We’ve spilled a fair amount of virtual ink on the use of digital technologies to market, sell, and service insurance. That’s pretty straightforward. More difficult is assessing the impact of digital technology on the core processes of insurance: underwriting, pricing, risk management, and claims.
If we are seeing digital being leveraged in these areas, there might be some fundamental changes going on that will have a broader impact on the business of insurance generally.
These are early days, so we’d really like your thoughts.
Can we spread risk in a population of one?
A recent article in the Economist argues that technology is not only changing the processes around insurance, but the nature of insurance itself. The author uses telematics enabled Usage Based Insurance (UBI) as an example.
Rather than relying on “blunter proxies to assess risk—age, sex and marital status” for automobile insurance, the author notes that “modern technology enables insurers to gauge individual risk much more precisely.”
The author suggests, this runs against the ‘spread of risk’ concept. When insurers move away from putting large numbers of risk items into a single pool, greater precision allows cherry picking lower risks. In the process, “insurers may transform themselves from distant, cheque-writing uncles into ever-present and interfering helicopter parents.”
If that sounds a bit extreme, consider Progressive’s recent announcement that its Snapshot program would begin to penalize risky drivers, as well as rewarding safe ones. It seems that the parent in the chopper will be carrying a stick as well as a carrot.
And at the macro level…
The Economist says that if technology can better assess (and risk manage) at the client level, technology driven initiatives will support larger trends and promote implementations which will lower risk (and premium) overall.
Many of the UBI programs can be used to measure and modify behaviour, in favour of lower risk. The Economist author notes that protection devices in homes, connected to alarm services, can minimize property risks from fires, broken pipes, etc. The author cites a report from Morgan Stanley which suggests that, if widely adopted, there could be a $109 billion savings in automobile and home insurance.
This could set the stage for even greater competition, an in a different dimension.
Will insurers become tech companies?
As most tech suppliers will confirm, insurance has been a slow follower to the tech world. But, for some, this is changing, and quickly. Insurers that are early adopters (such as Progressive) could realize the benefits of better risks. And, as Celent’s Donald Light points out in a recent blog post, those that take the higher risks at a lower premium would, on average, be the recipients of adverse selection. Possibly without even knowing it.
The emphasis on digital could cause fundamental change in the insurance company structure and function. The Economist author notes that as insurers move to more sophisticated underwriting and rating algorithms, “insurers are busy trying to make themselves more like tech firms.” The article notes that Aviva has set up a “digital garage” to develop new products.
Last year, American Family Insurance announced a partnership with Microsoft to develop an ‘accelerator’ to support tech developers building applications for smart homes. At the time we wondered in print whether this was a point solution, or part of a bigger strategy.
This year, at Celent’s Innovation and Insight Day, American Family was presented a model insurer award for crowd-sourcing ideas within the company to spur mobile innovation. This doesn’t sound like a typical insurance company contest. Just saying.
What do you think?
Are these isolated cases that will be interesting, but less than consequential anecdotes? In ten years, will all have settled and will we be doing the same business, but with some cool apps?
Or is this the start of a deeper change to the business of insurance? If so, what do you see coming?
We plan to focus on this as part of our fall Insurance-Canada.ca Executive Forum, so we would appreciate your wisdom.