Insurtech: cutting through the hype
The noise surrounding insurtech can make it hard to get a clear understanding of what is actually going on, and what we should be doing about it.
A new report from research and advisory group Celent attempts to go back to basics and answer some simple questions about how technology will influence insurance.
What does insurtech actually mean? Which concepts present the best value opportunities, over what timeframe? And how should insurers prepare?
Insurtech as a term is poorly defined and understood, which in turn has led to confusion over its future value, the report says.
Celent defines insurtech as “a set of characteristics that describe a future vision of insurance, founded on a heightened level of digital engagement, a switch in proposition from purely indemnity towards active loss prevention, a fundamentally different business model, and a shift towards a more agile way of working”.
Insurtech moves away from periodic towards continuous customer experience; from mass to tailored markets; from event-driven to prevention, from tiered to utility/behaviour-based pricing; and from process to data orientation.
The shift has been towards “a new, fundamentally different proposition, enabled by technology to operate at a significantly lower cost base and be more responsive to shifting patterns of customer demands”.
But which areas offer the most opportunities?
Distribution remains a major battlefield for insurers across all market segments, the report says.
According to a recent Celent survey, personal lines is likely to see the largest impact from insurtech in the near term, with aggregators and robo-advisers playing a significantly larger role.
In fact, within five years these channels, alongside digital platforms, could become the primary source of new sales in personal lines.
“These findings imply that retail lines insurers should be investing in distribution agreements and digital engagement technologies today if they are expecting to play a significant role in the future,” the report says.
“They also raise some tough questions for insurers selling mass-market products through traditional agent and broker channels.”
Commercial lines will follow a similar pattern to personal, but over a longer timeframe, the report says.
Technology is enabling new propositions and forms of client servicing to develop, and new patterns of business are starting to emerge.
In personal lines utility/behaviour-based pricing is being explored by many, “but is not yet a widespread focus”, with most products still sold as commodities with minimal tailoring.
“Data, artificial intelligence (AI), mobile and connected devices still present a huge opportunity for insurers,” the report says. “As the ease of access becomes simpler and cost to develop these technologies continues to plummet, it is likely we will continue to see a flurry of activity while insurers seek the winning product design.”
Commercial lines appear to favour a move towards active loss avoidance and disaggregation of covers.
“Although the promise of sensors and connected technologies for commercial appears great, the absence of standards is likely to hamper progress at scale beyond a few specific and narrow market segments in the near term.”
In terms of business model, insurers’ skills and capabilities will need to evolve.
“As robotics and AI continue to advance, the next wave of cost reduction is just starting to get under way, potentially leading to leaner and more virtual operations,” the report says.
“Although it may not yet be possible to create a totally virtual insurance operation (an algorithm-based business), technology advances will at least enable us to achieve the next jump in operational efficiency.”
The report concludes that greater change is expected sooner in personal lines than commercial.
And it is clear that, regardless of the line of business, distribution innovations are more likely to have greater impact in the near term.
The timeframe to achieve future value from new tech-enabled proposition and business models is longer and less certain.
If insurers are to respond to the threats and opportunities of insurtech, they must adapt innovation activities to the needs of different business lines.
“A one-size-fits all model will not be sufficient to reflect the nuances of each line of business,” the report says. “For some lines of business and insurtech concepts, the urgency is high, while in others it is low.”
Insurers must also continue to focus on innovation in distribution as “traditional retail distribution patterns remain under threat from digital initiatives both inside and outside the industry”.
The message is clear: understand what insurtech is and where it is going, and focus on areas that will deliver the greatest value in the shortest time.