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.