In the year ahead, insurers will be challenged to more effectively anticipate, prepare for, and adapt to an accelerating evolution in how insurance is designed, sold and serviced, while differentiating their products, services and distribution platforms for the emerging digital age.
These rapidly changing circumstances are being driven by rising customer expectations for greater access, transparency and convenience. This has emboldened the insurance industry to start transforming standard operating procedures and business models so they can keep up with traditional as well as new forms of competition. They are also looking to innovation to help them boost revenue and profitability.
Deloitte's "2018 Insurance Outlook" suggests that by prioritizing one or more of the following initiatives over the next 12-to-18 months, insurance companies of various stripes could make significant progress in their ongoing mission to maximize value creation and growth. At the same time, they could reinvent themselves for an increasingly web-driven world:
- Auto insurers need to employ more digital solutions to increase profitability and strengthen customer relationships.
Damage costs are escalating, in part because it is five times more expensive to repair the growing number of vehicles with sensor-equipped technology, according to a report in the April 3, 2017 edition of The Wall Street Journal. At least for the near term, insurers may have to accept the likelihood of higher claims severity when such cutting edge vehicles are damaged, and perhaps reconcile the difference by focusing instead on the potential for reduced frequency, as sensors can help prevent accidents from occurring. An added benefit may be the influx of sensor data to improve underwriting and pricing, with the eventual goal of accurately modeling the risks of fully autonomous vehicles (which pose their own existential risks for auto insurers and major growth opportunities for carriers of other lines, such as product liability).
In the meantime, insurers should be more proactive in the telematics arena, with nearly 100 million drivers globally expected to have usage-based insurance (UBI) policies by 2020, according to a report in the Feb. 24, 2017 edition of Forbes. With UBI, carriers can develop more predictive underwriting models using real-time driving experience, as well as leverage their real-time connection to policyholders to offer complementary products and services. Such steps could help ward off attrition from non-traditional competitors — such as car manufacturers bundling insurance into their sticker price.
Indeed, UBI is already having an impact on customer experience, as price satisfaction scores are higher among customers who participate in auto telematics programs, even when those policyholders have experienced premium rate increases, according to the "2017 U.S. Auto Insurance Satisfaction Study" by J.D. Power.
- The proliferation of sensors could bolster a property insurer’s value proposition.
Eighty million smart home devices were delivered globally in 2016, with expectations of a compound annual growth rate of 60 percent perhaps raising that figure to as many as 600 million by 2021, according to a report by IHS Markit. Commercial properties could see similar technological upgrades via the expansion of smart offices, factories, and other business facilities. The Internet of Things (IoT) phenomenon can be leveraged to transform the insurer/customer dynamic from a defensive to an offensive posture, enabling carriers or their surrogates to monitor indicators of potential problems and send alerts if a threat arises to prevent or minimize property damages.
Sensors can also be utilized to achieve more personalized underwriting and pricing, as well as to ultimately drive down claims frequency and severity. More importantly, ongoing connectivity could raise consumer perception of a property insurer’s tangible value and fuel a surge in customer touchpoints to reinforce insurer/client relationships.
Insurers that make digital transformation not just a priority, but a continuous improvement process are most likely to reenergize their cultures as well as grow their top- and bottom lines. (Photo: iStock)
To realize the full potential of connectivity, property insurers will likely need to collaborate with manufacturers and service providers to deliver and leverage sensor driven capabilities. More nimble data management and advanced underwriting models may be required to reflect these additional risk parameters. Insurers may even choose to subsidize installation of sensors to accelerate the transition, as potential returns could offset their upfront investment.
- Robotic process automation (RPA) and cognitive intelligence (CI) technologies can give insurers an opportunity to reduce costs and reimagine how they conduct business.
Rapid increases in computing power and decreases in data storage costs are making widespread use of RPA and CI a reality for many industries, including insurance. Indeed, insurer spending on cognitive technologies is expected to rise 44 percent globally on a compound annual growth basis over five years, reaching $1.02 billion by 2020, according to the IDC “Worldwide Semiannual Cognitive Artificial Intelligence Systems Spending Guide.”
The goal is not only to automate most mundane, ‘box-checking’-type tasks in underwriting, policy administration and claims, but non-routine soft skills as well, such as intuition, creativity and problem solving. This could potentially free up thousands of people hours while improving the productivity and raising the value of human capital.
- New underwriting approaches needed to safely turbocharge cyber insurance growth.
Sales of cyber insurance are reportedly on the rise, but have not yet come close to reaching the line’s full potential as perhaps the biggest growth opportunity in the property-casualty industry. Many businesses are still going bare or are underinsured. A survey by the Council of Insurance Agents & Brokers found that only one-third of their members’ clients have bought cyber coverage, while a global study by the Ponemon Institute revealed that companies have only insured 15 percent of the potential loss to their information assets.
The problem is that cyber threats keep mutating, making the past anything but prologue for underwriting and pricing purposes. Therefore, to profitably capitalize on what is likely to be a growing demand for coverage, insurers should consider focusing their underwriting efforts more heavily on each applicant’s risk management maturity, perhaps certified by an objective third party. They could also go beyond mere risk transfer to provide or at least facilitate a comprehensive risk management package. For smaller prospects, insurers could establish standard, preferred, and substandard cyber risk profile templates to streamline underwriting. And to close the information gap long term, the industry could press for greater sharing of anonymous, aggregated loss data, an advantage they already enjoy with auto and workers’ compensation claims.
Such proactive steps could help insurers avoid losing business down the road to alternative risk-transfer vehicles — such as the potential to securitize such risks via cyber bonds.
Build it, and consumers will come
Looking at the big picture, insurers that make digital transformation not just a priority, but a continuous improvement process are most likely to reenergize their cultures as well as grow their top- and bottom lines. For more on how insurers can capitalize on emerging opportunities for growth, operational improvement, and expense reduction, as well as overcome some of the economic, regulatory, and market challenges that may arise in the year ahead, download Deloitte’s "2018 Insurance Outlook."
Sam Friedman (email@example.com) is insurance research leader with Deloitte’s Center for Financial Services. (Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.) Michelle Canaan is an insurance research manager with the Center. These opinions are their own.