Marcus von Engel, Financial Services Consulting Partner, PwC
If you’re in the insurance industry, you’ll never go a day without talking about InsurTech. InsurTech is the priority in the conversations of insurance executives as it’s widely recognised that a disruption is now rapidly taking place in the insurance industry. For a long time, new market entrants found it difficult to break into the insurance industry.The large, well-established incumbents had advantages in size, and their distribution models reinforced the inertia to change. The industry is complex and highly regulated, with outdated and highly entrenched processes. Heavy investments in compliance systems were required to manage ever-increasing regulations.
However, according to PwC’s most recent CEO survey, insurance is an industry most afraid of disruption and concern is on the rise. Therefore, interest and investment in InsurTech are growing rapidly. Unlike in the past, fast followers will struggle to compete as the market shifts and innovation that is driving disruptive change can quickly turn incumbents to laggards.
One innovation that has gotten a lot of chatter within the insurance market is connected devices. The recently developed themes of the “connected home,” “connected car,” “connected business,” and the “connected self” all have significant implications for insurers. Biosensors and other connected devices, also referred to as Internet of Things (IoT) that generate real-time data is shifting the power from insurer to customer, and creating an asymmetrical relationship that did not exist previously.
There are also areas where the power is also shifting to the insurer. As artificial intelligence and machine learning continue to shape the future of business, the insurance industry will benefit from the operational efficiencies that artificial intelligence (AI) and machine learning provide, but they also will be at risk on how these technologies impact coverages, particularly liability, in their client base. Deployment of AI to underpin robotic process automation for tedious, paper intensive processes is accelerating as solutions aid in reducing friction and expenses. Insurance companies that will make the most meaningful improvements will use deep learning techniques to understand their claims and underwriting processes. Machine learning techniques are now being used to build predictive claims models and cull a book of business designed to reduce losses and increase profitability. These types of technologies, coupled with process mining techniques, the integration of connected sensors and IoT data to the underwriting process will meaningfully differentiate the most sophisticated insurers.
The overriding principle is that insurance companies must be prepared for a world where disruption from InsurTechs is unavoidable
Many traditional carriers are embracing the pending changes by starting ventures, partnering with startups and generally staying close to the potential opportunities and threats that innovation will bring in the coming years. In addition, new and exciting technologies are having widespread implications and are starting to impact the insurance industry in profound ways. Here are few examples of how the industry is adapting to these changes:
• In-house Innovation–a British multinational insurance company has opened its Digital Garage, in the heart of London's Tech City of Shoreditch to help trade with brokers and customers.
• NewCo - an American mutual life insurance company, with over five million clients, has launched an in-house startup that offers simplified life insurance for millennials through a convenient online experience.
• Eco-system Engagement –a German reinsurance company has partnered with accelerators linked with a Berlin based technology accelerator, and an InsurTech accelerator to focus on innovation in insurance.
• Corporate Venture Capital Firms –a strategic venture arm of a global insurer has launched a €200million venture capital fund, which includes an investment in an online platform for comparing and buying insurance, and a niche insurer providing financial services to low-and middle-income neighborhoods.
• Acquisition –one the United Kingdom’s largest insurers has taken a majority stake in a UK based automated advice experts.
• Partnerships –a major German insurer has joined forces with Chinese major internet provider and an Asian investor to establish a new digital, customer centric insurance company in China with affordable coverage options.
Insurance “as-a-platform” is likely an area where incumbents and InsurTech scan collaborate. The InsurTech startups are constrained by significant regulatory barriers to become actual carriers and lack the capital needed to scale quickly. By providing the technology platforms for insurers, startups can capitalize on their nimbleness and expertise. Incumbents are then able to focus on being the stewards of capital and understanding the evolving risks of the business.
PwC has identified three key stages for insurers to address the threats of InsurTechs: (1) scan, (2) focus, and (3) act. First, insurers need to scan the market to understand the disruption and business impact. Currently, the InsurTech landscape is highly fragmented and you’ll find new processes and capabilities emerging almost every day. Understanding what is possible, who is doing what and the potential impact on your business is critical.
Next, insurers must consider carefully their core capabilities to decide which market position to hold, and then translate this into an innovation strategy, which is appropriate for their business model and goals.
Finally, once they define and act upon a strategy to build the capabilities to start driving change. One of the biggest challenges is experimenting with new ideas at pace, and then translating successful ideas into value.
The overriding principle is that insurance companies must be prepared for a world where disruption from InsurTechs is unavoidable. It is time to challenge all assumptions. Will InsurTechs become insurers faster than insurers can become InsurTechs? Only time will tell.