In the early days of my insurance career, an older, wiser colleague told me that the insurance business model was elegant in its simplicity. It’s “money in and money out, and you take your profit from the float.”
Things have changed. A number of analysts are suggesting that technologies are driving fundamental alterations to the insurance business model. I’d like your thoughts.
Why change what has worked for 300 years?
The recently released Capgemini World Insurance Report 2016 provides a global perspective and some interesting scenarios based on input from 15,000 individuals. The report has two major sections, the first focusing on Gen Y & Customer Experience. The second models connected technologies threatening the insurance business model and is the subject of this post.
The bottom line: Risk fundamentals are undergoing a major shift. According to the authors:
“Since its inception, the insurance industry has been built upon its ability to detect, analyze and manage risk. Now new technology is changing the nature of risk in insurance, altering the most fundamental aspect of the business.”
An important building block in the report’s construct is that the use of modern technologies provides transparency for the consumer. The report authors cite UBI/telematics programs as examples of insurers using technology to help drivers change behaviour which lowers risk and, potentially, reduces premiums.
In Canada, programs from Industrial Alliance and ingenie would be specific examples.
As a by-product, these technologies are also driving change in the insurance business model. The report authors write: “While insurance products traditionally almost exclusively revolved around a transfer of risk from policyholders to insurers, connected technologies may gradually introduce more risk mitigation models, along with risk transfer. ”
And the impact of this is….
Capgemini believes that application of new technologies will decrease risk overall, putting demands on insurers to find other sources of revenue. (The authors do recognize requirements for insurers to develop cyber risk coverages, but don’t comment on the materiality of associated premiums.)
The authors suggest that insurers interested in staying in the business need focus on short-, medium-, and long-term strategies to mitigate the consequences.
So, what’s the plan?
In the short term, insurers need to prepare for growth by rationalizing and streamlining business operations. Tactics will include straight through processing and product simplification. Key targets include improving the customer experience and building capabilities in data and insights.
The medium term (3-5 years) plan needs to include optimizing the value of the data by mastering its management. This will enable introduction of new service offerings (interpreting data) and development of ‘creative’ insurance products. (The authors cite an example of Allianz, which has partnered with Panasonic to monitor home devices, and dispatch repair teams when required.)
In the long term (5-10 years), Capgemini says that new entrants will include technology companies which will blend insurance covereage with its products. “To remain relevant over the long term, traditional insurers must strive to make their businesses more agile while deepening existing customer bonds,” the authors write.
This will encompass operations, finance, and governance
Existing products and processes will change. For example, underwriting will have access to real-time data which could allow insurers to “move beyond customer segmentation- based pricing and into dynamic pricing at an event and exposure level.”
This will have significant impacts on existing technology. the report says, “This greater complexity in risk modeling and pricing will require more robust and adaptive data analytics as well as more adaptive core insurance systems.”
(While not mentioned in the report, one immediate consequence of this is that finance officers and directors will have to understand that time frames for refreshing/replacing core systems will shrink from a major project every 10-15 years to a continuous improvement pattern.)
The bottom line?
Assuming risk is lowered, barriers to entry will allow non-insurance organizations to take positions, leveraging their expertise in operationalizing data analytics to support customer centricity.
However, insurers will come to the table with deep understanding of risk management, rating, underwriting, claims management, and finance. These are non-trivial assets. And they are necessary … Just not sufficient anymore.
What do you think?
Are you seeing this future? Are you planning for it? Have you put parts in place?