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Insuring Disruption

How can the insurance industry adapt to the advance of technology?

by Alison Weiss

April 2016

Today, the global insurance industry is confronting the possibilities—and the pain—of digital disruption due to the advancement of the Internet of Things (IoT). According to Capgemini’s 2016 World Insurance Report (WIR), breakthrough IoT technologies are upending the concept of insurable risk, so insurance companies must consider how to embrace revolutionary business models and improve how they engage with customers if they want to succeed in the new connected economy. This is a huge game-changer for a powerhouse industry that generated approximately $USD 5 trillion in global insurance premiums to cover risk in 2015, alone.

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The WIR identifies three IoT technologies that are expected in the near future to significantly reduce the demand for risk-based insurance: autonomous self-driving cars, smart ecosystems, and wearables. All take advantage of real-time connectivity and smart programming to create safer environments and make it possible for customers to avoid risks. For example, as more cars with self-driving features become available, they will help drivers avoid traffic and reduce the risk of traffic accidents. Connected homes will automatically detect potential gas leaks or faulty appliances. And soon wearables will routinely transmit health information to healthcare providers to help promote healthy outcomes.

Nigel Walsh, VP, head of UK Insurance at Capgemini, observes that insurers will need to take advantage of new technologies and insights garnered from all the customer data being generated by connected devices to develop creative and useful products and services that are relevant to consumers. So, in the new disrupted insurance marketplace, instead of simply selling homeowners insurance, insurers may offer a service so that customers are automatically notified if their smart refrigerator has an issue—and a repair person is dispatched before any damage occurs.

“In this scenario, insurers are bringing together IoT data generated from the connected device to provide customers with a relevant, preventive maintenance service that makes their lives easier,” he says. “It’s a dramatic change in the business model, and more importantly, people will pay a premium for this.”

The traditional risk-based insurance chain is breaking down, but leveraging connected sources and IoT data and achieving data insights gives insurers great opportunities...”

Walsh contends that offering value-added products and services also builds customer engagement. In the past, consumers may have been satisfied contacting their insurance company once a year for an insurance quote or when they have a claim to file. However, WIR findings (based on thousands of customer surveys and over 150 insurance executive interviews in 30 countries) reveal that globally 14 percent of all customers already would consider purchasing insurance from a technology company, while 23.4 percent of younger millennial customers would make this choice.

That means the insurance industry must extend the current, more passive, customer interaction model. “Insurers will become irrelevant if they aren’t careful to build better engagement with their customers. The businesses they’ve spent a fortune creating will disappear,” says Walsh. “Companies need to understand their customer base and invest in things that are relevant to engage in a better way with that community.”

According to the WIR, there is no one-size-fits-all technology to address the advancement of the IoT and changing customer demands. However, firms that have expertise in technologies, such as customer data analysis, are in a better position to thrive. While the insurance industry has always relied on storing and analyzing data, connected devices now are constantly generating much larger volumes of data in real time. The key for insurers is to have the ability to analyze and manage the data quickly so that they can generate useful insights that are actionable for the consumer or the insurance broker, or carriers, themselves.

Walsh is working with a growing list of clients across the global insurance industry seeking guidance about how best to approach digital disruption. He believes the first step is for insurers to honestly evaluate what markets and customer segments they serve and their ambitions for the future. For example, not all insurance companies have dreams of expanding internationally or serving technologically-savvy younger consumers. Then, it is important to determine where insurers are regarding their digital maturity and how best to move forward.

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Nigel Walsh is VP and head of UK Insurance at Capgemini.

Some insurance providers are electing to establish completely new companies because their legacy organizations aren’t able to adapt quickly enough. Others are building partnerships with technology companies to develop creative new insurance products and services. Indeed, the popularity of this choice is one reason for the recent rapid growth of the insurance-technology market, which has raised $2.12 billion in financing since 2010.

“I don’t think there’s ever been a more exciting time for the insurance industry than right now,” says Walsh. “The traditional risk-based insurance chain is breaking down, but leveraging connected sources and IoT data and achieving data insights gives insurers great opportunities to offer news services and transform to meet new consumer expectations.”

Photography by Shutterstock