April 3, 2018
The insurance sector belongs to mature and highly competitive industries. The vast array of market players operates inside a low-growth environment, and there is a great risk of a race to the bottom on rates. Moreover, this risk is attributable to the changes of distribution models and new technologies. Still, the cost base remains too high with numerous manual processes demanding multiple handling.
The business models that have served the insurance industry for years require a complete overhaul these days. Insurers are perfectly aware of the positive correlation between innovation and competitiveness:
Digital Differentiation: With the help of digital platforms insurers can focus on digital layer customization. Customer portals help to keep the customer at the core of the business.
Data & Analytics: The major challenge is to be able to convert big data into insights, as data amount has grown.
Innovation: 1-5% of IT budgets are dedicated to R&D. There should be a bilateral approach to innovation: leveraging internal innovation and strategic partnerships with InsurTech.
InsurTech: There is a robust community of InsurTech startups that offers a different approach to the very business model and underlying technology in the insurance industry.
However, the historical conservatism of the insurance industry runs counter to the frantic pace of technological development and as a result, fails to correspond to the current problems.
Insurance fraud stands out from all the challenges as it is destructive for insurance companies on a global scale. The loss amounts are astonishing. According to Aviva fraud investigation, 9 out of 10 insurance claims involve fraud. Insurers have no other option other than to pass these losses to clients, and this leads directly to higher car insurance costs. The problem of insurance fraud is complemented by present-day insurance systems which appear to be arcane due to the inability to measure the risk.
Apart from being archaic and plagued with red tape, the insurance industry has perceived clients in a generalized manner. Drivers are different in many aspects, but insurance has ignored their individuality. Behavioral patterns and accident risk are directly dependent on the driving style, weather conditions, pavement quality, and other parameters which are interconnected and have to be considered.
There is an unyielding need to create a community of safe drivers and promote the idea of safe driving in society. In other words, there have to be incentive mechanisms to encourage people to improve their driving culture. The insurance industry requires a multi-targeted tech product, providing a personalized approach to every driver, minimizing the possibility of fraud of any kind, and motivating road safety culture improvement. But the innovative approach cannot do without an appropriate regulatory framework.
The ultimate aim is to create a new global standard for the insurance industry by leveraging cutting-edge technologies. The solution must rely on complex tech framework: a quintessence of artificial intelligence, open-source intelligence, link, visual & text analytics, and image & signal processing. The ideal platform for insurance combines AI-based fraud detection and real-time dynamic evaluation of driving conditions to give each driver personalized approach. And this precision should be served with usage ease and convenience via smartphones.
In the process of development, it is important to create unique operations to mobilize the insurance industry to a qualitatively new level. The market players can use the technology to tackle the existing challenges. The solution based on blockchain technology, AI, IoT, and Big Data could offer insurance on-demand with no lengthy contracts. It’s absolutely logical today that the driver activates the system only when driving. Apart from being adequate to modern lifestyles, it would also pass savings onto the customer.
The new stance on the insurance requires preliminary analysis and research: driving patterns of drivers have to be examined to elaborate the framework that corresponds to a great variety of parameters. The primary mission of the insurance industry is being able to detect the risk, understand it, and manage it properly and promptly. Technologies make fraud detection predictive and can help to evaluate driving conditions dynamically. It is about time insurance is provided with highly anticipated transparency via digital age standards.
The injustice of the generalized approach has been related to pricing. Everyone had to deal with high premiums regardless of whether you are a law-abiding driver or the reckless one. Telematics supplies the auto insurance industry with usage-based service, which means driving patterns and premium rates get finally aligned. In the process of driving, the behavior is monitored: hard braking & hard cornering, fast acceleration, time of the day, etc. Telematics not only brings accessibility to low-risk drivers but also serves as incentivizing tool for adopting safe driving habits.
Some estimates suggest that usage-based insurance will be provided for about 50% of all vehicles by 2030. Basically, the insurance industry will gradually move away from being imposed and even forced on the clients. From the insurers’ slant telematics help with keeping in touch with the driver in a positive way, as this is a channel for constant feedback.
While technologies are obviously a positive development for the insurance industry, the regulatory and policy consequences can generate a certain percentage of uncertainty. The regulatory regime has to differ from the traditional insurance as far as the technologies are concerned. At present, market conduct and governance are those fields that are most likely to be affected. In case the insurer decides to adopt technologies, he is expected to consider the appropriateness of internal control considerations as well as compliance with the market rules.
The regulatory environment stimulates insurance companies to pay special attention to the cybersecurity risk management framework. Regulatory agencies are now approaching the establishment of regulations concerning insurer’s conduct in the context of this particular operational risk. Data protection belongs to regulatory snowballing that is set to shake up the entire insurance industry.
It has been argued that regulation is not able to keep pace with InsurTech. Innovations happen much faster, and regulators rarely look forward. This generates challenges. If we return to the conservatism of the insurance industry, we are likely to find its grounds here – in the protection offered by regulation. This is the major reason insurance has been sheltered from the technologies in contrast to other spheres.
From the regulatory perspective, the solution takes the form of the balance between the regulation itself, technological development, and consumer protection. In this case, the regulator is empowered to do his job by policy and guidelines because it would be much easier to change. Disruptors and incumbents equally strive to change the insurance industry, and regulation plays a big role this pursuit.
There has to be an environment harnessing innovations. Regulatory harnessing means assessment, testing, and effective release to the market. The location within this environment is likely to become a leader of regional development hubs for InsurTech.