How the insurance industry faces an unprecedented wave of disruption

In a world where the very concept of ownership is changing in favour of pay-as-you-use models, it is little wonder that insurance is facing change as well. After all, how do you insure a driver who only uses a car for less than 100 hours a year or for risks to an asset which may have a varying number of owners and users?

This may well see a transformation in the insurance business model as well as the entry into the market of the cash and data rich internet giants who can bring their personalisation powers to bear on the sector.

“New technologies will result in new forms of insurance business model based on the emerging technology,” says Pinsent Masons partner Naoise Harnett. “One example of this is Lemonade, a US home and renters’ insurer which has recently entered the European market in Germany. The Lemonade business model underwrites home insurance and settles claims online in minutes through the use of machine learning technology.”

Where new business models do not emerge, technology will instead be used to streamline and improve customer experience with established insurers through digitisation of their underwriting and claims processes to the extent permitted by GDPR and other applicable laws, Harnett adds. “An example of this in the Irish market is Zurich Global, which partnered with Snapsheet to simplify the customer claims experience and to shorten the claims cycle. Snapsheet’s core proposition is a virtual appraisal service, which allows insurers to collect information about claims and make estimates on motor physical damage automatically.”

He says improvements in artificial intelligence technology will permit insurance companies to analyse the data sets they have generated to better predict claims pattern and improve underwriting processes and pricing. “This will enable insurers to reduce the impact of the legacy systems issues which prevent insurers fully leveraging the data sets they have generated”, Harnett explains. Insurers and reinsurers will partner with technology companies to provide technology-based add-ins to policies such as health wearables which reduce the risk of a claim and allow premium reductions. Insurers will move from purely paying claims to also engaging with consumers to reduce the likelihood of claims or even prevent them.”

KPMG’s Brian Morrissey stresses the regulatory compliance issue. “The main innovations we’re seeing in the industry involve very technical modelling, using AI, machine learning and value-based dynamic pricing etc. Many of the big insurers are testing new technologies, products and ways of interacting with customers in certain markets, all of which must comply with regulations around consumer and data protections.”

Disruption is affecting almost every aspect of the sector, according to PwC insurance partner Darren O'Neill. "Globally, the insurance sector has been undergoing consistent disruption driven by the pace of technological change and continuously evolving consumer expectations," he says. "Many global insurers have implemented AI initiatives to create more seamless interactions with their customers, including greater levels of personalisation and more targeted marketing and selling."

And while the disruption has mainly related to customer experience and cost reduction up until now, there is an emerging shift towards new business models. “The increasing use of sensors, AI and machine learning in combination has affected the practices of loss anticipation and compensation moving them towards more proactive risk detection, intervention and prevention”, says O’Neill.

“Examples in health insurance include health monitoring and alerts from mobile devices which are being built into health coverage. Other examples include the use of the Internet of Things (IoT) technology to reduce property claims, to predict and prevent mechanical or machinery failure, control crop damage risk, to monitor driving behaviour through telematics for pay-as-you-use insurance, to capture real-time data from ground sensors, aerial surveillance and satellite imagery to monitor and manage risk. The result is better outcomes for policyholders and lower, more proactively managed risks and claims for insurers.”

With this shift towards data driven technologies it appears inevitable that the market will attract the attention of the internet giants who have already successfully disrupted a range of other sectors. The jury is still out on that one, according to Naoise Harnett.

"There has been a lot of industry commentary and analysis for a number of years that the big tech companies of Google, Apple, Facebook and Amazon may enter the direct insurance market", he says. "Insurance is ultimately an industry based on data which is used to determine the level of risk and to price it accordingly. Insurers have struggled to fully utilise and analyse the data sets they have generated over years. However, the big tech companies are essentially data companies. They have huge troves of data and they do not have the legacy system issues the insurers have and they are skilled in analysis of that data to a level the insurers are not."

The big tech companies have also generated particular data sets which would lend themselves to particular lines of insurance business such as home insurance and health, he notes.

But the market may not be all that attractive to them. “The common refrain from the incumbents in the insurance industry usually is that the big tech companies will not enter the direct insurance market on the basis that the margins in the industry are too low and if they understood the burden of operating a regulated business subject to national supervisory authority oversight they would not get into it,” says Harnett. “Notwithstanding this, speculation persists as to whether the big tech companies wish to enter the insurance market as underwriters or alternatively, as brokers with a view to managing and owning the customer relationship.”

This approach would be consistent with some of the noises from the insurance industry about the big tech companies not being interested in underwriting and settling claims and dismissing the threat that the big tech companies pose to them, Harnett adds.

“However, given the data available to the big tech companies and their ability to interface so easily with customers and to streamline the customer experience, this approach would also be a major threat to the incumbent insurers,” he notes.

“Under this model, the established insurers could potentially become product producers with regulated balance sheets upon which the risk is underwritten but have limited interface with the insurance customers and therefore lose lots of other revenue generating opportunities and data sources as a result.

“This comes back to the point that insurers need to digitise and engage with insuretech to improve the insurance customer experience quickly irrespective of whether the big tech companies enter the direct insurance market or not.”