Ready to transform
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The insurance industry is going through a critical phase. Perhaps for the first time ever, it is facing the pulls of economic and risk uncertainty, on the one hand, and of opportunity on the other. In 2014, insurers will need to make significant changes in their approach to business to come out on top. We believe that technology will be the most important lever of that transformation.
Trend 1: Improve consumer protection
Insurers will increasingly look to provide financial security to consumers (covering all properties and life risks) instead of transactional risk services. Not only will they look to understand and educate consumers, but they will try to teach consumers about good behavior. This in turn, will help consumers save money and in the process improve consumer protection; for example – driving patterns, home security, wellness programs.
Trend 2: Understand, educate and reward consumers
The second trend we’re seeing is that insurance companies will also sharpen focus on the younger demographic segments, where huge opportunity awaits. It is projected that by 2020, Gen Y will be the second largest generation after Baby Boomers; more importantly, they will have overtaken the latter in terms of purchasing power well before that time. In a 2010 survey, 48% of Gen Y respondents confirmed their intention to buy life insurance within three years, and 20% said they would do so within one year.
However, these intentions haven’t materialized into business. Per capita spending on insurance continues to slide, largely because the young aren’t taking adequate cover. Part of the blame rests with the industry, which runs on a traditional brick and mortar agency model of distribution, and is not fully geared to fulfill the younger generation’s expectations of digital consumption. This needs to change, and fast. Insurers, today, need to better understand consumers, educate them and eventually, reward their good behavior – like a good driver could pay lesser premium than a relatively rash driver.
Trend 3: Promote self-care
The cost of health insurance is on the rise and so are health insurance expenses. These costs are eventually passed on to consumers in the form of higher policy premiums, which lead to fewer consumers going without coverage. In order to limit the rising costs, insurers will look to minimize administrative costs and increase spends on consumer care. They will increasingly focus on promoting self-care and using technology to engage and educate consumers.
One of the recent reports on the global insurance industry reveals that customers clearly desire a mix of traditional and new channels. It also says that customers prefer online networks to physical (agent) networks for comparing policies and services, accessing information and finding the best rates. So although customers still prefer to purchase their policies from their trusted agents, they no longer solely rely on them for advice on which brand of insurance to buy.
Since the digital trend will only strengthen going, forward, it is imperative that insurance companies quickly embark upon an integrated multi-channel strategy of brand building and distribution. Those who are quick to adopt digitization will likely shape the future of insurance consumption.
Trend 4: Adapt transformative business models
Not that the industry is a total stranger to technology. But for the most part, it has leveraged technology as an enabler – of efficient operations, customer acquisition, and customer service and experience. Perhaps for this reason, insurance companies have not felt the need to modernize their legacy systems. Another reason for this conservatism is that insurers apply the same tenets of risk mitigation on which their business is founded, to manage their own organizations.
These factors are responsible for the insurance business falling behind other industries, such as retail, telecom or even banking, which have embraced technology to transform the core of their business.
But 2014 could be the year that the industry starts to bridge this gap by “mainstreaming” the use of technology to transform the heart of its business, which is the management of risk. A strong push in this direction comes from the need to shore up underwriting income, which will help compensate for the muted investment income in a low-interest environment.
Carriers can improve underwriting efficiency by acquiring customers with a lower risk profile or by improving the accuracy of risk estimation. Technology can play a big role here. Take the auto insurance business, for instance, where telematics and usage-based insurance (UBI) could potentially change the game by enabling insurers to assess individual driver risk based on actual driving behavior and charge “personalized” premiums instead of a flat rate. Insurers opting to use telematics technology can further break down their pricing model into pay as you drive (based on the distance driven) or pay how you drive (based on driving pattern) variants. One estimate says that there will be 100 million UBI / telematics subscribers by 2018.
A preview of a technology-transformed insurance industry is visible in the following prediction by one of the world’s leading IT research and advisory firms: “(By 2024) At least 10 percent of activities potentially injurious to human life will require mandatory use of a non-overrideable ‘smart system’.”
Trend 5: Enter new markets
Another trend highlights the growing importance of emerging markets. Insurers will look to leverage structured, unstructured and external sources to improve underwriting. Insurers in the United States and Europe are battling two serious challenges – a low investment return environment along with market saturation. This is driving them to explore new opportunities in the emerging world.
Swiss Re, in its outlook for 2014-15, predicts that emerging markets will drive as much as 4% growth in the global life insurance premiums. While, non-life premiums will grow 8% in these markets, this growth is only a paltry 2% in developed ones.
Trend 6: Manage growing risk
Today, insurers are faced with an unprecedented volume and variety of data and data sources. In the United States, insurance carriers have steadily increased their use of external or third-party data for core business processes. Although this has enhanced carriers’ access to data and improved several outcomes, it has stretched their legacy systems’ ability to aggregate and analyze huge quantities of data. The strain on IT systems is compounded by the increasing frequency of catastrophes and natural disasters, which is reshaping the global view on reinsurance and underwriting.
All of these are driving the need for large-scale modernization of IT infrastructure. Insurers will increasingly look to apply innovative risk transfer mechanisms to minimize exposure to catastrophic losses.
The way forward
The trends portend that the global insurance industry will leverage technology as a tool of transformation, expand into emerging markets, digitize to understand, educate and reward consumers, promote self-care, improve consumer protection, and manage growing risk. That being said, a majority of insurance companies have not yet started this journey. We hope that the current drive to automate the value chain while refreshing claims and underwriting systems will progress beyond those goals to look at how technology can transform the core of the business. But we will have to be patient. For as Matthew Josefowicz, managing director of Novarica puts it, “Insurance technology budgets and plans change slowly, and insurers’ self-assessment of their own IT capabilities remains modest – most insurers are primarily investing to get up to the bar, not over it.”