"Innovation in Insurance: How Technology Is Changing the Industry - Institute of International Finance"


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S E P T E M B E R 2 0 1 6
S E P T E M B E R 2 0 1 6
Innovation in Insurance
A variety of breakthrough technologies are set to spur a fundamental transformation of the insurance industry.
Cloud computing, the Internet of Things (IoT), advanced analytics, telematics, the global positioning system
(GPS), mobile phones, digital platforms, drones, blockchain, smart contracts, and artificial intelligence (AI)
are providing new ways to measure, control, and price risk, engage with customers, reduce cost, improve
efficiency, and expand insurability. These technologies are also enabling the creation of new insurance products,
services, and business models. And while emerging technology provides opportunities for traditional insurers
to modernize and reinvent themselves, it also forces them to respond to new sources of competition from
increasingly well-funded and nimble software-based companies that are beginning to make inroads in the
market by focusing on unmet consumer demand, bringing down cost, and providing new services. This paper
examines how technology is beginning to reshape the insurance landscape and the potential challenges and
opportunities facing the industry.
Innovation in Insurance
Innovation in Insurance
Until recently, insurance has been a virtual island in a sea of technological change. While new players worked
to disrupt banking and wealth management—after entirely transforming music, publishing, travel, taxis and
booking—insurance seemed to be operating much as it had for decades. That era of relative stability has ended
with the increasing deployment of advanced sensor technologies and related services. Insurance is now, like
other major industries, grappling with the risks and opportunities of new technologies as we will see below.
The main body of this paper is organized around different breakthrough technologies. Two major impressions
emerge: technology is changing the nature of risk and is enabling new products, services and channels. One
of the most exciting implications resulting from these developments is expanded insurability for low-income
populations, which we will cover in our upcoming companion report, “Insurance Inclusion.”
Insurance has been an industry with low customer engagement. A 2014
by Morgan Stanley and Boston
Consulting Group found that consumers interacted less with insurers than with any other industry in the study.
Many insurers have limited interaction with a significant portion of the end-consumers because a considerable
amount of their business is intermediated—brokers, for instance, amass an impressive $45 billion in annual
compensation from insurers around the world. Furthermore, the slow digitization of the industry has hindered a
high frequency of interaction between insurers and insureds. The lack of more customer touchpoints has meant
that insurers have fewer opportunities to gain insight into customer needs and to use insights to customize
products. A desire to become more consumer-centric and enhance personalized services is shared throughout
the industry. As AXA’s new CEO Thomas Buberl said, “Insurance suffers traditionally from a lack of contact
with customers. We want to do more.” According to Christof Mascher, COO, Allianz, “How to get to a higher
frequency of interaction with customers was always a big challenge for insurers. The digital age has brought us
countless opportunities and frequent touch points.”
Major shifts in client demographics, behaviors, and expectations are underway and will have important
ramifications for the insurance landscape. This shift has been led by millennials, individuals born roughly
between 1980 and 2000. This generation will constitute half of the global workforce by the end of the decade.
In the United States, they already comprise the largest share of the overall population as well as the employed
population—at 26% and 34%, respectively. Millennials, whose exposure to digital technology and innovative
platforms from an early age have made them the first generation of “digital natives,” are beginning to move
into their peak earning and spending years and have become an influential segment of the population. Their
high expectations for technology-based services, convenience, transparency, speed, regular engagement, and
a personalized experience that reflects their needs are defining how products and services are delivered. Their
preferences and expectations are a particular challenge for the insurance industry.
Though still only a tiny share of the overall $4.5 trillion insurance market, new digital players pose a potential
competitive challenge as their low-cost technology platforms and different business models help them compete
asymmetrically by targeting areas of the insurance value chain. They also face fewer legacy costs and benefit
from greater specialization, risk tolerance and agility—44% of insurance tech companies have fewer than 10
employees (Chart 1, Pg. 5).
Startups are using technology to reduce operational costs and help enhance the client’s user experience by
improving convenience, transparency, timeliness, simplicity, personalization, and customer engagement. As we
Innovation in Insurance
will see throughout the following sections of the paper, from mobile insurance policy management platforms
to usage-based automobile insurance, the insurance technology (insurtech) industry is expanding quickly.
Investment in insurtech startups more than tripled last year, rising from $740 million in 2014 to above $2.6
billion in 2015, according to data from CB Insights, a U.S.-based research firm (Chart 2). The strong inflow of
capital has continued in 2016, with CB Insights reporting that the first three months of the year experienced
the second largest quarter for financing ever in the space with more than 45 deals raising $650 million. And
while the U.S. remains the most active country for insurtech, the momentum is growing globally (Chart 3)
and (Chart 4). This growing momentum has been an
important catalyst for a number of incumbents to begin
modernizing and improving their services through the
adoption of breakthrough technologies in order to
remain competitive.