If we had the opportunity to travel ten years into the future, we probably wouldn’t recognize the world we would encounter. As Bill Gates once quoted: “We overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10 years”. This wisdom might also be true for the insurance market. If we look at the rapid technological developments in and around the traditional insurance product, take for example apps and wearables tracking lifestyle and behavior and the development of self-driving or even autonomous cars, the unprecedented impact of these developments on the way consumers make use of insurance and how insurers should evolve their business models can’t yet been fully overseen.
In 2019 and the upcoming years smart-devices and the internet-of-things will increasingly melt the physical and online world into one, leading to an immersive increase in data available. Consumers and businesses will be more digitally connected than ever before. Consumers are increasingly using smart devices like the Fitbit or Garmin Smartwaches to monitor their own health and behavior like their heart rate, sleep and activity. Making their lives more convenient and secure. Other examples are the Waterhero that detects and turn off the water in case your house is flooding or the SmartDriver app that is monitoring driving behavior in real-time.
The rise of smart-devices
For insurance providers, these developments in IoT data will create new opportunities to improve and even transform their business models. In this article we will cover the most important trends in insurance and highlight the opportunities for insurance providers that come along with these technological innovations.
In 2019 the digital maturity of insurance companies will significantly increase and lay the foundation for the evolution to come. Research from Gartner (2019 CIO Agenda: Insurance Industry, 2018) reveals that digital transformation has the highest business priority for insurers, surpassing revenue and business growth. The frontrunners in the insurance market already realized change is coming and started thinking completely different to stay relevant in the next years and beyond. In 2019 it is time to act on those plans.
In the past years we’ve seen Insurtech companies take the lead in the digital transformation by accelerating digital innovation and experimentation. In 2019 we will see real use-cases finding large scale adoption. This means traditional insurers should respond to the propositions of InsurTech companies and make the change visible to the consumer. Therefore, it is essential for insurers to gain insights in consumers’ needs and find new ways to satisfy these needs . On a more technological level, the transformation will be based on IoT and data analytics implementations to optimally leverage the value of customer data and technology with Predictive Analytics, Machine Learning and Artificial Intelligence. Resulting in new capabilities that improve efficiency, flexibility and personalization of the traditional insurance product.
Premiums based on individual risk are not new. Property and casualty insurers have already made their first steps in this world, however in 2019 we will see an increase in the efficiency and accuracy of the algorithms with which these predictions are calculated as technology is ready to deliver.
To be able to accurately set premiums on an individual level, insurance companies need to improve the accuracy of their risk-predictions and embrace new (real-time) data sources. Insurance companies, have an information advantage over individuals. Their access to data gives them the opportunity to better understand ‘the bigger picture.’ By deploying Data Science and Machine Learning algorithms the data provides insights in what high-risk factors are, and which behavioral cues most likely lead to a negative event. Based on these predictions, insurers can improve individual risk assessments and set their premiums accordingly.
As the relationship between consumer and insurer is changing, we also need to have a profound understanding of the ethical consequences and propel a discussion on who is benefiting from this transition and who is in control of the data. Individual premium setting originated from property and casualty insurance, but what if this would be applied in health insurance? Currently, this is forbidden by law. This is reasonable cause every individual has the right to receive health care for a price that is acceptable. But there might also be benefits in sharing these data with insurance providers as we think of the ‘bigger picture’ in relation to preventive insurance in which we will dive into later in this article.
As mentioned before, the Internet of Things will provide more and more customer data available for real-time data analytics. We will see an increase in the evolution of digital twins, in which each individual object or human is represented by his or her behaviors in the physical world. Take for example car sensors that represent the driving behavior of policyholders or medical apps that register numerous variables such as blood pressure, heart-rate, sugar, metabolism et cetera.
Behavioral premium setting based on low-risk behavior
When the policy holder is willing to share these data, for example for positive rewards or premium discounts, the insurance provider can develop new on-demand business models in which the policy holder only pays for the insurance at times they actually make use of it and reward low-risk behavior and offer personalized discounts based on these digital twins. Low risk drivers can be rewarded with lower premiums, the same holds for people who participate in fit challenges organized by insurance companies. In these cases, the consumer has the freedom to voluntary choose if he or she wants to join a program such a behavioral policy pricing and high-risk behavior will not be penalized.
These developments still feel somewhat futuristic, but we already see untraditional competition from tech-oriented organizations like Apple and Amazon entering the market. These companies have access to immense data pools, which they can deploy to facilitate individual and behavioral premium setting. As these companies are already specialized in technology and data analytics, and even produce wearables and smart devices themselves, they have the resources and competence to penetrate the market and take over market share from traditional insurance companies if they don't react rapidly.
In the previous paragraph we have looked into new ways of premium setting from a risk perspective, for which insurers need to be able to detect high-risk factors and behavior. But what if insurers have insight in these factors? How can insurers positively change their business and leverage this information to the advantage of the greater good?
Let’s get back to the health insurer. Imagine that the insurer is providing a free health app to their policy holders that is able to monitor several risk-indicators such as blood pressure, sugar, heart rate and activity. This data can be combined with the claim history of similar policy holders and analyzed to detect diseases in an early state. These insights then can be communicated to the policyholders by offering a free consult at a preferred GP. By doing this, diseases can be prevented or cured in an early stage; the consumer feels thankful and secure, and the insurance provider has prevented bigger claims from happening. Isn’t that a win-win situation for both?
Improve public health by the deployment of Data Science and Machine Learning
Another example is applicable to car insurance. Insurers should look at ways to prevent damages from happening instead of paying out claims (that with the help of a little bit of computing power could have been prevented). Imagine that every car provides a maintenance report to the insurer in real-time based on sensor data. It can be assumed that policy holders are not checking their vehicle every week or month. But based on the incoming data, the insurer can accurately analyze the state of the car and recommend repairs to prevent more severe damages (and thus claims) from happening. If we think win-win, the possibilities are endless.
Data driven claim prevention will not only lead to a decrease in costs. Focusing on new ways to deliver value to their consumers is also a way for insurers to differentiate from competitors in a market in which individual premiums will less deviate from insurer to insurer due to more accurate individual risk predictions. Offering the sharpest premium (and have margins) can only be reached by lowering the risk. On top of that, by helping to prevent negative events, you are able to create positive touchpoints with the consumer instead of touchpoints that evolve around negative events. This will drastically change the relation between insurer and insured as we know it.
In 2019 and the upcoming years financial services such as insurance products will become increasingly on-demand to fulfill the expectations of the modern customer. Younger age groups, such as millennials, which will make up the majority of new customers, value flexible contracts because it better matches their fast-changing lifestyles. Standardized insurance products with fixed coverages for a defined period of time don’t live up to these expectations anymore. On top of that, millennials don’t value the ownership of goods as much as their parents do, instead they prefer authenticity and participate in sharing economies such as Uber and Airbnb.
What is going to happen the coming years to fulfill the expectations of the newer generations? The first step made by insurers is offering modular insurance products. A modular insurance product will speak to the newer generations because they have the freedom to select the coverages they really need within a standardized insurance product. To even further increase the flexibility of insurance products, insurers are currently implementing ‘on-off’ functionalities to also provide flexibility over time. These business models have and will further bring back the control to the customer, but they don’t offer a frictionless customer experience.
Modular and time-flexible insurance products are a great step towards the 21st century insurance product. But these forms of insurance products lead to an immense number of choices for the consumer. The consumer is not always capable of determining the relevance of all available options due to a lack of knowledge of what the future will bring and isn’t always able to change their coverages in reaction to fast changing situations. These business models will therefore not be enough to outsmart competition in the long run.
The 21st century insurance product can be found in a true on-demand insurance product. As a policy holder you want to be insured only in situations in which you are exposed to risk. These risks vary from situation to situation and is thus derived from behavior. When owning a car, you don’t need an insurance for theft when you safely park your car in a secured parking place, but it is inevitable that you will park your car from time to time at parking places that are not secured. So, for these situations an insurance for theft comes in handy. This example shows the shortcoming of a modular insurance. Besides, consumers don’t want to change their insurance all the time to match the current situation, showing the problem of 'on-off' functionallities.
Trov.com: on-demand insurance
The insurer can take away these insecurities and inconveniences by offering a true on-demand insurance product. Which means insurers automatically select the right coverages at the right time based on actual behavior. Insurers could for example automatically activate insurance for theft when the policy holder’s GPS data shows his or her car isn’t parked at the default secured parking place. Or based on GPS data the insurer can activate and/or deactivate car insurance for accidents only when the policy holder is driving. Bringing back the profit principle to the insurance product to an acceptable extend.
On-demand insurance products will make sure the policy holder is always insured when needed without being insured for irrelevant coverages. Most important, the customer don’t need to think about it and has the freedom to live his or her live as they want it. This will make the relationship between insurer and policyholder increasingly more positive. Now, the insurer can really deliver customer-centric services.
Customer-centricity is becoming more and more important for creating positive customer interactions to build mutually beneficial and long-term relationship with customers. A seamless customer experience is what the customer is demanding. One of the most important parts of the current journey of the insured is claim handling. We all know that we, as consumers, want our money back as fast as possible. For the insurer this is a challenging task in which accuracy and speed should go hand in hand.
Claim filling by the policyholder will become more intuitive and as smooth as possible. Insurance companies will broaden the options to file a claim, such as uploading photos and videos, to decrease the time needed to file a claim and decrease contact points with human agents. Take for example Lemonade.com , which allows the policyholders to easily upload a photo, video or text about the damages without any hassle. From the perspective of claim payment to the policy holder, smart algorithms are able to detect claims with a high probability of being fraudulent. Claims that are instantly approved by the algorithms can be paid out within seconds. Human agents only have to focus on claims with a high probability of being fraudulent which increases the efficiency of the claim handling department and saves costs on human labor.
By doing this you are able to relieve some stress from the policy holder which just experienced a negative event while at the same time more efficiently handle claims. Again a win-win for insurer and insured.
The technological developments and trends described in this article will have a major impact on traditional insurance companies the coming years. The only way to survive is by keep listening and responding to your policyholders needs and behaviors. By doing this an exceptional customer experience can be delivered by distinguishing features and relevant products.
Interested in how we can guide you through these transformation by leveraging the power of Data Science and Machine Learning? Get in contact with one of our insurance experts and start now.