In article 4 of our ongoing insurance series, Eric Veron and Ian Wittkopp examine the new technologies, processes, and business models that can change the insurance industry. We describe many examples of how insurers like ZhongAn, Allianz, Axa and Acko have leveraged innovation to access new business models like microinsurance and embedded insurance while #Generali and other insurers work with startups to improve specific areas of their value chain.
New tech creates opportunities for reimagined processes and business models
In both personal and commercial insurance lines, new technologies have allowed insurers to be more intimate with their customers while achieving greater operational efficiency. New technology ‘building blocks’ like sensors, IoT data, and big data analytics capabilities, have spurred innovation of new processes in the insurance value chain (for example, predictive underwriting) while also enabling new business models (for example, usage-based insurance). Insurtechs and forward-thinking insurers have already begun to leverage these technologies across their value chains to improve offerings and gain advantages.
This article will provide an overview of the new technologies, processes, and business models that are changing the insurance industry, while explaining where they are in their maturity cycles.
Mapping innovative technologies in insurance
Innovation in insurance has been focused on two broad categories, improved customer service and greater operational efficiency:
- Recent innovation has prioritized improving the customer service experience across the value chain. Insurtechs like Lemonade have attracted customers with an end-to-end digital experience that some incumbents have quickly followed.
- Conversely, there is less ‘noise’ about improvements to operational efficiency (and a slimmer cost structure), but increasing efficiency is equally important for long-term viability. In reaction to an increased customer focus on transparency, insurers have had to justify cost and commission structures. Those with high legacy infrastructure costs, high human touch processes and little automation have struggled.
The table below examines how technology is creating opportunities for new processes and reimagined business models. The maturity scale refers to the level of maturity a technology has within the insurance ecosystem. While wearable sensors are a mature concept, this data has sparingly been used in underwriting/pricing outside of basic exercise discount incentives.
New technologies (blue circles) are the building blocks of innovation. Combining technologies leads to new processes across the value chain (red squares) and in some cases, creates opportunities for new business models (green triangles).
For example, Roots, a U.S. based insurer, collects driving data through a user’s smartphone sensors (blue circle). Data is analysed based on four general categories: ‘focused driving’, ‘smooth braking’, ‘gentle turning’, and ‘safe hours’.1 After a certain amount of data is collected, data analytics is used to create a driver score. Then, a personalized coverage quote based on the driver’s unique risk profile is provided which enables a usage-based model (green triangle).
In the following section, we’ll take a look at the key themes highlighted by the chart above.
Themes in insurance tech, processes, and business models
Data and the ability to integrate seamlessly are key
- The majority of technologies enabling innovation in the insurance industry require huge amounts of data to be leveraged. Insurers need advanced data analytics capabilities and also an IT infrastructure and architecture that allows customer data generated across the value chain to be aggregated for analysis.
- Some incumbents with inflexible IT architecture, data silos, and lagging data analytics capabilities have turned to start-ups for help. Even existing technology providers like Guidewire, a U.S. based P&C platform for the insurance industry or Accenture Life Insurance Platform, a U.S. based Life platform, have turned to flexible/on demand SaaS solutions. Guidewire released their InsuranceNow product designed for smaller insurers that want a cloud-based streamlined process across their value chain. By leveraging this product, insurers can increase their speed and quicken their time to market. Start-ups like Shift Technology, a Paris-based insurtech, focuses on filling the data analytics gap with a cloud-based SaaS AI solution that detects fraud and automates claims. Generali France used Shift’s SaaS product to improve fraud detection in property claims (from 0.7% closer to 2.0% -the benchmark of successful peers2).
Innovation started with distribution and has moved towards increasing efficiency
- From 2014 to 2016, nearly 40% of new insurtechs were focused on distribution. Policybazaar, an Indian-based insurance aggregation and comparison platform, exemplified this era of innovation and provided needed transparency. At that point, 94% of insurance executives expected distribution to be most impacted by technology3. In 2020 and onwards, reaching customers differently still remains vital, but much of the low-risk innovation has already occurred.
- Going forward, innovation will increase in the non-distribution components of the value chain like pricing/underwriting, claims, and operations, as fully licensed digital insurers like Hippo (P&C -U.S.), Bowtie (Health -Hong Kong), and Singlife (Life -Singapore) challenge the cost structure of incumbents and appeal to consumers desiring transparency.
- Bajaj Allianz in India is leveraging AI/ML and image recognition to accelerate fast resolution of car claims in less than 30 minutes.
New business models are a challenge and an opportunity
- Microinsurance, pioneered in China by ZhongAn, offers cheap shipping insurance policies which generates a massive amount of data and shows the necessity of ecosystem tie-ups and strong analytics capabilities. ZhongAn has leveraged its strong customer insights to work with SE Asian distributors and even launched an affiliated Virtual Bank in Hong Kong. Similarly, Acko has pioneered embedded insurance models in India, primarily in the Automotive industry. Through their partnership with Ola, an Indian mobility platform similar to Uber, Acko services 20M trip insurance policies each month.4 Tesla recently launched Tesla Insurance, an insurance offering for Tesla owners that saves 20%-30%.5 While not fully, ‘embedded’, there is a clear trend in that direction. In the meantime, Allianz and AXA are investing to tackle microinsurance segments in emerging markets with mobile-based insurance solutions.
- With the IPO of Lemonade in July 2020, Social Good insurance models have gained increasing traction. Lemonade customers for example, choose a charity when they purchase a policy and Lemonade makes annual donations of unclaimed money to those charities (after their flat fee is deducted). In 2019, donations amounted to $630K. While many insurers have social good programs, Lemonade was one of the first to add social good to its business processes, which helped the company appeal to a younger demographic. Friendsurance is a Peer-to-Peer insurtech that pools together customers with similar insurance needs and pays cash back to the group if there are unused premiums at the end of the year. About 80% of users received cashback of roughly 30%.6
- While incumbent insurers are traditionally risk averse and hesitant to embrace new models like P2P, they may be able to leverage an older concept, Parametric Insurance (an insurance product that pays out if a set of conditions are met). Parametrix, an Israeli start-up, launched a parametric product that makes fixed, predetermined payments to cover downtime for IT systems.
Implications for Insurers
Insurance companies need to continue innovating in order to maintain their appeal to consumers. In the coming years, operationally excellent and lean cost structures will no longer be a differentiator or competitive advantage; they will be mandatory.
- Changing technology creates opportunities for new business models. Forward-thinking insurers will need to determine how they can embed insurance products through ecosystem tie-ups and partnerships. Changes also create new risks that must be insured which will require new models of insurance.
- Traditionally, financial institutions have reacted to new technologies and opportunities in two ways: make or buy. This set of options has expanded to include partner and invest. Incumbent insurers have done a good job of investing (almost every major insurer has Venture Capital capabilities), but they must continue to build partnership capabilities in order to put in place frameworks that allow insurtech partners to be onboarded in a few weeks, not 8+ months.
In future pieces, we will provide our viewpoint on the following questions:
- Do insurtechs have enough differentiation to sustain a competitive advantage?
- What should incumbent insurers do to respond?
- Take the Root test drive and save, Root Insurance Co, August 2020.
- Generali France: Artificial Intelligence Working to Detect P&C Insurance Fraud, Shift Technology, October 2019.
- Technology and insurance: themes and challenges, Swiss Re Institute, June 2017.
- Press Release – 20 Million in-trip insurance policies, OlaCabs, August 2020.
- Tesla Insurance, Tesla Support, August 2020.
- Friendsurance: Friends with Benefits?, Digital HBS, March 2018.