May 29, 202013 min read
Authors: Emil Waszkowski - Head of Digital Consulting
Technology is playing an increasingly important role at every stage of the insurance value chain. More and more insurance companies have started building ecosystems, the Internet of Things (IoT) solutions, big data or mobile applications to provide more value to consumers and to build businesses that are resistant to disruption. Read about the phenomenon of Insurtech and what actions to take to respond to changes effectively.
The speed at which COVID-19 is impacting many businesses around the world is unprecedented. Insurance companies are no different - they are facing a number of issues following the coronavirus outbreak. In such difficult circumstances, insurers need to strive to increase efficiency and reduce costs by using technology and creating new products and services tailored to the changing expectations of digital customers.
Most insurers struggle to introduce value innovation products successfully. The main reasons behind it are legacy systems, regulatory restrictions and the lack of determination to introduce new products. Optimizing internal processes is more successful. In 2018, the insurers’ net income grew by 66.3% compared to 2017. It’s safe to say that at least a part of this growth can be thanks to the use of analytics, automation and Insurtech solutions focused on optimizing specific tasks in the value chain.
The demands of digital customers are constantly growing. No wonder - the technological development has allowed more personalized services that are available at any place and time. Customers that are used to such services require similar experience from companies operating in more traditional industries and are willing to pay more for that. Besides, there are two particularly visible trends among insurance customers - they want to be actively protected, not just insured, and they only want to pay when they actually use the service - in a ‘pay as you go’ model.
If insurers won’t meet the abovementioned needs, the price will be the only feature that distinguishes them among the competitors. According to the Accenture report, in the absence of other distinguishing features, the price remains the top loyalty driver for the car (52% of customers claim this) and home (50%) insurance customers globally. This is also true for the 38% of life insurance customers.
These strong expectations from customers towards insurers to add value in their daily lives through real-time interactions provides a chance for brands to differentiate themselves, increase engagement, and explain the pricing.
When it comes to choosing the preferred purchase method, the share of particular channels can be radically different depending on the country. However, there is a visible global trend to look for insurance online, confirmed by the results of the Bain survey. It shows that in each of the surveyed countries, at least 50% of customers use the Internet at some stage when buying both Property & Casualty (P&C) and Life, Disability & Health (L&H) insurance, which is a 60% increase compared to 2014.
The report shows that at least 50% of respondents are open to buying insurance from new entrants and companies outside the insurance industry. Interestingly, at least 60% of millennials agree with that. In general, customers still prefer offline channels because they consider them to be more personalized and easier to use. Therefore, insurers should focus on providing better User Experience on each stage of the customer journey. Digital insurers in China are good examples as they have paved that way and have been the first who offered value and examined their users’ needs to offer the most personalized product and therefore achieve unprecedented conversion.
When it comes to the abovementioned challenges, Insuretech can be both a threat or an opportunity. To understand it better, let’s start with its definition. Insurtech (which is an abbreviation from insurance technology) is a term referring to tech services and products designed to increase the efficiency of the insurance industry. Insurtech companies can be divided into three types:
According to the World Insurtech Report 2018, the biggest advantages that incumbents insurers see in Insurtech companies are the agility and the ability to address the market needs. It’s clearly visible in the investments in Insurtech - in 2014-2018, the value of financing increased by 46% annually (CAGR) to over $ 3.9 billion in 2018.
Throughout the whole of 2019, there was great momentum for insurtechs with funding levels increasing steadily. What can be worrisome, though, is that the overall funding for insurtech investments decreased significantly - by 54% during the first quarter, compared to the numbers last year. The longer the coronavirus remains out of control, the more reluctant investors could be to fund new ventures.
The good news is: Despite the considerable percentage drop, there’s still a lot of activity seen in early-stage funding rounds. Even though the economy is suffering because of the coronavirus, insurtech innovation is expected to be wounded only in the short term. How so?
In the midst of the COVID-19 crisis, insurance companies are practically forced to start collaborating with mature insurtechs or third-party specialists to develop innovative solutions. Many insurers seem to understand that, which opens up new possibilities for insurtechs that are mature and capable enough to partner up and enable quick market launches.
Not to mention that established insurtechs like Lemonade or robust comparison platforms will still have a chance to thrive in a more “digital” environment that the COVID-19 crisis created.
Actually, speaking of insurtech startups - they operate in every insurance area. Take a closer look at the most interesting examples of companies that are seen as enablers (we’ll move to the challengers later in the article):
Zendrive is an interesting example of a company that claims "it has been founded to make roads safe with data and analytics". They analyze over 180 billion miles of data using a mobile app only to measure and improve driving behaviour. Thanks to that, Zendrive insurers can reinforce best practices and reward drivers for driving safely.
Shift, on the other hand, offer AI-native SaaS solutions that help insurers defeat fraud and automate claims. Shift claims to detect potential fraud in insurance claims with a 75% hit rate. Thanks to the advanced chatbots, they’re able to handle claims faster than traditional companies.
Companies from other industries also see an opportunity in the insurance sector. Tech Giants, manufacturers and retail companies that have direct access to clients, also want to implement insurance products in their ecosystems. According to the PwC survey, 74% of insurers are aware that some part of their business is at risk because of the actions of tech giants and Insurtech challengers. It's not surprising that they wonder what the best way to secure their businesses is. That's why we've gathered the crucial areas they should focus on when it comes to developing new products and using technology. Some challengers can also be an inspiration.
Insurance clients have an average of 2.7 interactions with the insurer per year - for example, they need to report damage or make another claim, look for information on the insurer’s website, etc. This is not much and usually happens in difficult situations, like theft or accident.
In such cases, the insurer should always meet the customer’s needs simply and quickly - it’s crucial for customer satisfaction. The Apteligent’s report clearly shows that 65% of respondents admitted that a useful mobile application could influence choosing the insurance provider. The mobile app is also the best way to connect both online and offline worlds and to measure interaction with clients on various channels - from online to agents.
Interestingly, the COVID-19 crisis brought a significant shift in the adoption rate of mobile technologies, which might as well change the ways insurance companies operate after the crisis. Consumers still want to get their finances in place, as fast as possible, without leaving their homes - now maybe even more than ever.
The insurers who are not ready for offering mobile solutions and automating their processes to some extent, might not be able to keep up with the crisis and its aftermath. Actually, for many industries, going mobile is now the most important thing on the agenda. Here’s our mobile application guide for the insurance industry, in case you’re interested.
China is the most developed market in terms of the use of mobile channels in insurance. Leapfrogging may be one of the reasons behind it - in some countries, including China, many people have skipped using desktop computers because they couldn’t afford them at that time. Later, when they could, they’ve started using smartphones to buy products and services. As we've already mentioned, Chinese mobile applications approach insurance sales in a non-standard way by combining educational elements and one-to-one consultations.
Xiaobang is a good example, which targets middle-income families with online courses on insurance planning and financial education. Once they finish the courses, the startup approaches them with one-to-one consultants who tailor insurance plans to their needs. Xiaobang claims to have a 40% conversion rate.
When it comes to Western Insurtech companies, Lemonade is an interesting example. They use AI and bots in both web and mobile applications to offer insurance for landlords or property owners in a few dozen seconds. In addition, the startup offers integration and a widget for middlemen services in real estate sales and rental, so that customers can get insurance immediately after making a reservation.
Traditional insurers may also set the bar high. For example, the GEICO mobile app is called the best insurance mobile application in the US. It offers a full range of features from buying insurance, through policy management, vehicle registration certificate, payments to ordering assistance services, reporting damage and getting informed about progress thanks to the push notifications. Traditional insurers also use applications to improve the premium calculation process. A good example of such an insurer is Generali, the third-largest insurance company in the world, that uses an app that streamlines the work of agents tied in car insurance sales. After scanning the document, the app can read them and calculate premiums, which significantly facilitates the agents’ work.
Customers expect insurers to change from being simply a payer to be a preventer and partner. Companies that want to meet these expectations have to start building ecosystems of technologies and systems with added-value.
This is usually clear for technology companies and those that have undergone digital transformation, but in fact, every modern company should build ecosystems of services that improve customer experience and provide added value. Having additional services gathered around the central product positively affects its sales and also generates additional revenue.
The phenomenon of ecosystems has been initiated by technology giants such as Amazon. No wonder - they’ve had direct access to users and huge amounts of data about them. What they needed to do was to offer a range of different services. It’s easier for them than other companies to occupy new sectors, such as insurance.
An interesting example of an insurance company that has already built an ecosystem is Ping An, a Chinese conglomerate that mainly deals with insurance, banking, and financial services. On its platform, 'One Account', Ping An offers medical consultations, car and real estate sales as well as banking services. This way, it serves over 350 million customers online and is the most valuable insurer in the world.
It’s advisable for other insurance providers to go beyond the traditional insurance value chain and to offer additional services with added value. For example, a home insurance provider can offer property monitoring or assistance in repairs.
What is important, when designing such services, insurance companies should identify the elements that distinguish them from their competitors, based on their products, customer needs and possible partnerships. This will allow them to stand out in the market and find loyal clients.
If insurers don’t create such ecosystems, then it will be done by retailers, automakers, technology and real estate companies, and leave insurers to be commodity suppliers.
The Internet of Things is a concept that assumes that all devices will be able to communicate with each other through an Internet connection. According to Gartner's analysis, in 2020, the total number of such devices is expected to reach 20.4 billion.
Insurance providers can start using the IoT devices that have been already installed in cars, homes or smartwatches and other so-called wearables. The challenge remains to learn what data to collect and analyze and then how to use it. This is one of the areas where insurers should try to create new ecosystems or join existing ones. To give you an example, one of the oldest North American life insurers, John Hancock, replaced its traditional offer with interactive life insurance that uses data coming from wearables to reward those clients that make healthier choices regarding physical activity and nutrition. Such a service is offered at no additional cost, and it gives its clients access to professional fitness and nutritional resources and sets personalized health goals.
By connecting the growing number of devices to the Internet, it’s possible to monitor them in real-time and quickly detect problems if they occur. Thanks to that, insurance providers and manufacturers can provide recommendations in real-time, and in the event of a breakdown or accident, they can offer repair, replacement or compensation.
A good example of an Insurtech startup is Neos, that combines home insurance and its protection using the Internet of Things. It offers home monitoring, leak and smoke detectors (by providing smart sensors connected to the app), 24/7 assistance, and of course, home insurance.
Another concept that is worth mentioning is Usage-Based Insurance (UBI). According to surveys, 41% of customers would consider buying such insurance. UBI is a special type of insurance policy that calculates the premium amount based on the driving style analysis, the most often measured by mobile apps. UBI insurance providers take such factors under consideration: vehicle mileage, speed, acceleration and deceleration intensity, length and time of travel, number of kilometers traveled and vehicle location.
An interesting example of UBI is Root that claims to be “the nation’s first licensed insurance carrier powered entirely by mobile and founded on the principle that car insurance rates should be based on how you drive, not who you are”. By using data from the app, Root is able to set prices individually and accurately and reward safe drivers whose insurance should also be cheaper.
According to the World Insurance Report 2019, 37% of respondents would try on-demand insurance. More and more businesses are trying to meet their needs and Metromile, which offers car insurance for people who don’t drive a lot is one of them. Their customers pay a small basic premium and then per each driven kilometre, which allows them to save even $1000 on car insurance. Metromile uses a small device and an app that measures different parameters. The investors who have already invested $ 300 million in Metromile, definitely see the potential.
However, not all the startups that introduce new business models in insurance achieve fast success. Trov is such an example. They provided insurance on demand for everyday items, such as electronics, sports equipment, and musical instruments, via mobile app. All their clients needed to do was to take a photo, select an item from the database and choose the insurance coverage. Some of their insurances could be activated by specific triggers, such as a location. However, for several years, they couldn’t grow enough and finally decided to pivot. Now, their white-label solution enables insurance incumbents, financial institutions, and consumer platforms to launch the on-demand insurance application with zero-to-limited integration with their legacy systems. Lloyds Banking Group has been the startup’s first client.
Insurance providers should treat cybersecurity as both a threat and an opportunity. It’s risky because they store a massive amount of sensitive data about their clients and especially during systems upgrade or switching to cloud services, insurers should pay particular attention to data security.
On the other hand, the increasing usage of digital services by both companies and private individuals means that they need to be protected against possible losses can be an opportunity for insurers. Juniper Research estimates that in 2019, there will be over $2 trillion losses caused by cyberattacks. In addition to providing the insurance policies, it’s possible to create a system of services covering the entire value chain: diagnostics and support in the event of an attack. At least some Insurtech companies are well aware of that. For example, Coalition, offers insurance coverage for network breaches, employees’ data and password breach, ransomware, privacy liability, business interruption, fines, etc. In addition, their clients also get cybersecurity tools. In case of an incident, they offer professional support during and after it.
The currently used methods of calculating the risks usually take into account metric data, not real consumer behaviour and activities. Most insurers don’t measure all the data about their clients that is currently available. In addition, according to the World Insurance Report, 37% of customers are willing to share additional data in exchange for a personalized offer and better protection. What is more, 55% of them are able to pay extra for risk-prevention services.
The use of available data affects the possibility of personalization of products on a massive scale. For example, someone who is chronically ill but has a healthy lifestyle may be at lower risk than a person who does not engage in any physical activity or drives a car dangerously. Insurers who make the most of the new data will be able to better respond to customer expectations and better estimate risk.
Although so far, we’ve mostly focused on customer relationships, optimizing internal processes is also very important. Without this, it’s impossible to provide customers with seamless user experience and achieve short time-to-market (TTM). To achieve this, incumbents need to start with modernizing legacy systems by implementing APIs and microservices architecture. It will allow all their services to be connected and to work around transactional legacy systems.
Digitalization is not only about using new technologies and bragging about being the first. It’s a process that requires vision, experimenting, continuous development and the right leaders. We’ve already covered this topic in the article about why digital transformation programs fail. It’s particularly valid in the insurance as they need to change the focus from the product to customers and customer experience. Although according to McKinsey’s report ‘The Making of a Digital Insurer’, some experts are afraid that the legacy systems companies use can be an obstacle towards digitalization, in fact, insurers are able to recreate some processes without making huge changes in the systems’ architecture.
Insurance companies still struggle to provide their customers with the value they’re looking for. Most of them are afraid to take steps to introduce value innovation and to stand out. With this approach, clients see them as commodity providers and price is the only factor that differentiates them from competitors. We’ve described phenomena and activities that are the fundament of transformation, however, each case is different and there is no one optimal strategy for all.
Contact us and together we’ll define what activities will be the best for your business development.
Editor's Note: This post was originally published in October 2019 and has been updated for accuracy and comprehensiveness.