CTO Corner is a BITS publication covering emerging trends and technologies in the financial services industry.
CTO Corner: InsurTech – Trends, Issues, and Recommendations
Dan Schutzer, Senior Technology Consultant, BITS
Highlights – An explosion of new start-up companies and technology advances are changing the insurance industry. Although these advancements hold promise for a more efficient, customer-focused insurance industry, they raise privacy, security, and regulatory questions. Such questions include what rights each of the parties have with respect to the raw, aggregated, and processed data; what uses should be permissible; and under what circumstances. This CTO Corner discusses these trends and the issues they raise, recommending steps insurers should take in the near-term.
The Opportunity – Technology trends hold promise for making insurance more personal, including its price, and could drive the demand for new forms of insurance. For example, the introduction of networked smart sensors and artificial intelligence (AI) can, among other things, measure fitness and certain indicators on homes and driving, creating data that enable better ways to measure risk, settle claims, and price policies by usage and user behavior. Innovations such as sharing economies (illustrated by Uber and Airbnb), robo-advisors, and self-driving cars pose new risks and liabilities that create the need for new insurance products, still being defined and yet to be defined in the market of the future.
Take-away – Insurance companies are already partnering with and investing in innovation labs and start-ups to better understand and address these new opportunities. Additional benefits can be derived by taking steps to be more vigilant and adaptive, and by creating an industry dialogue that addresses privacy, security, and regulatory concerns, while also accommodating robust innovation.
Most FinTech start-ups are targeting traditional banking functions, such as payment innovations, robo-advisors, and peer-to-peer lending, but the insurance industry will likewise be impacted by global technology and business innovation trends2. The insurance industry is an attractive opportunity for technology start-ups because of its huge revenue base (U.S. insurance industry’s net premiums totaled $1.1 trillion in 20143) and complex network ecosystems.4
In 2015, InsurTech start-ups received over $2.5 billion in funding.5 Currently, there are over 1,300 InsurTech firms with technology spending in global insurance expected to reach $205 billion by 2019.6 Although many of the current start-ups are focused on improving the efficiency of established insurance companies, several are sowing the seeds of disruption.7 New innovations and products, such as pay-as-you-go insurance,8 have emerged that could change the nature of the industry. In response to these trends, the insurance giants are creating innovation labs, and investing and partnering with start-ups.9 These changes, driven by technological innovation, have privacy, security, legal, regulatory, and business implications that cannot be ignored. This CTO Corner discusses these trends and issues, what is already being done to address them, and provides recommendations
As innovative technologies, like Big Data, the Internet of Things (IoT), mobile technology, artificial intelligence (AI), social networks, and Blockchain10 gain momentum, they are providing new opportunities for the insurance industry. If done thoughtfully, employment of these powerful technologies will improve profitability and the customer experience. Although adoption of this technology is growing (annual spending on advanced analytics is predicted to reach 24% in life insurance and 27% in P&C), Bain’s 2015 benchmarking survey reports that roughly one in three life insurers and one in five property and casualty (P&C) insurers do not apply advanced analytics for any function.11
The introduction of networked smart sensors, combined with AI, provides the smart data needed to accurately assess an individual’s health and fitness, the condition and safety of their homes, and their driving behavior.12 This specific and tailored data augments averaged statistical models and, combined with analytics, speeds and improves a carrier’s ability to understand and quantify risk on both individual and aggregate bases. This will enable new opportunities to identify key behaviors, allowing the timely offering of customized insurance policies. The availability of data from social networks and smart sensors also helps to predict individual user’s insurance needs, making it possible to focus sales and marketing efforts on both current and prospective new customers within their micro segments.13
Smart sensor data also enables more competitive premium pricing and expedited claim settlement. Real-time monitoring of smart sensor data enables prompt adjustments to a customer’s insurance premiums. For example, insurance companies today set health insurance premiums based on a snapshot of the applicant’s health, with blood samples and other tests run by a doctor. If the customer changes lifestyle patterns by quitting smoking or losing weight, their insurance risk also changes, but this data is otherwise unavailable to an insurance carrier.14 Smart sensor data also expedites the settling of claims through real-time inspections.
In the future, it is likely that insurers will preemptively inspect insured properties before a hurricane or at the start of hail season, which could provide new potential lines of business or products. Drones using sensors, such as thermal (IR) cameras and laser measuring units (LIDAR), can provide detailed models of a building or property.15 Drones present a way for insurers to start building large data sets for their risk modeling and loss estimation tools. Imagine an insurance company, using pre-inspection data, providing a financial incentive or new policies that would encourage a customer to make property repairs that could mitigate damage in advance of a natural disaster. The nature of the customer-insurer relationship could change dramatically to everyone’s benefit.
Coupled with machine learning, this will automate many laborious tasks in claims assessment, like counting the number of shingles missing on a roof or determining if a brick facade is at risk of crumbling. The use of drones requires compliance with regulations designed to ensure user safety and privacy, but these regulations are changing as the technology evolves. For instance, new FAA rules for businesses using drones16 relax earlier regulations, allowing any claims adjuster or underwriter to use a drone to perform inspections after taking a written exam, analogous to a driver’s test.17 Over 70% of the Fortune 500 P&C carriers are reported to be using drones today.
Smart contracts, powered by Blockchain, hold the potential to enable customers and insurers to manage claims in a more transparent, responsive, and irrefutable manner, including enforcing rules on where a customer spends money. For example, after an auto accident, Blockchain could help enforce that the customer goes to approved garages or, in a ski accident, only to approved doctors.
Application Programming Interface Standards (API’s) are needed to communicate data from sensors, such as cameras, microphones, GPS services, and date/time functions, to insurance companies. Adopting open API standards for accessing insured data profiles enable more competitive and innovative offerings (Open API’s were discussed in the September 2016 CTO Corner18). For example, “Insured rating19,” a publicly available API, enables users to develop a rate plan reflecting risk levels posed by prospective customers.
PRIVACY AND SECURITY CHALLENGES
The permission and capture of personal data inevitably raises questions about data ownership and privacy. What rights do each of the parties have with respect to the raw, aggregated, and processed data; what uses should be permissible; and under what circumstances? This difficult issue demands a public dialogue designed to reach a collective understanding of the potential benefits and risks and build a consensus on the acceptable balance for all involved parties.
At present, a customer needs to permit the capture of more granular, personalized information. If this data reports safe or healthy behavior, perhaps a policyholder’s rates may decrease or be more tailored to meet that individual’s needs. On the converse, if this data collection finds the customers participating in risky behavior, their rates may increase. To prevent customer dissatisfaction, the insurance company should consider revealing to the customer what qualifies them for a rate reduction or increase. This would help to set expectations or even motivate the customer to adopt less-risky lifestyle choices.
Another challenge with the growth of smart sensors is cybersecurity. Embedded systems, like digital video recorders, home routers, and smart sensors, are sold at lower profit margins and often as white-labeled components, compared to flagship devices like smart phones and tablets. Manufacturers of these devices often lack the expertise to maintain and secure the systems.20 Worse, most of these devices cannot be easily upgraded with security and other patches. Computer operating systems regularly push patches to affected system but, often, the only way to update the firmware in your home router or smart sensor is a complete replacement, leaving these devices vulnerable to compromise.
NEW INSURANCE FORMATS
Technological, business, and regulatory changes are driving new forms of insurance, creating new markets, and changing the consumer’s insurance preferences. The rise of social networks, mobile devices, and real-time transactions may increase the popularity of policies that cover single events, such as a wedding, a trip, a home renovation, or a scheduled surgical operation.21 Some increasingly popular new forms of insurance are:
• Micro-insurance,22 with low premiums and low caps, helps to better serve people who cannot afford traditional insurance policies, including the underinsured populations in developing countries. Micro-insurance may be offered for a wide variety of risks, including health (illness, injury, or death), property damage or loss, crops, livestock/cattle, and natural disasters. Several major insurance organizations have formed a micro-insurance consortium and micro-insurance “venture incubator” (MVI)23. The group is currently evaluating opportunities to deliver risk protection to underserved markets in Latin America, Africa, and the emerging Asian market.
• Pay-per-use24 allows customers to pay for insurance based on usage, and to turn insurance on and off, such as for special events. It is expected to be widely accepted in the future, even if premiums are higher.
• Lifestyle apps25 allow policyholders to improve and insure their lifestyle (their home, motor vehicle, dog, holidays, iPhone, treasures, travel, etc.) in a single policy based on highly personalized risk assessment through a digital platform. “All in one place” platforms (aka a concierge service) would replace traditional intermediaries with a digital broker. These services may consolidate multiple policies, converge with financial planning tools, and provide robo-advice on gaps and duplication in coverage. They could be structured to offer convenience and the ability to turn insurance coverage on and off as needed. Continuous consumer engagement could replace price as the key buying criterion with the result of increasing brand loyalty.
• Variable premiums and behavioral-based pricing. Premiums vary over the policy term based on behavior. This can be used to encourage better behavior.
• Concierge services. Health insurance reform is driving many large healthcare providers to offer insurance directly to users if they stay within network, integrating not only the distribution and writing of policies, but the actual performance of services related to what is being insured. Other healthcare providers limit their practice, offering higher priced concierge services at fixed annual fees for those who can afford the cost.
• New insurance needs. Business and technology innovations, such as ride- and home-sharing (illustrated by Uber and Airbnb), robo-advisors, and self-driving cars, are creating new risks and liabilities that create the need for new types of insurance.26
To keep up with the accelerating pace of change, many insurance companies are creating incubators and investing in innovation labs and start-ups to more fully understand and respond to these new opportunities and threats. They should also consider engaging in shared industry dialogue to address unresolved privacy and security concerns. To accompany these initiatives, insurance companies should:27
• Consider the Worst Possible Scenario (WPS) and devise strategies to cope with the disruption if it happens.
• Be flexible with existing business practices or business models making it easier to adopt new practices. This can include mergers and acquisitions to quickly fill gaps and taking risks on innovative products and services.
• Stay vigilant and continuously monitor results to assess whether the execution is working, and take necessary corrective steps quickly.
• Consider organizational change to become more effective and expeditious in responding to disruptions. For example, an organization might restructure itself as a small collection of flat business units that provide larger spans of control and give more responsibility to employees.
• Foster a culture of innovation. This includes creating a more collaborative culture and providing proper resource support (tools and technologies) to help employees be more self-motivated and self-directed. The resources-processes-values (RPV)28 framework of organizational capabilities can be used to assess an organization’s ability to meet the challenge of disruptive change.
• Support important industry initiatives. There is much confusion regarding issues of security, privacy, and innovation in the marketplace. Industry efforts to gain a shared understanding of the issues and how they can best be addressed is crucial. Various industry initiatives are helping create consensus and improve public perceptions as to acceptable actions with respect to security, privacy, innovation, and competition. Examples of important industry initiatives include BITS’ support for innovation and regulatory effectiveness such as work with the OCC on defining “Responsible Innovation,”29 as well as work done to propose sound policies regarding third-party data access, and to catalog the financial industry’s use and stewardship of data to address anticipated policymaker concerns.
The explosion of new start-up companies and technology advances are changing the insurance business. Global technology and business innovation trends offer opportunities and challenges that are not yet fully understood or addressed. They hold promise for a more efficient, customer-focused industry, but they also raise privacy, security, and regulatory concerns.
Many insurance companies are already investing in innovation labs and start-ups to embrace, understand, and address these new opportunities. Additional benefits can be derived by taking steps to be more vigilant and adaptive, and by creating an industry dialogue that addresses privacy, security, and regulatory concerns.
3. http://www.iii.org/fact-statistic/industry-overview, Insur tech the new gold for start-ups, https://swissfinte.ch/insurtech-switzerland/
5. https://letstalkpayments.com/the-four-ps-of-insurtech/, https://letstalkpayments.com/how-one-company-is-empowering-brokers-and-insurers-in-the-face-of-insurtech-rivalry/
8. http://www.lowmileagediscount.com/what-is-payg/how-it-works.asp, auto insurance rates based on the number of miles you drive.
9. The Largest Insurers Are Building Incumbents to Ride the InsurTech Wave
May 11, 2016, https://letstalkpayments.com/the-largest-insurers-are-building-incumbents-to-ride-the-insurtech-wave/, https://letstalkpayments.com/international-insurtech-focused-accelerator-programs-aimed-to-find-the-uber-of-insurance/, May 11, 2016, https://letstalkpayments.com/the-largest-insurers-are-building-incumbents-to-ride-the-insurtech-wave/
10. As many as 20 blockchain startups are focused on some aspect of the insurance market today, McKinsey Report Weighs Blockchain Impact on Insurance Industry http://www.coindesk.com/mckinsey-report-blockchain-insurance-impact/
11. How Insurers Can Invest in Big Data Analytics to Improve Decision Making, http://www.bain.com/publications/articles/how-insurers-can-invest-in-big-data-analytics-to-improve-decision-making.aspx
12. The AI Dashcam App That Wants to Rate Every Driver in the World, http://spectrum.ieee.org/cars-that-think/transportation/sensors/the-ai-dashcam-app-that-wants-to-rate-every-driver-in-the-world/?utm_source=TandM&utm_medium=Newsletter&utm_campaign=TM06282016
13. http://www.alexandergroup.com/blog/sales-strategy/micro-segmentation/, http://www.alexandergroup.com/blog/sales-strategy/micro-segmentation/, A New Approach to
Segmentation for the Changing Insurance Industry, By Mark Carr and Amy Modini, http://www.cmbinfo.com/cmb-cms/wp-content/uploads/2012/03/HealthDoc_FINAL.pdf, http://www.ibm.com/developerworks/library/ba-ind-microsegmentation/
17. The Insurance Industry Is Poised to Lead the Way in Drone Adoption, https://www.cbinsights.com/blog/drone-property-insurance/?utm_source=CB+Insights+Newsletter&utm_campaign=457e59841e-TuesNL_7_5_2016&utm_medium=email&utm_term=0_9dc0513989-457e59841e-86660125
How Insurers Can Invest in Big Data Analytics to Improve Decision Making, http://www.bain.com/publications/articles/how-insurers-can-invest-in-big-data-analytics-to-improve-decision-making.aspx
19. http://www.programmableweb.com/api/insured-rating, http://www.programmableweb.com/news/59-new-apis-intuit-stumbleupon-and-firetext/2012/05/06
20. Security Economics of the Internet of Things, https://www.schneier.com/blog/archives/2016/10/security_econom_1.html
21. http://www.eventinsurancenow.com/index.cfm?fuseaction=ccontent.singleevents, http://www.specialeventinsurances.com/special-event/event-insurance-101.html, http://www.specialeventinsurances.com/special-event/event-insurance-101.html
22. https://en.wikipedia.org/wiki/Microinsurance, http://www.microinsurancenetwork.org/, https://www.allianz.com/en/products_solutions/sustainable_solutions/microinsurance.html/, https://www.cbinsights.com/blog/microinsurance-next-big-thing/
28. https://hbr.org/2000/03/meeting-the-challenge-of-disruptive-change, https://www.utdallas.edu/~chasteen/Christensen%20-%202nd%20article.htm, Clayton M. Christensen and Michael E. Raynor talk about the RPV framework in their book The Innovator’s Solution: Creating and Sustaining Successful Growth.
29. http://www.occ.treas.gov/news-issuances/news-releases/2016/nr-occ-2016-55a.pdf, http://fsroundtable.org/letter-to-occ-on-responsible-innovation/