digital revolution

Legacy carriers may want to sidestep the digital revolution

by Keith Hemmer  Alacrity Services   May 2018

The insurance industry is not a natural breeding ground for digital disruption. Insurance is a complex and traditional business that requires a great deal of human interaction, which at least partially explains why legacy carriers have generally avoided taking steps to fully embrace the digital revolution without suffering too many harmful consequences. But they cannot continue to rely on old ways of doing business. The world around them is changing rapidly

To be sure, there is little evidence to suggest that digital disruption represents a mortal threat to the traditional insurance model in the same way that Netflix put Blockbuster out of business or Priceline, Expedia and others nearly killed the travel agent. But the model is changing. The three primary areas of focus for insurance companies—risk management, loss prevention and claims management—are all being impacted by new technologies. Each of these areas is potentially improved (or at least altered) by new tools that are either being developed or are already deployed in the marketplace

As an example, consider how property-and-casualty insurance has evolved to address innovations in the connected home. Today, remote front-door cameras and light switches can prevent break-ins, while video doorbell apps such as Ring allow a homeowner to see who is at the door and answer remotely. Many P&C companies now offer discounts on homeowner policies to households that install similar systems. Some companies are also bundling their policies with smart-home sensor systems that can warn of necessary repairs—anything from a badly rusted pipe to faulty wiring in a carbon monoxide/fire alarm unit—and prevent damages and claims.

The coupling of non-traditional products and services with insurance represents a significant new source of revenue for an industry with typically low organic growth rates of around one or two percent. It also shifts the classic insurance model away from its emphasis on up-front risk management (ie selecting the right risks) toward more of a focus on risk avoidance and loss prevention. It’s been known that not all homes bear the same amount of risk – but the major shift here is that beyond characteristics like location and age – homeowners are able to take an active role in loss prevention which needs to be reflected in the insurance premium. Herein lies an additional opportunity for insurers to burnish a more modern and relevant image—that is, to mitigate the growing perception of a lack of fairness and transparency in insurance pricing by introducing new models (e.g., usage-based auto insurance) that are more accurate predictors of risk or loss in the digital era.

A Balanced Approach

As with any business, consumers interact with insurers using technology to varying degrees. Gen X and older customers may rely on family members or friends to guide them through the use of new digital technologies, while Millennials have a more natural affinity for using digital platforms due to their upbringing with constant exposure to technology. All consumers today demand personalized service from insurance providers—as they do from all marketers—and are becoming more engaged in what has historically been a low-involvement category. Thus, companies must strike a balance between making digital platforms accessible and easy to use while delivering quality human service at every touchpoint.

Take chatbots, for example. Chatbots are increasingly being used for customer service applications, with apps built on message platforms serving as virtual insurance agents. Insurers have also begun leveraging the technology in the claims process to allow customers to initiate claims faster at any time of day or night. Insurers, banks and financial services companies are among the leading users of chatbots, according to Grand View Research, which expects the global chatbot market to reach $1.23 billion by 2025, based on a compound annual growth rate of nearly 25 percent.

The usual assumptions about technology’s generational divide, at least when it comes to chatbots, may not apply. A recent study by Salesforce.com and various tech partners revealed that chatbots are roughly equally popular among Millennials and Baby Boomers, though there was some disparity in the tool’s perceived effectiveness depending on the specific function. Millennials identified “24-hour service” as the leading potential benefit of chatbots, while Baby Boomers cited “answers to simple questions” and “getting an instant response” as their top choices.

Going forward, insurance is likely to see increased chatbot adoption in several areas. For example, the technology may prove indispensible in anaging the large, complex data sets involved with any new business cquisition, especially for firms in need of modernization. Chatbots are also a natural extension of communication via text/messenger. More than 2 billion messages are exchanged monthly between people and businesses on Facebook’s Messenger platform alone. As with any artificial intelligence solution, however, there are inherent risks. The technology cannot be robust enough to cover all scenarios – so it must have elegant backups to connect to the customer service agent, in order to avoid a poor customer experience. Customer’s can quickly become frustrated dealing with a non-performant chat bot…Plus, insurers may encounter growing resistance to collecting personal information through sources like chatbots, particularly in light of the recent data privacy breaches at Facebook.

At this point, it is unclear how much of the insurance business can legitimately be automated. What is clear is how much remains at stake. Automation may reduce the cost of a claims journey by as much as 30 percent, and a large incumbent can more than double profits over five years by digitizing its existing businesses, according to McKinsey’s research. While most insurance executives recognize that investments in digital technology are a critical component of any customer retention and growth strategy, they also acknowledge that the industry has a lot of catching up to do. A 2017 survey from risk management firm Willis Towers Watson found that 58 percent of senior insurance executives believe their organizations lagged behind their peers in the financial sector in terms of implementing digital technology.

To an extent, this is understandable. For any major insurer, making the switch to digital entails taking on significant risks to the business, including higher expense ratios and potentially shrinking profits in the short term. Moreover, even for companies willing to take the full leap, there are no assurances or guarantees. The digital revolution makes no promises, after all. It only creates winners and losers.

Lessons from the Competition

As insurers accelerate the adoption of digital technology, legacy carriers retain some significant advantages over digital insurgents—namely their size and scale, strong balance sheets, vast data histories and experience with underwriting. Those advantages may be eroding, however. A study by CapGemini and financial trade group Emma found that tech-driven startups are gaining in appeal, particularly among younger consumers seeking more data-driven personalized experiences from their financial institutions. Nearly one-third of the 8,000 customers surveyed said they rely on digital-native “insurtechs” either exclusively or in combination with incumbents to access insurance services.

Venture capital is also pouring into the sector at a torrid clip. A 2017 report on digital disruption in the insurance industry by McKinsey found that huge bets on insurtechs from institutional investors, totaling in the billions of dollars, have had the effect of disintermediating reinsurers and are now extending to the primary market. Still, as the report noted, insurtechs are not expected to overtake the industry any time soon.

In the meantime, legacy carriers can learn valuable lessons from the success of digital disruptors like P&C insurer Lemonade and the Palo Alto, California-based start-up Next, which provides insurance coverage for small businesses. These companies have been able to leverage technology to carve out operational efficiencies and reduce overall claims. And they’ve managed to do something that all insurers have attempted for decades—settle claims faster. Lemonade’s “Jim” chatbot made headlines when it received a renter’s insurance claim via text, ran it through 18 anti-fraud algorithms, approved it and wired the payment to the customer’s bank—all within three seconds, according to the company.

Those kinds of stories tend to get magnified in social media and can add up quickly in the consumer’s mind. According to the CapGemini survey, insurtechs have earned a reputation for better value for money and timely, efficient service. At the same time, respondents cited several areas in which they felt incumbents performed better than insurtechs, including security and fraud protection, brand recognition and personal interaction. In addition, nearly 40 percent of customers say they trust major insurance carriers, compared to only 26.3 percent who trust insurtechs

Balancing these considerations, one could make a strong case for collaboration between insurtechs and incumbents. In fact, three-quarters of the more than 100 senior insurance executives polled in the above survey said that developing insurtech capabilities would help them better meet customers’ evolving demands, and more than half (52.7 percent) agreed that having insurtech capabilities would help them quickly design personalized products.

Insurers of the Future

When one looks out on the insurance industry in 10 to 15 years, it is easy to see how digital technology will create new challenges as well as generate solutions to complex problems. For example, as the sharing economy expands, new types of insurance products will emerge to meet the needs of homeowners who become hoteliers when they start accepting guests through AirBnB, or for the part-time contractor who takes on a new project as an Uber driver.

Meanwhile, the Internet of Things will shake up the insurance model from the workplace to the home, as a staggering 28 billion items worldwide will be connected to the Internet by 2020. Insurers will have reams of IoT data with which to create highly targeted products and services—while navigating the difficult terrain of privacy—as more consumers don fitness monitors that can broadcast their vital signs, allow insurance companies to monitor their driving and install speakers in their homes that can listen in on conversations.

Technology will also transform the way insurance companies conduct their businesses. The insurer of the future will have experience data on its internal systems and be able to tap into vast amounts of additional data from external sources. It may also channel data to its AI engines, wired directly into the sales and underwriting processes. As time progresses, insurers will increasingly recognize technology upfront. Automated agents will become commonplace as the first line of customer service. In fact, there is even the potential for “straightthrough” processing—i.e., information that comes straight from the customer, resulting in a closed claim that is never touched by human hands.

Not all of these innovations will come to pass. Complex regulations may thwart the growth of alternative models such as peer-to-peer insurance. On the other hand, consumer demand may overcome resistance to new technologies or services. Drones are a perfect example. Consumers today expect ever-faster delivery service, drone implementation is gaining momentum faster than any other aviation acceptance. Regulations will also develop around data security and protection, in which insurance carriers are already well versed. Data storage, management and customer privacy all to be considered—and in this case, caution and even a little bit of risk aversion are probably a good thing. As companies weigh these risks and rewards, it is worth noting that insurance is unique in that it doesn’t technically create something itself. Rather, it is a critical enabler. Insurance makes business in many industries possible and gives people the confidence to make purchases (like a car or home). Those industries and people are changing far more rapidly, but insurance cannot allow itself to lag too far behind. For the insurance industry, embracing the digital revolution is equal parts imperative and opportunity. Invariably, any insurer that can leverage technology to provide an elevated customer experience in a difficult and unforeseen situation—from delivering relevant and accurate information in a timely manner to ensuring a smooth, streamlined claims process from start to finish—will have an immediate and lasting edge over the competition.

5 Predictions for the Future of Insurance:

  • The first line of customer/claims service will be determined by Alchatbots, not a live person
  • There will be opportunity for limited human over0sight roles, but the vast majority of underwriting will be done in real time by algorithms.
  • Data analytics will prove to be a net positive. Insights gleaned will be used to proactively reach out to customers, not just in a product sales capacity, but to provide genuine value adds and enhance customer service. c
  • Usage based insurance will expand rapidly alongside the gig economy – the fixed annual premium model will drastically change. Data analytics will prove to be a net positive. Insights gleaned will be used to proactively reach out to customers, not just in a product sales capacity, but to provide genuine value adds and enhance customer service. c
  • Technology will simplify the flow of information to and from the customer. There will be concrete opportunities to use AI to help that process, but insurers won’t ever get to the point of completely replacing humans in the process.

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