Following on from Part 1 of our Digitalisation in the (Re)Insurance Industry series (available here), we now consider what potential opportunities are available to industry operators and consider how these entities can leverage off established and emerging technologies.
As noted in Part 1, this new era of digitalisation presents challenges. However, with the right application, digitalisation will also foster innovation and potentially reduce costs in the sector. Below we set out some of the key opportunities emerging for (re)insurers and intermediaries.
Value-Creation for Customers
Digitalisation has had the effect of reducing costs for (re)insurers, specifically by reference to the way claims are processed, handled and settled. Technological advances are such that real-time information can be collected and used to process and settle claims far quicker than would have previously been the case with manual systems. All this should contribute to reduced costs for both the insurer and the insured.
As mentioned in Part 1 under ‘data protection risks’ value-creation emerges through personalisation. Now more than ever, insurers (and reinsurers at a secondary level) are collecting data specific to people’s health, driving habits, home security etc. Therefore, there is an opportunity to create non-homogenised insurance policies that are specific to the behaviours and risk profile of individuals. Insurance Europe have echoed this point by noting that “insurers can, with their clients’ consent, use big data to monitor their health and provide them with lifestyle tips and health advice”.
When we talk about risk profile, it no longer means a risk profile based on certain common characteristics with other people, i.e. age, gender etc. Risk profiles should now consider much more than that. For example, younger drivers are likely to pay high insurance premiums based on nothing except a common belief that they drive more dangerously. Digitalisation and technology can ensure that not every young driver is ‘penalised’ for being young. Driving habits can be continually analysed and premiums can, in theory, react in real-time to the ongoing driving habits of the specific driver.
A New Business Model?
Technology is effectively enabling (re)insurers change their business model completely. Previously insurers were involved in risk protection – now, with enhanced digitalisation and technology, insurers are shifting towards a model of risk prediction and prevention. In the motor insurance industry, it has been predicted that insurance premiums could fall by up to 25% in the next 15 years as a result of more widespread digital safety systems being implemented.
The shifting role of insurers is already being seen. There is an increasingly widespread appetite for insurers to assist with risk prevention. Certain insurers have introduced, as part of their home insurance package, technology such as remote sensors to prevent home intruders. This is symptomatic of the direction the industry is going in. No longer are insurers expected to write policies and simply file them away until they are needed. Insurers will, in the future, be expected to work with insureds to reduce the risks which they have insured against. This should in turn lead to lower premiums for insureds and less frequent pay-outs for insurers.
These ongoing and live observations of insureds’ habits facilitates a movement away from a traditional ‘annual’ insurance policy. Consumers want more up-to-date coverage and it is the mandate for insurers / intermediaries to adapt to this. Digitalisation can facilitate more streamlined processes, enabling customers to avoid having to fill out the same repetitive questionnaires which rarely provide the same level of data that modern data collection techniques can.
Digitalisation in Brief
Digitalisation is going to be a major defining factor in the way the (re)insurance industry progresses over the coming years, and its impact is already garnering attention. (Re)Insurers / intermediaries attention should be focused on how they collect information securely and how they use this information to create value for insureds. Through value-creation for insureds, costs will be reduced, claims will be less frequent, and the role of an insurer will likely shift from risk protection, to risk prevention.
The key point is that digitalisation must be embraced but in a regulatory compliant way. For example, customers who are submitting wearable technology data to insurance companies expect their premiums to reflect their health status, and that their policy will be tailored having consideration for their specific needs. While this presents a huge opportunity for insurers (e.g. better analysis of customer behaviours and enabling insurers to better price risk), it is also a challenge to ensure that the data is being used for the right purposes, and in the right manner. The implications for (re)insurers / intermediaries are real, including fines (up to €20,000,000 or 4% of total annual global turnover (whichever is greater), reputational risk and litigation by individuals whose rights have been breached.
Should you have any queries in relation to digitalisation in the insurance industry, or queries relating to the ongoing compliance requirements emanating from enhanced digitalisation, contact your usual William Fry contact or a member of our Insurance and Reinsurance team.
Contributed by James Grogan