By Stephen Applebaum and Alan Demers —
Insurance is, at its core, five things:
- Underwriting and pricing risk,
- Selling and distribution,
- Claims adjudication,
- Servicing, and
- Investment management.
Of course, there are hundreds of other skills and important areas of the business but these are the five central pillars of any insurance company.
Technologies are emerging which enable omnipresent, real-time connectivity between the people and businesses being insured and their insurers, and that is fundamentally changing the business of insurance. Here’s how.
Underwriting: Retrospective to Prospective
Underwriting and pricing is all about data and information at both the macro and micro level. Understanding socio-economic market trends, segmenting and accurately predicting how those may move and change is important. But the most critical data of all is at the individual customer level – the person or business you are about to insure. The more you know about their risk profile, the more accurately you can price their insurance and therefore the more competitive you can afford to be in selling and marketing.
Imagine if an insurer knew virtually everything about the behavior of the insured. Not only where they live but how they live, how they drive, their health and their daily habits. And imagine if the insurer had access to all the historic and predicted natural risk data about where the insured lived and worked and traveled. And imagine if there were computer programs powerful enough to gather, store and utilize this data to create an accurate and dynamic risk profile of the insured. No need to imagine – those capabilities already exist and are being refined, expanded and perfected. The debate over whether zip codes or credit scores are a fair and proper proxy for insurance risk will soon be moot, along with all the other retrospective information which has until now informed the underwriting process.
Usage Based Insurance Evolves to Hyper-Personalized Insurance
A good example of this evolution in insurance is the well-publicized auto insurance product known as Usage Based Insurance (UBI) which is enabled by telematics – the joining of two sciences—telecommunications and informatics such as computer systems. In its infancy UBI purported to offer auto insurance discounts based on driving behavior as reported by a device connected to the insured’s vehicle. In fact, these early programs were little more than clever marketing programs and were mostly counter-productive and unprofitable. Adoption rates grew slowly, initially attracting mostly better drivers willing to share their information. But over time, as smartphones proliferated and became more powerful and capable of reporting more critical driving metrics, these programs have evolved to become effective enablers of accurate risk quantification. In fact, some of today’s more sophisticated reward -based telematics programs are shown to significantly modify driving behavior and reduce risk.
The initial resistance of consumers to share personal information eroded as they began to embrace other tech-enabled programs such as Google, Facebook, Amazon, Spotify and Uber which require extensive sharing of personal information in order for user to participate.
We are already seeing the expansion of these connected platform ecosystems to include car makers, insurers and supply chain partners and transform the risk, accident and claims management process in terms of speed, cost and customer service. And, early-stage telematics programs have evolved and expanded to pay-per-mile, distracted driving avoidance and – while still early on – crash notification.
The future of connected auto insurance programs is promising as adoption rates increase and accident services enter the mainstream from various directions. One of the more impactful benefits will be the transformation of today’s reactive claim model into one which self-activates and makes the process easier and more efficient, from initiating a claim and every step through to reconstructing how the accident happened. This model will serve to make current breakthrough technology even more powerful and spontaneous, for example photo estimating. The possibilities to accelerate the claim life cycle and bolster service represent exciting new value propositions waiting to unfold.
Connected insurance is spreading beyond auto to include other personal lines of coverage such as Homeowners, Property, Life, Health, Accident and Travel and into Commercial lines including property, small business, fleet, ride-sharing, home-sharing and Workers Compensation.
Digital Ecosystems: Opportunities through the Internet of Things
The Internet of Things (IoT) will transform the world in the near future and networked devices and sensors will enable this change. According to McKinsey, in 2010 there were 12.5 billion networked devices and it is estimated that by 2025 that number will exceed 50 billion
The IoT is becoming a routine aspect of the everyday lives of consumers globally and is transforming business models across all industries. This new digital landscape presents new opportunities for insurers: to develop new products (such as parametric insurance), open new distribution channels (such as embedded insurance) , and fundamentally reinvent their business and products to include risk prediction and avoidance and real-time assistance and support on a hyper-personalized basis.
Even the investment management function of insurance is changing as carriers form Corporate Venture Capital arms and invest in third party vehicles which fund and leverage InsurTechs and innovative new technologies that are not only transforming insurance business operations but are earning outsized returns on investment capital as they exit into public markets.
A Connected Insurance Industry
The connected insurance industry of the future will still be supported by the same five core pillars but underwriting and pricing risk, selling and distribution, claims adjudication and servicing and even investment management will look nothing like they did in the last millennium – to the benefit of all stakeholders, including the customer.
About the Authors
Stephen E. Applebaum, Managing Partner, Insurance Solutions Group, is a subject matter expert and thought leader providing consulting, advisory, research and strategic M&A services to participants across the entire North American property/casualty insurance ecosystem focused on insurance information technology, claims, innovation, disruption, supply chain, vendor and performance management. Mr. Applebaum is also a Senior Advisor to Waller Helms Advisors. WHA is the premier investment banking boutique focused on the crossroads of the Insurance, Healthcare and Investment Services sectors.
Stephen is a frequent chairman, guest speaker and panelist at insurance industry conferences and contributor to major insurance industry publications and has a passion for coaching, mentoring, business process innovation and constructive transformation, applying disruptive technology, and managing organizational change in the North American property/casualty insurance industry and trading partner communities. He can be reached at [email protected].
Alan Demers is founder and president of InsurTech Consulting LLC, with 30 years of P&C insurance claims experience, providing consultative services focused on innovating claims. After initiating and leading claims innovation at Nationwide, Demers collaborates in the forefront of InsurTech, partnering with insurance leaders, startups, design thinking experts and service providers to modernize personal, commercial and specialty claims.
As Vice President of Claims Innovation at Nationwide, Alan conceptualized a vision and road map to build next-generation claims, automating and digitizing claims experiences, progressing from inception through prototype testing. He served as a founding member of the Corporate Innovation Council and played a key leadership role in establishing goals, practices and an innovative culture at Nationwide.
Alan is an accomplished executive leader and has worked for two separate Fortune 100 insurance companies in a number of corporate, national and regional leadership roles among personal, commercial, non-standard and specialty lines claims. Prior to leading claims innovation, he served as head of claims for Nationwide’s commercial agribusiness and non-standard claims. Other noteworthy roles include: field vice president, regional claims officer and national catastrophe director, quality assurance director.
Alan began his career with Aetna as a claim adjuster and advanced to a corporate claim consultant, prior to joining Nationwide in 1995.