auto insurance liability now shifts from insureds to product liability (Shift of ~$112B). This is a welcome change for more predictable driving behaviors but what does that do to the cost of auto ownership?

• As we see more incidents of cyber crime these days, there is a steady increase in cyber liability insurance numbers with an annual growth of 36% expected to reach $10B by 2020. How risky is this business given there is a 125% increase in cyber attacks YoY and as we have seen a single breach of customer data can drop a firm's valuation by $6B (Experian)?
• What if someone like a Google or an Amazon with the necessary data and analytical skills and platforms that reach millions not only offered more personalized products, but also began to cherry-pick low-risk customers? If they did so in significant numbers, the insurers’ business model of collecting premiums from low-risk policyholders which contribute to the claims of high-risk ones could fall apart?
• While policy bundling has arrived providing consumers the convenience and discounts on auto & home insurance going through the same insurer, we haven't even gotten started on developing more personalized underwriting & pricing models for each consumer with collective data and customer 360 degree view. Are we going to see that fundamental shift in the next 5 years?

Would love to hear your thoughts/comments on how you see this industry shaping up and what it means to us?!!

Data Credit: Deloitte Financial Services

Sid Nandi is a transformation leader, coach, technology strategy & management consultant experienced in helping organizations, business and technology undergo digital transformation with agility delivering customer centric products and solutions.

?His venture (DigitalTaaS) provides management, strategy & delivery consulting specializing in digital transformations to help organizations transform their business, technology & operations in creating sustainable value in a digital world. He is passionate about connecting and collaborating with fervent transformation professionals from all industry verticals committed to building sustainable enterprises!.