Risky business - the changing nature of the insurance industry

Rita Gunther McGrath

Globally recognized expert on innovation and growth strategies with an emphasis on corporate entrepreneurship.

https://www.linkedin.com/pulse/risky-business-changing-nature-insurance-industry-gunther-mcgrath

The importance of this article is not the details of what is confronting the insurance industry, but rather the consequences—sometimes unintended ones- of technology on business.

Changing assumptions and the business of insurance

One would think that technology that prevents losses would be a major boon to auto and property and casualty insurers. Houses are now becoming “smarter” with sensors to provide early warnings of problems and avoid various kinds of potential damage. Owners of new cars are benefiting from a host of technologies that have been developed to pave the way for autonomous vehicles but which are in the market now. These include technologies such as sensors that can slow a vehicle down if it detects an obstacle, blind-spot assistance, cars that can park themselves, and so on. 

The ironic consequence of all this new, safer, technology, however is that when risks go down, so too do premiums, and eventually profits, as a recent study by McKinsey projected. 

Not only are cars themselves safer, but many Americans are taking fewer car trips. Even obtaining a drivers’ license is down across many age groups. Internet shopping requires fewer car trips. Young people, burdened with student debt, are unable to afford their own vehicles. People and companies are moving to be in areas with public transportation options rather than in suburban campuses (we’re looking at you, GE). More people want to live in bike-and-walking accessible environments. The well-worn teenage ritual of driving around orange cones to pass a driving test may be in retreat.  

In other changes, job losses are shrinking the market for insurance such as workers’ compensation and disability insurance, and of course who knows what is going to happen with health care. 

Do millennials really want to interact with brokers? Maybe a chatbot would be more responsive.

 As with other intermediaries such as travel agents and taxi dispatchers, insurance brokers face the threat of digital disintermediation. A recent Accenture report found that revenues to brokers were in steady decline and profits from more digital ways of doing business were largely distributed to customers. While the armies of brokers working for large insurance companies were once a reliable route to market, their hold on the burgeoning population of millennials is likely to be weak. 

No less an authority than the Council of Insurance Agents and Brokers found the challenge of interacting with millennials to be so significant that they actually created a 45 minute webinar for their members with pithy advice such as “engage, don’t tell” and “use social media.” It really is a hoot – have a quick look if you have time. 

More significantly, perhaps, is the emergence of direct-to-buyer channels in more and more corners of the insurance business. Gather, for instance uses technology to create risk pools consisting of local small businesses. The businesses pay into the pool, and the insurance processes are handled by an entirely captive company. Gather takes a 5% membership fee, but doesn’t make profits from denying claims. Coverwallet is another relatively new company that uses technology and design to dramatically improve the insurance experience for small businesses. 

Chatbots, software designed to interact with people using artificial intelligence and machine learning are also potentially disintermediating to many players throughout the insurance value chain. 

Solving customer and company pain points

Given how little has changed in the insurance business since your dad’s days, it isn’t surprising that a whole lot of customer pain has grown up around the industry. As in other fields, tech startups are emerging to tackle these with the hope of finding a new profit model. 

Insurify has created a digital broker that uses artificial intelligence and natural language processing to streamline the process of shopping on a mobile platform. Cover takes the mobile commitment even further – take a picture of anything you want to insure with your phone and they’ll get you a quote. PolicyGenius is committed to tackling America’s under-insurance problem, recognizing that the majority of Americans don’t have protection from even modest disruptions in their financial lives. Friendsurance, a German startup, essentially offers peer-to-peer insurance with the promise that customers can get part of their premiums back if they remain claimless. 

Vaporizing the value of historical data sets and creating new arenas to contest

Progressive Insurance, whom I’ve often mentioned as a leader in creating value from new technologies, was among the first to take advantage of the power of digital technologies with its 2008 introduction of its Snapshot offering. Initially, the program, which uses telematics to collect information about how its customers are driving, offered a discount, or reward, to drivers it deemed to drive carefully, avoiding such practices as hard braking and rapid acceleration. Recently, the company has taken things a step further by charging those drivers it deems more dangerous an actual surcharge.

The bigger story behind the Snapshot offering, and telematics in general, is that they erode what was once a treasure trove for incumbent insurance companies – their vast troves of historical data. These data, which captured information such as one’s history of accidents and claims, formed the basis for traditional underwriting and pricing decisions and constituted a barrier to entry in the industry.

Today, so-called ‘connected’ cars are producing huge amounts of data in real time and creating entirely new ecosystems of interaction. With such rich troves of information about what is actually going on with drivers, insurance companies may well be looking to shift from their traditional business of spreading risks to new activities, such as providing information in real time. This will, inevitably, create a new set of battlegrounds as automakers, digital map-makers, app developers and myriad other players seek to be the dominant source of information for the digitally connected driver.

How soon should incumbents in the industry move? Welcome to the inflection point. 

While I don’t have the space here to do a really comprehensive overview, there’s an excellent perspective on the major trends for 2017 in this CapGemini report which goes into a lot of detail. 

Insurance on the whole has been a pretty complacent industry. And don’t take y word for it – the folks over at The Economist agree. 

What advice would I give an insurance industry executive? Job one is to begin to develop a sense of urgency to get smarter about potential trends and changes. Get out of the building and look for what improvements new technologies make possible in terms of workflows, customer experience and other key practices. Taking the time to not be crushingly “busy” is key to getting a more strategic, future-oriented perspective. 

The research I’m doing reveals that strategic inflection points are often brewing long before they land on your doorstep as a credible threat. And I’m not the only one who thinks insurance is on the brink of big changes.

As before, where there is uncertainty, there is also opportunity

Tim Kunde,the founder and CEO of Friendsurance, makes a telling observation about what incumbents have in store: “Companies like Spotify are so hyped, but the global music industry only makes $15 billion (€14 billion) in annual revenues, excluding concerts,” says the entrepreneur. “The German car insurance market alone gets €20bn ($22 billion) a year in premiums.” Where there is that amount of money to contest, it is bound to attract entrepreneurs