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Insurance industry challenged by technology

  • Posted on July 16, 2015

This is a guest blog post written by Avanade alum, Bo Svensson. 

The concept of insurance has been around for hundreds of years and is definitely here to stay. However, one cannot say the same about the incumbents of the insurance industry and many analysts predict massive change to the market structure including take-overs, consolidations and introduction of a host of new competitors.

Recently there was a board meeting at one of the world’s largest insurance companies where a key topic was “How not to become Uberized.” A top executive from the insurance industry put it this way: “Don’t let what happened to the taxi industry happen to us. Taxis thought regulation would protect them and you see where that got them. We can’t allow ourselves to be Uberized.” Just a few weeks ago, Mrs. Inga Beale, CEO of Lloyds, stated that the whole business of insurance is facing profound change due to the fast-paced development in high tech, and she noted that insurers are in danger of being sidelined as improving technology allows big data analysis to “undermine the sector’s traditional role in managing risk”.

The insurance winners of tomorrow understand that they are facing convergent disruption and that agents-of-change with different vectors intersect in these years. The most profound changes are being fueled by the Internet of Things, the digitization of transaction meta-data and the continuous development of a digital space for connecting people, information and processes – i.e. a digital workplace.

Internet of Things means that everything comes online and becomes trackable – we already see it in cars that become more intelligent and less prone to accidents. In addition, we see built-in GPS technologies (also called “vehicle telematics”) that will allow any insurer to insure the car by mileage and driver habits, so that the elderly woman using her car for shopping and a Sunday ride could reasonably pay a fraction compared to the sales representative driving every day and under all conditions.

As most of the metadata needed to automate registration of our household belongings and valuables already exists at the point of transaction, we will see more and more granularity in home insurance policies.  Premiums will be much more adapted to the individual household and that will mean lower premiums for many thus challenging the “combined ratio” (premiums vs. payments). On the other hand, insurance fraud will become next to impossible – to the benefit of all those being honest and responsible - rendering transparency as a natural way to get lower premiums.

The most profound change seems to be in how we perceive insurance, especially the realization that insurance inherently is a social construction where we collectively vouch for each other. The fact that our collective has moved to the internet has given energy to new business models where “friends insure friends” in a new concept called “peer-to-peer insurance” - where people get together using internet-platforms to establish peer-to-peer arrangements. We see the same in banking where peer-to-peer lending is growing, just as we see it in accommodation (AirBnB) and transport (Uber).

For an insurance company to remain relevant and competitive it must create its own a digital space to move into, a space that can host the workplaces of all the different activities and interactions that constitute an insurance operation. A move from physical to digital.

C-level management should put emphasis on executing as many Digital projects as possible and they should implement this as a key metric to observe. No one knows exactly where disruption or innovation will come from – but it is easy to extrapolate from current observations to realize that anything Digital will yield benefits, insights and knowledge.

Bo H Svensson

Hi Lars, thank you for a thoughtful and relevant comment. I share your viewpoint on the matter and several analytics confirms what you say; that peer-to-peer insurance only will take of by usage of re-insurance. On the short term (3-6 years) it seem as if P2P insurance predominantly will be found in the easy-to-deal-with areas of insurance, just as we see it in banking where it is the "good loaners"/"low risk segment" that P2P models address. It is the low hanging fruits that are harvested first. An issue is that the existing Insurance industry as a whole is highly regulated, and that the P2P models scrape of the "bread-and-butter business" of the incumbents - and does it without having to comply with a bunch of regulations and rules that burdens the larger companies in the industry. It seem reasonable to assume that existing insurance players also will embrace P2P models and "technology supported premiums" - and any established player should definitely invest in understanding P2P (including blockchain) and should invest in digital projects aiming at incorporating these new go-to-market models. As you point out the established players has the advantage of already being the hub. Insurance of the future is a software game.

August 12, 2015

Lars Olufsen

Good read, Bo. One thing I think will be a challenge for the peer-to-peer models when it comes to insurance, is the financial solidity. It takes the Money Bin of Scrooge McDuck to run an insurance company because of the risk landscape involved, which is also why you'll see pioneers like Friendsurance actually re-insuring many policies with traditional insurance companies. The traditional peer-to-peer model works well with things like electronics, cars, art, perhaps even housing in a "commune-like" philosophy. But when it comes to things like personal liability and injury claims, the payouts are sometimes so large, that it will take a large pool of people for the model to work, and the larger the pool, the less the trust-relation. So where Uber and AirBnB are very tight in the trust-relationships (you're right there with the driver, or it's the home-owner giving you the keys in person), Insurance quickly becomes a less tight relationship between a much larger pool of people, that need to relate their trust not to each other, but to some sort of hub, which essentially is what a traditional insurance company is.

August 11, 2015

Bo H Svensson

Hi Nic, Thank you for you comment. So far I have not encountered peer-to-peer models among the established players, but I am convinced it is on the drawing boards. "Peer-to-peer" is what defines the Internet and it is deeply ingrained in how we interact as humans and as business entities. It is about relations (between people, processes and information) and at the core it is about "you and the other" - but P2P also renders the middle-man obsolete. The most impressive P2P force is what stems from "block-chain" technology and its ability to support transactions between entities without a 3rd party. Crypto-currencies like BitCoin and block-chain based authentication services will simplify processes and make the cost-of-transaction almost zero......and that is why I believe P2P holds a huge disruptive potential on many levels. Many modern thinking companies invest in supporting and nurturing a P2P landscape in their own organizations through building a digital workplace that supports and encourages relation building and process integration.

July 17, 2015

Nic O'Brien

Hi Bo, I enjoyed reading your blog and the peer to peer insurance model could have a disruptive impact on traditional models - have you seen any examples where a conventional insurance company has encouraged such communities - perhaps they could offer their business models to facilitate the processes.. thanks, Nic

July 17, 2015

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