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Bracing for the big insurance industry shake-up

Is the insurance industry ready to embrace ‘the new normal’?

Technological advancements are fundamentally changing the way we manage risk, both as consumers and organizations, resulting in perhaps the biggest shake-up of the insurance industry in its history. We’re already seeing driverless cars, for example, and although they might not be able to eliminate car accidents by themselves, there’s no doubt that they will change the balance of risk management and mitigation in the event of a collision with, say, another car—with the value of insurance premiums slashed as a direct result. It remains to be seen whether this reduction in the cost of insurance premiums would be replaced by a similar rise in risk management fees.

As an industry that has been built on mitigating risks of all shapes and sizes through a traditional system of premiums and claims, these advancements make the future less than certain. A report from Capgemini suggests that the value of claims relating to risk is set to drop off the cliff, with potential loss in value of 20 to 40 per cent, which could have profound implications for insurance demand and premium income.

Insurance enables the world to function by underwriting the perils the world risks every day—but now that the way risk is managed has changed irrevocably, the time has come for insurers to ask themselves if they are content to jeopardise their own business by refusing to evolve. As with all things, Insurance 2.0 may not be the answer to eliminating risk completely, and some may see it as a risky business. But for insurers, at least, it looks like the best way to survive and prosper.

As a recent white paper validates, the Internet of Things (IoT) is already playing a significant role in managing risk and reducing and predicting claims. By accessing data from wearable devices, doctors are now able to prevent a serious heart problem by monitoring patients’ activity in real time and contacting them to tell them to adjust their behaviour before it has an adverse effect on them. Similarly, monitoring adherence to rehabilitation programmes allows physiotherapists to manage the quality, time, and cost of claims. At the same time, connected homes can now use sensors to warn owners of the risk of potential fires or flooding.

There’s no doubt that a world where car accidents are a thing of the past, medical conditions are diagnosed and prevented before they take hold, and household accidents such as flooding or fire could be prevented before they happen, would improve all of our lives considerably. You may think that this seems more like a Minority Report-style science fiction story than anything approaching reality—and for the most part, you’d be right. But the truth is that technology and innovation are also allowing us to move closer and closer to, if not eliminating, risk completely—or at least preventing it to such an extent that it will have a minimal impact on us all.

So what does this mean for insurers? It means that we’re living in a world where risk itself is reduced. The increased prevalence of connected devices, combined with technological advancements, show very little sign of abating—and so the insurance industry is finding itself arriving at something of a crossroads. Does it turn left and continue down the path of traditional-style risk mitigation that will most likely lead to reduced GWP and loss of brand identity? Or does it turn right onto the data-driven super-highway and embrace a new way of operating? If those in the insurance industry are serious about survival in an increasingly risk-managed future, there is only one option available to them.

It is clear that the new normal of insurance will look very different from today’s model, and that a significant change of mind-set will be required if insurers are to truly benefit from the more proactive approach of Insurance 2.0. Instead of behaving passively and reactively to events as before, Insurance 2.0 will force insurers to play an active role with their customers on an ongoing basis. Where they might once have only had one interaction with a customer every year—perhaps at the time of renewing their premium—this model must change so that insurers become relationship-focused every second of the day.

Insurers must work with customers, and perhaps also with hardware and software manufacturers, to find ways to access the data provided by customers from technology, including smart phones, wearables, industrial monitors, and IoT-connected devices to add greater value. Insurers will differentiate themselves by the value of the relationship they add to their customers, as well as the flexibility of their premiums—and insurers that are able to leverage data to provide the best service will be those that are most successful.

In this model, insurers and policyholders will work together to create a valued, continuous partnership focused on improving overall quality of life. For example, an insurer will be able to monitor the activity of the water in an industrial property, advise on any chronic performance issues, such as sub-optimal central heating performance via dialogue or acute risk issues such as leaks, via immediate alerts. This data-driven model adds considerable value for customers and also provides, through the very fact that a trusted relationship has been established, important opportunities for insurers to identify good and bad risks, minimise claims payouts, and upsell relevant products and services—creating a win-win situation for both parties.

Insurance 2.0 is going to be a game changer—and insurers will need to decide quickly which way they turn at the crossroads. The IoT is not an IT implementation—it is a change of business model. Much depends on the level of adoption of technology, but there’s a good chance that if some of the more astute organisations within the industry decide to take the plunge and change their business models soon, then the rest of the industry as we know it today could change completely—as quickly as the next 12 months.

By Sanjay Tugnait CEO, Capgemini Canada, and ‎Tom King, Sr. Director – Insurance, Pegasystems

This article is web-based only, and not available in the January/February printed edition of Canadian Insurance Top Broker.

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Copyright © 2017 Transcontinental Media G.P. This article first appeared in the January/February 2017 edition of Canadian Insurance Top Broker magazine