No one would argue that the insurance industry has hung its hat on being able to efficiently and effectively deal with natural disasters and catastrophes. However, the exponential increase in today’s digital technologies and related increase in frequency and severity of man-made catastrophes (cyber attacks, etc.) has given risk management personnel a new wave of disruptors to deal with.
To better understand the many faces of disruptors already in play or not yet experienced, research and consulting firm Novarica, in its recent report, “Understanding Insurance Disrupters,” studied 13 insurance disrupters and positioned them according to their impact on three areas, for which brief examples follow:
Product and Risk: Insurers should put new and expanded offerings such as Internet of Things, i.e., telematics/UBI, wearables, smart home, etc., and microinsurance/on-demand insurance in perspective, evaluating and comparing them to their existing product potential.
Cost Basis: Novarica places drones and big data/machine learning in this category because they streamline processes and lower costs. Both may impact how risk is measured and priced, says Novarica.
Distribution: This area is more dynamic and fast-moving. Blockchain and online direct distribution (comparative raters) change how insurers sell, and how they will thrive in an omni-channel world, notes Novarica. Last week, a consortium of insurers, including Aegon, Allianz, Munich Re, Swiss Re and Zurich launched the Blockchain Insurance Industry Initiative B3i to explore the potential of distributed ledger technologies to better serve clients through faster, more convenient and secure services.
And consider that, as Google reconsiders its foray into the industry, Amazon has applied to 37 states for selling online auto and life coverages. The company already sells insurance in the UK, launching Amazon Protect, offering cover to safeguard Amazon purchases against accidental damage, breakdown and theft.
Further advances are seen in the number of tech startups that will foster disruption: According to CB Insights, funding for insurance tech companies rose from $740m in 2014 to $2.7b a year later, with startups targeting all areas of insurance.
If you view these disrupters as threats to your existing product set, rating/cost-factoring and distribution efforts, it’s clear that disrupters are a force to be reckoned with for insurers of all sizes.
So how are insurers competing against this changing landscape?
Novarica argues that insurers with legacy systems should ignore the “adapt or die” slogan, and replace it with “adapt or decline.” The message is clear: being able to adapt is a mandate: Insurers must adapt to the new world of disrupters, and their systems must be upgraded to respond quickly, efficiently and cost effectively.
Andy Scurto, president of ISCS, the developer of SurePower Innovation®, a cloud-based modern enterprise suite for property and casualty insurers, agrees. “The top insurance technology solution providers are aware of this mandate, and the technology employed to administer to these changing business requirements needs to be as robust and comprehensive as the business itself.”
Jeff Goldberg, Novarica’s vice president and author of the report, maintains that without digital channels, effective data analytics and agile core systems, insurers will face declines. “Their agents and customers will first tolerate and then resent their poor communication capabilities. Their actuaries, underwriters and claims adjusters will start to underperform in the market for lack of data and analytical capabilities. And their product freshness will grow stale compared to more agile peers as core systems inhibit speed to market,” he says.
Goldberg maintains that insurers can respond one of three ways:
- Continue operating as normal, with the understanding that their book of business may decline or lose profitability due to outside disruption;
- Invest in the disruption itself, either through their own innovation labs or by funding 3rd third-party companies, even if it means cannibalizing their core business;
- Attempt a “fast-follow” approach, looking to partner with third-party innovators as a particular disruption impacts their market, relying on agile core systems to support a variety of business models and product variants.
“Most insurers will balance their investments in digital channels, data analytics, agile core systems, and new business models or products,” concludes Goldberg.
Scurto recommends that insurers focus on the business problem that is generating the technology upgrade discussion in the first place, as well as keeping an eye on potential future disruptors. “To be able to compete, it’s important to look at systems that promise agility and flexibility of response to the known and unknown,” he says.