Insurance is a tough business to love from a customer point of view. It’s all about spending money on something from which we’d rather not see the value. We buy a policy not wanting to make a claim on it — we don’t want to have a car accident or have our house burgled or become seriously ill. Furthermore, insurance itself doesn’t protect us from such events — it protects us from the consequences.
Nevertheless, we want a sense of value for money from the premium we pay for cover. This can make it hard to pin down exactly what value looks like. A cheap price? The level and detail of cover? For most it’s probably a compromise between the two. Then there is the mutual suspicion that exists as we negotiate this transaction. Will the company try and squirm out of paying up on a technicality? Are we, as customers, always completely honest in the information we submit? As a result a gulf exists between them and us. In most cases, our contact is limited to the points of purchase and renewal — or in the event of a claim.
Our relationship with insurance and the very nature of cover is changing rapidly, though. Technology is re-writing the rules of engagement offering opportunities for innovation from start-ups as well as established sectors we wouldn’t normally associate with insurance. The venerable giants of the industry are being challenged to keep pace or face being left behind, overtaken by agile upstarts.
Smartphone apps, wearable tech and the ability to connect just about anything to the Internet of Things enables the creation of data streams from whatever is insurable. The result is detailed, up-to-date information on which to calculate risk and price insurance. All of this is good news for you and me.
The Internet of Insured Things
There appears to be a ready appetite for the resulting disruptive forces. A report by Boston Consulting Group and Morgan Stanley found that 50% of consumers would consider switching to new innovative business models. Technology, of course, is the key enabler of those models. The BCG/Morgan Stanley report foresees a world in which 80% to 100% of new cars will be connected and almost everything in a typical home could put online.
“The significant impending change creates major opportunities for insurers that are looking to embrace it, but also poses significant risks for the laggards,” the report says. “Cheap, connected sensors have the potential to transform the insurance offering — be it in motor, home, health insurance, or industrial settings.”
The report’s key forecast is the growing role of ‘ecosystems’ — interactions between a network of companies, individuals and institutions in the delivery of services. It highlights the current low level of interaction with customers compared with other industries — the result of the traditional and impersonal annual contact approach. Consumer behaviour and expectations are changing and the report recommends a “step change” in the way insurers engage their customers.
Accenture draws very similar conclusions in its Technology Vision for Insurance 2016 report: “(Technologies) could also enable insurers to create new business models based on personalised, real-time assessment of risk rather than using historical data and averaged pricing. Pay-as-you-go and usage-based insurance models, for example, will become more sophisticated in the years to come.”
The report found that “84% of insurers agree that organisations are being increasingly pressed to reinvent themselves and evolve their business before they are disrupted”, with 83% seeing the Internet of Things bringing transformative change to the industry.
The age of delightful insurance?
The insurgent attitude of incoming challengers is exemplified by Lemonade, a peer-to-peer insurance start-up causing a fizz of excitement, with its simple slogan “Insurance that doesn’t suck”. The company is remaining tight-lipped over exactly what products it will bring to market, but for further proof of its ambition to shake things up just look at the declaration on its homepage: “We’ve redesigned insurance from the ground up to make it honest, instant and delightful”. When was the last time you were delighted by an insurance offering? Whatever the details of Lemonade’s business model turn out to be, they are clearly enough to get the money flowing in. The company has attracted $13million in seed funding from Sequoia Capital.
Across the insurance industry, the most fertile and active sector when it comes to innovation and investments has been healthcare, accounting for 56% of insurance tech start-ups between 2010 and 2015, according to CB Insights. In America, a major factor has been the way Obamacare has created new demand and given rise to new markets. But there are many reasons why opportunities for health insurance innovation are plentiful.
We produce huge amounts of accurate and real-time data about ourselves from the apps on our smartphones and wearable tech such as fitness monitors. Everything from workouts, steps walked, hours slept, calories consumed and more. From the insurer’s point of view this is pure gold — detailed, rich data on which to calculate risk instead of a single annual snapshot of circumstances.
The real advantage for them, though, is the advantage they can offer their customers. Instead of being a remote provider of financial cover, insurers can seize the opportunity to build a direct relationship with the customer by becoming their health partner, offering support, advice and incentives to lead a healthier life. A well-known example is Vitality which offers a wellness programme featuring reduced health insurance premiums, discount gym memberships and other lifestyle benefits for members.
Better data on its customers gives Vitality better insight into their lifestyles allowing for better risk assessment. By helping those customers live healthier lives, the company pays out less, reducing costs. Healthier lifestyles for customers are a far more valuable and tangible benefit than mere insurance cover which they hope never to actually claim on. That’s real value, rather than ‘dead money’ spent on a year’s claim-free cover.
Speed up or get overtaken
Motor insurance is slightly different, but there are parallels. Think about the process. When you insure your car you tell the insurance company about yourself, your car and where you keep it. Economy with the truth on a few probing questions, such as driving convictions, medical conditions, annual mileage, could invalidate any future claim.
However, apart from these fairly narrow risk assessment parameters, there is nothing to stop you going on to behave with utter recklessness. As long as the insurer never finds out — though convictions or claim — they can remain blissfully unaware of how inaccurate their risk assessment is. Filling out the forms — on paper or online — has been pretty much the limit of data acquisition. There are no sections asking if you do handbrake turns in the street or drive everywhere at 100mph.
This seems crazy when there is so much better quality, bang-up-to-date data about you, your car, your journeys and many other relevant factors. Connected cars can measure and report back on everything from where and when you travel to how you drive. Not everyone will be comfortable with having Big Brother as a passenger. But it stands to reason that the more information you are prepared to share with an insurer, the more personal they can make their assessment of risk. Accepting certain conditions could lead to lower premiums, which would be especially attractive to people who otherwise would be lumped into higher risk groups, such as young male drivers.
So-called ‘black boxes’ are already popular with young motorists desperate to mitigate crippling new driver premiums under a system in which safe drivers share the cost of insuring the bad ones. An insurer could even use such detailed, live data to offer guidance on becoming a safer driver by highlighting risky habits, warn of a dangerous problem with your car, or if you’ve parked in a high-crime area and forgotten to lock the doors.
In the UK, Guevara is on a mission to start a motor insurance revolution with a peer-to-peer model with a twist. The firm groups drivers together and pools their premiums, which decrease each year depending on claims made. This approach effectively also shares risk among members of the group which — the thinking goes — makes them less likely to make a spurious or exaggerated claim if the impact of doing so is felt by someone they have a connection to.
Metromile targets urban Americans who don’t drive much with pay-per-mile policies. The Metromile Pulse is a device that plugs into a car’s diagnostic port and tracks distance travelled, but it’s not a black box and doesn’t measure other factors such as speed or driving style. It does, though, access engine information which feeds into the accompanying smartphone app, offering diagnostic data and driving statistics in addition to route optimisation and car location features.
It’s all about the data
With access to high quality customer data being the differentiator, the emphasis shifts from the financial ability to underwrite large risk pools and towards the technology that can exploit small ones. That means that tech companies might be better placed to capitalise on those opportunities than established insurance giants. It follows that any company that already has a lot of detailed data on their customers will have an advantage.
The shift will also be in what insurance companies actually are. As with Vitality, rather than being a static financial institution betting against risk of something triggering a claim, they will increasingly play a partnership role, using data not only to price risk but to help customers achieve positive outcomes rather than just protect them against bad ones.
As Accenture puts it: “Insurers can also evolve from providing cover to becoming valued partners that help their customers monitor, mitigate and avoid risk. The result? A more transparent and trusted relationship between insurers and customers. Insurers can interact with customers more frequently than only when they pay or claim, creating positive moments of truth and boosting customer satisfaction in an industry that is becoming increasingly commoditised.”
The shifts under way in the insurance sector represent a perfect example of the win-win outcomes made possible when we harness and unlock personal data. It is not a case of a consumer victory over the greedy corporate giant. Nor is it the little guy having zero control and having to fall in line with an industry-dictated status quo. The potential is to create entirely new models rather than tweak or squeeze old ones — business made truly personal in an industry where a bespoke deal is the ultimate goal of both consumer and provider.
Businesses needs to respect our data and be honest and transparent about how it is used. Regulators must hold them to account and ensure risk assessment is fair and not loaded such that the vulnerable are profiled out of the market.
For companies keen to embrace that kind of openness and honesty and with the ambition to make them real differentiators, there is the opportunity to do something that is better for the customer and better for the business. And given they are in the business of risk, the implications of ignoring such opportunity should be all to clear.
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