Digital technologies can be harnessed by the re/insurance industry to narrow insurance protection gaps in developing and emerging markets, thereby improving societal resilience after natural disasters, according to a report published by the Geneva Association.

However, the protection gap problem is not limited to emerging markets, the report emphasized, pointing to the recent example of the devastating earthquake that hit central Italy on Aug. 24, 2016 where only 10 percent of total losses were insured.

And the global protection gap is getting worse, the report said, noting that uninsured losses have risen from 0.07 percent to 0.19 percent of global gross domestic product (GDP) in the last 40 years.

“Risk exposure, primarily driven by accelerating urbanization, has clearly outpaced insurance penetration,” said the report titled “Harnessing Technology to Narrow the Insurance Protection Gap.

“Therefore, re/insurers need to further strengthen their contribution to society’s resilience to disasters as well as to creeping developments such as ageing or longevity,” commented Anna Maria D’Hulste, the secretary general of the Geneva Association, in a forward to the report.

“Digitization is a unique lever for insurers to develop more affordable, efficient and customer-centric products and solutions, thereby enhancing the societal value of insurance,” the report said.

“In developing and emerging markets, in particular, technology offers the potential to increase insurance penetration by addressing obstacles in the areas of distribution and claims settlement which, for example, hinder the wider uptake of microinsurance,” the report said.

In mature insurance markets, there is a perception of “product complexity and opacity at the customer end,” which have impeded the expansion of the reach of insurance products, it added.

“Technological advancements could effectively address this issue, for example, by enabling customers to put together products the way they really want to,” the report said. “Based on big data, insurers could predict what customers need, instead of asking them to answer a multitude of underwriting questions.”

In addition, the report noted, new technologies and improved analytics could “lower the cost of policy administration, marketing, distribution and claims settlement and, at the same time, improve risk selection and underwriting.”

Overall, technology will boost the affordability, awareness and appeal of insurance globally, the report indicated.

Affordability and Risk Awareness

In developing and emerging markets, protection gaps can be attributed to affordability and low levels of risk awareness and risk culture, the report said.

“In emerging markets, many, if not most, potential customers have never before had formal insurance. This is particularly true of developing countries, where insurance schemes linked to mobile phone subscriptions are generally the first experience of the low-income population with formal and individual insurance,” it continued.

As a result, innovative mobile-based insurance, can go a long way in boosting awareness and narrowing protection gaps, the report said.

Technology and the Insurance Value Chain

“New (digital) technologies are expected to profoundly impact all links of the insurance value chain in a way which offers the potential to radically lower transaction costs and mitigate traditional obstacles to insurance such as moral hazard and adverse selection,” the report said.

Indeed, the report noted it is widely believed that the biggest source of value creation in “digitized insurance will be in reducing costs and developing new – and more customer-centric – products and solutions.”

The key to unlocking this potential and tapping into the vast protection gap is to integrate technology, data and analytics, the report affirmed.

The impact of digitization across the value chain is pervasive, permeating the areas of pre-purchase, sales and operations, it continued.

“Firstly, it reshapes the way customers discover and perceive insurance propositions pre-purchase,” it said.

“Secondly, sales are enhanced by dropping costs as a result of disintermediation, and increased conversion of leads on the back of tailored solutions and ‘digitally enhanced’ physical distribution channels.” Disintermediation connects carriers with their customers directly, “enabling tremendous gains not just in terms of cost-efficiency but also in anticipating and understanding customer needs. Both effects are set to boost insurance penetration.”

And, finally, by facilitating straight-through-processing, digitization “can lead to a massive reduction in back-office costs. Coupled with big data and predictive analytics, it can also translate into significant improvements of the claims ratio and, therefore, improves the affordability of insurance,” the commentary said.

Mitigating Moral Hazard

Further, the use of modern technology such as telematics makes it less likely that insureds will be careless and take risks, or behave against the interest of other insureds simply because they are protected (which alleviates moral hazard), the report said.

“Also, big data enables quantum leaps in risk classification and makes insurance more attractive to good risks who benefit from more favorable individual pricing. Adverse selection where primarily high-risk individuals would buy insurance is effectively mitigated. Overall, insurance markets become more efficient and offer a better deal to risk-conscious insureds.”

Stepping Out of the Comfort Zone

“Digitization is a unique lever for insurers to develop more affordable, efficient and customer-centric products and solutions, thereby enhancing the societal value of insurance,” the report said.

“However, in order to achieve this – and preempt potentially disruptive new competitors – insurers need to step out of their comfort zone. The imperative of digitizing the value chain is bound to present major challenges and even tribulations to incumbents, from managing channel conflicts to implementing headcount reductions in administrative functions,” it emphasized.

“Even though the insurance industry’s digital (r)evolution has just begun, technology has already contributed to narrowing protection gaps,” said Dr. Kai-Uwe Schanz, senior adviser to the Geneva Association and a co-author of the report. “Digitization is a unique lever for insurers to develop more affordable, efficient and customer-centric products and solutions, thereby enhancing the societal value of insurance.”

Deputy Secretary General of The Geneva Association and report co-author, Dr. Fabian Sommerrock, said, “The use of technology is one of the most relevant and topical dimensions of the global protection gap debate.”

He hoped that the report would help “sensitize the global re/insurance community, governments, lawmakers, regulators, standard-setters, development banks, supranational organizations and consumers to the enormous leverage technology can deploy to make societies more resilient through risk mitigation, and protection products and solutions.”

Source: Geneva Association

*This story ran previously in our sister publication Insurance Journal.