The frontier of innovation in insurance

Is it really happening?

Let’s start with the word insurtech. It’s a mashup of insurance and technology and yes, it is happening right now.

On the technology side we are seeing trends that have been coming for a while, including the use of big data, risk analytics and predictive analytics. We’re also seeing new innovations that are mostly on the horizon. These involve blockchain technology, smart contracts, the Internet of Things (IoT) and artificial intelligence (AI), deep learning or robotics.

On the insurance side, our research shows that two-thirds of insurtech companies — both incumbents and new players or start-ups — are currently looking at technology as way to improve the efficiency of back-end and front-end processing. The goals are obvious enough: cost reduction, more seamless delivery of products and services, and a user experience that’s more in keeping with the internet — and less like the paper slips from Lloyd’s of London.

Perhaps more importantly, one-third of the companies we are tracking — companies that are trying to innovate in the insurance space — are now looking at technology as a way to create new products, new types of insurance like spot insurance, where insurance can be switched on and off, or peer-2-peer insurance. Even more, they are looking at ways of fundamentally changing the way the system works. Technology could pave the way for new ways of mutualizing and mitigating risk and for disintermediating the process of transferring risk or paying claims.

A broker heralding the disintermediation of insurance sounds like someone announcing the demise of our profession. That is not the case. In fact the more risk transfer options that arise and the more complex the landscape is, the more our services will be needed to help navigate that landscape. As the frontier of innovation in insurance is settled, we believe that both insurers and brokers will have opportunities to deliver more value than ever. We just have to be ready to understand and seize those opportunities.

So what now?

Many believe that there is gold in the hills out on this frontier and many organizations are already looking for it. They might find it in several ways.

First of all, whoever finds the greatest operational efficiencies through technology will find a potentially huge vein to mine. There are already some nuggets ready to be scooped up. One example is in the elimination of claims processing costs through smart contracts that are enabled by blockchain. Blockchain is a technology or protocol that was developed to track transactions on Bitcoin. Through its consensus architecture, it appears to be able to eliminate human error, and through its distributed delivery, to be unhackable. For now simple forms of insurance – flight cancellation insurance for air travelers, for instance – have been tested in this model. But many new proofs of concept and pilots on blockchain-enabled insurance products have been released recently and much research is now being done into further uses of the blockchain protocol.

Insurance enables innovation and growth by hedging the risks brought on by that innovation

Other examples involve replacement of manual systems that have been used for hundreds of years in our industry. There are several reasons that these manual systems persist, some having to do with regulation and others with the bespoke nature of insurance underwriting and claims settlement. But the intelligence of technology is evolving to accommodate more complex processes. The possibilities for increasing speed and accuracy are significant.

Second, insurers will need to see what gold might be found in new, innovative products. This is likely to involve new ways of mutualizing, monitoring, mitigating and modeling risk and capital is already pouring into the search for these new opportunities.

Third, new systems arising will themselves come with new risks and the insurance industry will have an opportunity to insure those new systems. Exactly how that might happen is unclear. If blockchain is immutable and unhackable, does that mean blockchain-based systems are risk free? Some of the latest news about distributed ledgers shows that not to be the case. As always, insurance enables innovation and growth by hedging the risks brought on by that innovation — meaning that as insurtech develops, so will a demand for products to insure it.

What companies will need to figure out is how to participate in the potential gold rush. Will they send out their own prospectors or just bid for what other prospectors find? We seem to be seeing some of both. Some companies are innovating in house. Others are looking toward start-ups that may provide technological answers and will in turn need partners who can sell their products. Others are joining industry consortia so resources can be pooled.

Insurance companies will need an internal innovation function to quickly assess and incorporate new ways of doing business

Whatever approach they pick, insurance companies will need an internal innovation function that will allow them to quickly assess and incorporate new ways of doing business.

Carriers would also do well to consider what insurance buyers are looking for in an increasingly customer-centric world. Here’s a brief list:

  • Seamless, integrated delivery channels and an easy and secure user experience
  • Speed
  • Transparency
  • Trustworthiness
  • Lower costs
  • Personalization

Personalization poses a particular challenge in that insurers may be looking to reduce the effort and expense of underwriting but personalization calls for bespoke solutions. Buyers will want what they want, as buyers always do. They will want insurance for the risks they face when and how they face them. They will not want to pay for anything they don’t need. The design of products and systems to deliver those products will need to encompass the evolving demands of the insurance buyers.

Are we ready – can we do this?

The data needed most for insurance decisions is claims or loss data

Although the industry is clearly ripe for disruption, not much has happened yet. In the last few years, we’ve seen the beginnings of potentially disruptive competition from forces outside the traditional boundaries of the insurance sector – Google, for example. Few new players have arrived, however, and the reasons are obvious enough: the regulatory and capital/balance sheet hurdles that insurers must surmount are high.

Yet capital is coming into insurtech. The frontier is thriving. Are the insurers of today ready? Again, the answer is yes, for many if not most of them.

The key is that the carriers bring with them two huge advantages: claims data and experience with risk analytics. The Googles, Amazons and Facebooks have access to customer data and they know how to use it. Those capabilities can be presumably applied in a commercial insurance setting by the social media leaders or other tech/media/telecom players with expertise in big data.

What those companies don’t have is the data most needed for insurance decisions, which is claims or loss data. And they don’t have the insurance industry’s experience in risk analytics: in taking loss numbers, insurance costs and company-specific data and producing valuable insights in how risk can be most efficiently mitigated and transferred.

Insurers have a huge advantage. They must recognize and use it. They must also be creative. And they must be willing to take risks of their own if they are to reap the rewards of exploring the new frontier of innovation.

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About Magdalena Ramada

Magdalena Ramada, PhD, is a Senior Economist at Willis Towers Watson’s Research and Innovation Center with over 1…
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