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New digital risks call for insurance innovation

12 October 2023 Swiss Re

• Digitalisation enables insurers to monitor, mitigate and price risks more efficiently, allowing for more tailored insurance solutions that can help close insurance protection gaps.
• Insurers are targeting a 3–8 percentage point improvement in loss ratios and savings of 10–20% in other parts of the value chain through digital transformation.
• Growing business interruption and cyber risks emerge as flip side of reliance on digital infrastructure.
• Swiss Re's new Digital Insurance Index shows advanced economies with strong infrastructure and R&D are better prepared for digitalisation of their insurance sectors, but emerging markets should benefit from faster catch-up growth.

Digitalisation is a source of new growth, new risks and new efficiencies for the insurance industry. Digital value creation has led to an increase of firms' intangible assets, including digital data. At the same time, increased dependency on digital infrastructure makes such assets more vulnerable, for example to business interruption and cyberattacks. In its latest sigma study, "The economics of digitalisation in insurance", Swiss Re Institute finds that potential benefits across countries and throughout the insurance value chain are far from exhausted.

In the report, Swiss Re Institute introduces the Insurance Digitalisation Index, which tracks the progress made in 29 sample countries with respect to the digitalisation of their insurance markets. South Korea came out on top of the index, followed by Sweden, Finland and the US. While advanced markets with strong physical infrastructure and high internet access rates have made most progress in digitalising their economies, China, Slovenia and India are catching up. China, for example, has moved up by ten places in just ten years. This is because emerging markets can jump straight into adopting newer digital technologies rather than transitioning from legacy systems.

Jerome Haegeli, Group Chief Economist at Swiss Re, said: "The study clearly shows a positive correlation between resilience and digitalisation. For society, digitalisation is a force for giving more people access to insurance and thereby closing protection gaps. For insurers, gains from better underwriting, risk mitigation and risk measurement from digitalisation of insurance improve the quality and efficiency of their work."

Digitalisation of the wider economy will also create new risk pools, opening up opportunities for insurers. For example, digital technology has facilitated sharing-economy business models, which have resulted in fundamental shifts in operational risks and liabilities that require innovative insurance risk transfer solutions. Sharing services like Uber and Airbnb are increasingly replacing private ownership. This requires a shift in business mix from personal to commercial lines based on usage, as personal lines typically exclude cover for commercial usage of vehicles and homes. Insurers can help achieve such coverage through innovative digital risk transfer solutions.

With the shift from producing physical goods to providing information and services, the global value of intangible assets – which increasingly include digital assets – of listed companies has increased fivefold over the past 20 years, to USD 76 trillion in 2021. Close to 80% of that value remains uninsured. Firms will need protection against digital risks, for example business interruption and cyber risks, as well as the emerging liability risks related to AI. Cyber security is a key concern for businesses globally, as reflected by the rapid growth in demand for cyber insurance: Swiss Re Institute estimates global cyber premiums will reach USD 16 billion in 2023, up 60% from 2021, and USD 25 billion by 2026.

Digital technology allows insurers to gather and process large sets of data using connected devices, data analytics and machine learning. This will allow more holistic and accurate risk assessments and better pricing of risks. Digital solutions can also automate standardised tasks, such as data collection and analysis for underwriting, driving down costs and ultimately leading to lower premiums. Insurers' digital transformation projects are targeting a 3–8 percentage point improvement in loss ratios and savings of 10–20% in other parts of the value chain.

Pravina Ladva, Group Chief Digital & Technology Officer at Swiss Re, said: "Despite the rapid digital transformation of the insurance industry, accelerated by recent advancements in cutting-edge technology, we still see significant potential to make insurance more accessible and affordable for consumers. Our industry should see this as an encouragement to continue investing in innovative solutions and adapting to emerging risks."

For consumers, online marketplaces lead to greater price transparency, present multiple insurance products and providers in a single place and allow customers to seamlessly complete the onboarding process online, making insurance more accessible and affordable. Aside from distribution, investments in insurance technology have shifted towards efficiency gains and improving underwriting and claims.

How to order this sigma study:
The English version of the sigma 5/2023, "The economics of digitalisation in insurance", is available in electronic format. You can download it here.

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