The insurance sector has entered a phase of profound transformation. Numerous InsurTech startups have popped up to challenge the traditional model by generating more than 16 billion dollars in the last year from insurance companies.
I believe that we will see a completely changed insurance sector in the medium term. But I consider it a joke for an industry conference to show a picture of a newborn and sell it as the last intermediary or the last client to have purchased an insurance policy. I’m convinced that insurance companies will still be relevant in the future, or will become even more relevant than they are now, but these companies will have to be InsurTechs or players who use technology as the main enablers for reaching their own strategic objectives.
— Matteo Carbone (@MCins_) 9 ottobre 2016
The reach of this digital transformation goes way beyond the elimination of “the middle man” and interpretations from a distribution point of view. The direct digital channel dominates very few markets and deals only with compulsory insurance. Whereas, in the vast majority of markets, a multichannel-oriented customer continues – with variations from country to country – to choose at least at some point of the customer journey to interact with an intermediary. The amplitude of the digital transformation happening in the insurance industry is widespread and encompasses all of the phases of the insurance value chain, from underwriting to claims.
Every insurance sector player – whether it’s a reinsurer, a carrier or an intermediary – ought to pose this question: How should the insurance value chain be reshaped by using the new technologies at hand? There are numerous relevant technologies that come to mind, including the cloud, the Internet of Things (IoT), big data and advanced analytics, quantum computing, artificial intelligence, autonomous agents, drones, blockchain, virtual reality, and self-driving cars.
In order to take full advantage of these technologies, there has to be a structured approach that begins with identifying use cases that can have an actual contribution to reaching strategic business goals, then takes these use cases and applies them in such a way to maximize the effects inside the insurance value chain of each player. Finally, it should look at the software/hardware selection or the “make vs. buy” choices. The essential idea is that there is no such thing as “one size fits all.” Each player needs to create customized use cases based on their individual strategy and characteristics.
To date, there are several types of approaches to mapping InsurTech initiatives. I have developed my own classification framework based on six macro-areas (awareness, choice, purchase, usage, IoT and peer-to-peer (P2P)). Insurance IoT, also known as connected insurance, represents one of the most relevant and mature InsurTech trends.
Connected Insurance represents a new paradigm for the insurance business, an approach that fits with the mainstream Gen C, where “C” means connectivity. This novel insurance approach is based on the use of sensors that collect and send data related to the status of an insured risk and on data usage along the insurance value chain. During the first edition of the Connected Insurance Observatory since January 2016, participants had the opportunity to learn what the results in the auto sector are and about some of the first uses of this approach in the other business lines.
Auto telematics represents the most mature InsurTech use case, as it has already passed the test and experimentation phase within the innovation unit. It is currently being used an instrument for daily work within motor insurance business units. In this domain, Italy is an example of international best practice: Here you can find that at the end of 2015, half of the 10 million connected cars in the world have a telematics insurance policy. According to the SSI’s survey for the Connected Insurance Observatory, more than 70% of Italians show a positive attitude toward motor telematics insurance solutions. According to the Istituto per la Vigilanza sulle Assicurazioni (IVASS), about 26 different insurance companies present in Italy are selling the product, with a 16% penetration rate out of all privately owned insured automobiles in the second quarter of 2016. Based on the information presented by the Connected Insurance Observatory – a think-tank I created in partnership with Ania that brings together more than 30 European insurer and reinsurer groups – the Italian market will surpass 6 million telematics policies by the end of the year.
Based on this data, we identified three main benefits that connected insurance provides to the insurance sector:
- Frequency of interaction, enhancing proximity and interaction frequency with the customer while creating new customer experiences and offering additional services
- Bolstering the bottom line, improving insurance profit and loss through specialization,
- Knowledge creation and consolidating knowledge about the risks and the customer base
The insurance companies that are part of the Observatory are adopting this new connected insurance paradigm for other insurance personal lines. The sum of insurance approaches based on IoT represents an extraordinary opportunity for getting the insurance sector to connect with its clients and their risks. The insurers can gradually assume a new and proactive role when dealing with their clients—from liquidation to prevention.
It’s possible to envision an adoption track of this innovation by the other business lines that are very similar to that of auto telematics, which would include:
- An initial incubation phase when the first pilots are being put into action in order to identify use cases that are coherent with business goals;
- A second exploratory phase that will see the first rollout by the pioneering insurance companies alongside a progressive expansion of the testing to include other players with a “me, too” approach;
- A learning phase in which the approach is adopted by many insurers (with low penetration on volumes) but some players start to fully achieve the potential by using a customized approach and pushing the product commercially (increasing penetration on volumes);
- Finally, the growth phase, where the solution is already diffused and all players give it a major commercial push.
After having passed through all the previous steps in a period spanning almost 15 years, the Italian auto telematics market is currently entering this growth phase. The telematics experience teaches us three key lessons regarding the insurance sector:
- Transformation does not happen overnight. Telematics – before becoming a relevant and pervasive phenomenon within the strategy of some of the big Italian companies – needed years of experimentation, followed by a “me, too” approach from competitors and several different use cases to reach the current status of adoption growth.
- The companies can be protagonists of this transformation. By adding services based on black box data, telematics has allowed for improvements in the insurance value chain. Recent international studies show how this trend of insurance policies integrated with service platforms is being requested by clients. It also shows that companies, thanks to their trustworthy images, are considered credible entities in the eyes of the clients and, thus, valid to players who can provide these services.
- If insurance companies do not take advantage of this opportunity, some other player will. For example, Metromile is an InsurTech startup and a digital distributor that has created a telematics auto insurance policy with an insurance company that played the role of underwriter. After having gathered nearly $200 million dollars in funding, Metromile is now buying Mosaic Insurance and is officially the first InsurTech startup to buy a traditional insurance company. This supports to the forecast about “software is eating the world” – even in the insurance sector.