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The future of insurance in a changing world

21 November 2017Jonathan Faurie

Insurers and brokers exist in an ever-changing world. The nature of insurance is keeping pace with this and will look significantly different in the future.

FAnews recently came across an article on knowledge.insead.edu which had an interesting take on this topic.

the article pointed out that earlier this year, vehicle manufacturer Tesla announced that it would offer lifetime auto insurance bundled with the cost of the vehicle. 

The company is betting that its improved machine learning will bring down the risk profile of its entire fleet of connected cars. 

Troubled reliance?

The article points out that Tesla’s announcement is only one of the many examples of how the traditional insurance model is poised for change. 

Traditional insurers have long relied on two customer touchpoints: at the time of sale and at the time of claim. As the world gets increasingly connected, the current data void between these two touchpoints is about to be filled. 

The article adds that insurers are already shifting in this direction. In the past, they captured data as a one-time event, using it to statically determine customers’ risk profiles and premiums. Today, they are embracing connected technologies, especially in the auto and health sectors, to offer personalised and dynamic insurance premiums to their customers.

Data paving the way 

The article points out that some insurers, like Progressive and Insure The Box, got a head start by retrofitting cars with data-capturing devices, while others are relying on partnerships with original equipment manufacturers. 

Greater market intelligence gathered via these sensors and connected products allows insurance firms to offer personalised premiums. This new source of data can also inform product innovation. Bought By Many, a UK based insurtech firm, has successfully intermediated such opportunities by aggregating users with special insurance needs – a rare illness or a unique occupational hazard – and allowing insurers to serve them at scale. 

The article adds that this connected model is also seeing early signs of uptake in the commercial insurance world. Logistics firms managing large shipments can gather sensor data to inform insurers on the status of shipments. Even business insurance can look at data patterns captured by cloud-based invoicing and accounting applications to determine the liquidity and credit-worthiness of parties. 

But connected insurance and personalised premiums are only the first steps towards a much larger potential for value creation. The insurance industry has long monetised the promise to protect customers should an extreme event take place. With constant data capture, they can now promise avoidance of such extreme events in the first place. 

The regulators role 

The article points out that the transformation of insurance firms into insurer ecosystems presents a large opportunity. Unlike traditional insurance whose moat and scalability ride on a comprehensive network of agents, insurer ecosystems will be easier to defend because of network effects. 

The article adds that the more data they will capture about customers, the more third parties will partner with them. In turn, the more third parties that offer value, the stronger the value proposition will be for the end customer. Eventually, a few large ecosystems may own the market. 

Regulators will also need to understand the ecosystem opportunity if they are to enable this shift. While traditional insurance data are heavily regulated, much of the data that supports new value creation is less clearly regulated at present. For example, data on active care and cure are heavily regulated in the healthcare sector but wellness and fitness data live in greyer zones. Regulators will need to draft policies that balance user privacy and innovation.

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