Advances in technology are impacting all points along the insurance value chain and re-shaping the competitive landscape.
Technology and the availability of new data sources are increasingly having an impact on insurance. Information, once digitalised, is being used to improve processes all along the insurance value chain. The rapid spread of internet-enabled sensors and ubiquitous connectivity are enabling new ways of communicating, information sharing, and insuring. New technology start-up firms – or InsurTech – are entering the industry to deliver some of the services typically provided by traditional insurers and intermediaries, and established technology giants (BigTech), including those in China, are also eyeing opportunities in the sector.
New high-tech start-ups (InsurTech) are increasingly targeting insurance, especially personal lines distribution.
Globally, InsurTech start-up activity is dominated by US-based, non-life companies, primarily in insurance distribution and related services. While predominantly focused on personal lines, InsurTech is also affecting selected commercial lines, largely in risk prevention. It is also enabling digital distribution to small- and medium-sized businesses. And some have built robo-advisors which use artificial intelligence to further increase penetration in insurance. In China for example, more and more tech-enabled solutions are now emerging across all insurance lines of business boosted by customer expecting interactions to be mobile first.
In response, insurers are setting up in-house innovation labs, partnering with large tech firms (BigTech), and investing in InsurTech start-ups.
Re/insurers have generally been slow to embrace new technologies, but there are signs that many incumbents are looking to upgrade their digital capabilities. Some are partnering with large technology companies and are also collaborating among themselves to test new technologies such as artificial intelligence and blockchain. Another strategy is to invest or partner with InsurTech start-ups that could help insurers in their own digital transformation. Most Chinese insurers and a number of global re/insurers have set up their own InsurTech venture funds. In 2016, the number of investments in InsurTech start-ups rose by 40%, and close to two thirds of the deals were funded by insurers.
Insurers are also experimenting with new services to boost customer engagement, and collect data about new risk pools.
Insurers also use technology to provide digitally-enabled services that involve more frequent interaction with customers. Alongside increased customer contact, the provision of these value-added services facilitates collection of data that can be used to improve underwriting, pricing decisions and better manage risk. Also, new risk pools are being created, and insurers are collaborating with start-ups to collect data and underwrite specialised or under-served niches.
While some failures are inevitable, InsurTech can enable incumbent insurers to upgrade their digital capabilities.
The recent expansion in venture investments has echoes of the 1990s dot-com bubble. Inevitably, some InsurTech firms, fueled more by hype than value-creation, will fail. But there are reasons to be hopeful that InsurTech will ultimately prove positive for the sector. The network effects associated with new technology – the tendency for it to become more valuable as more people adopt it – have grown significantly over recent years, driven by better infrastructure, smartphones, sensors, etc. Despite the highly anticipated public flotation of Zhong An, there have been few InsurTech IPOs, suggesting that entrepreneurs are focused on building a long-term relationship with investing insurers. The relatively modest investments in start-ups also means that any losses will not seriously impair insurers’ balance sheets.
InsurTech and BigTech do not pose an immediate competitive threat.
Recent surveys suggest that insurers are most worried about BigTech companies disrupting the industry — in China, any new strategic move from the leading digital/internet companies is intensely scrutinised by insurers. In principle, BigTech firms have the financial strength, technological expertise and customer-centric focus to offer a serious competitive challenge to incumbent insurers. At the same time, potential cannibalisation of revenues, brand dilution, lack of risk expertise and tight regulatory scrutiny, are reasons why this may not be a near-term threat.
Most innovation in insurance tends to be incremental but future innovators may eventually piggy-back on the infrastructure being developed today.
However, there is no room for complacency. The implications of digital technology for insurance will depend on how customer behaviour, insurers’ risk-absorbing capabilities and regulatory frameworks evolve in response. The latest wave of technology may simply foster further incremental changes to the industry, similar to past technological developments, broadening the scope and affordability of insurance to more households and businesses. Alternatively, it could prove more transformative if some of the typical hurdles to radical innovation can be overcome, especially in relation to the capture and analysis of information to assess risk more accurately. Over time new entrants could build on the infrastructure created by InsurTech and BigTech to offer compelling new risk protection solutions that are aligned with evolving regulation, and in doing so, present a genuinely disruptive competitive threat.
For more details download the latest Swiss Re Institute “Technology and Insurance: themes and challenges” report
Adapted by Yannick Even from an original article by Darren Lee Pain and Jonathan Anchen published in the “Swiss Re Institute Technology and insurance: themes and challenges ” report June 2017