The Impact of Technology on the Insurance Industry

The disruption of technology is not a new topic for top level executives within the insurance industry. In 1995 Clifford C. Duever (Regional Vice President for Safeco Corporation) stated that the "potential impact of technology on the insurance industry is almost unlimited. These technologies will affect all of us" (Gilbert, 1995).

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In the early days of the technology age insurers built their own legacy systems, some of which now are up to 30 years old. Jessica Reid, of the Insurance Times, wrote a spotlight piece about legacy IT systems in 2013 that highlighted the issue by comparing technology to a car engine; without maintenance it will inevitably deteriorate, and even with attention and upgrades newer and faster models will exceed its ability. In addition to maintaining the initial legacy systems the appetite of the insurance market towards merger and acquisition activity has led to many complex issues for IT departments, with regards to implementation.

Beyond legacy systems, other areas of insurance companies operations have proven to be a greater priority to senior management ahead of technology. In EYs (Ernst and Young) 2015 Business Pulse survey regulation is rated as the top risk for an insurance company, increasing from its second position in 2013. In the same survey, business model innovation was at number ten, having been thirteenth in 2013.

The KPMG Insurance Industry Outlook Survey 2014 listed customer demands (i. e. changes in customer focus, buying patterns, and preferences), coping with the change in technology and domestic competition as the top three transformation drivers in the upcoming three to five years. It was these findings, in addition to an increase in merger and acquisition activity, which led the survey to being titled “Revolution, not evolution”.

Revolution requires technology to be disruptive, as witnessed across many industries worldwide, one such example is Uber, Inc. Having launched in 2010 the annual revenue run rate of Uber which reached $10 billion by the end of 2015 (Reuters, 21.08.2015). What is more unique is that Uber has achieved this level of growth without making a single acquisition. Disruption inevitability brings new entrants into the market; a point highlighted by the PwC Insurance 2020 report entitled “The digital prize – taking customer connection to a new level”. A historic example of this risk within consumer insurance in the UK is aggregators. In just ten years aggregators now control 60 % of new motor insurance purchases and 50 % of personal insurance lines (Timetric, 2014).

A major form of disruption within the Chinese insurance market occurred in 2013 following the joint venture of Ping An, a Chinese insurer, and Tencent, a leading social network and e-commerce platform. In its first year, this joint venture achieved revenue of ¥740 million Chinese Yuan Renminbi (circa £77 million) by attracting new young customers to the insurance market. The joint venture is now planning an initial public offering in 2018 (Marbridge Consulting, 2015).

A concluding remark from the PwC report illustrates the main driver for this dissertation into both consumer and commercial insurance: “As customers become more informed, demanding and prepared to switch, the importance of being able to deliver what they genuinely value rather than more of the same is going to greatly increase”.

Despite the evidence there appears to be a fear of failure within the insurance market with regards to experimenting with new technology. This fear is highlighted in a McKinsey insight document in 2011 as insurers’ not wanting to damage the fundamentals of their business – such as trust in product offerings and strong relationships between the insurer and its clients (Martinotti et al, 2011).

An example of this fear is in motor insurance. Currently, the disruption is being seen within telematics (black boxes) and insurers are attempting to build their product offerings with this in mind. By contrast innovative insurers are taking their offerings further by adding value to the customer by including elements, such as traffic alerts, to the product.

The 2014 Accenture Digital Innovation Survey as well as the 2015 “Swiss Re Sonar – New emerging risks insights” study suggest that change will be prominent within the insurance industry in the future, and new risks will emerge that require an insurer’s foresight if they are to be managed adequately to allow fast, high-quality, decision making. Within the Digital Innovation Survey there is specific mention made to the insurance value chain, and that radical extension here will be key to future success. The survey also concludes that insurers are expected to invest more than $40 million in digital projects in upcoming years.

Of high risk in the Swiss Re Sonar study is the “Challenges of the Internet of Things” (IoT). By 2020 there will be nearly seven times more connected devices than people, illustrating the scale, and potential for big data. The insight insurers can gain from such quantities of data will impact all departments within an insurance company. The more worrying point, however, is the risk for insurers if they are not in the position to capitalise on such data opportunities.

A major risk for insurers surrounding IoT is the potential it has to attract new entrants towards the insurance market, in the form of large technology companies, such as Google. These businesses have no legacy system issues and have platforms to collect vast amounts of customer data.

There are additional risks when creating platforms that can take advantage of the IoT, for example an insurer must consider each internet connecting device as a potential entry point for cyber attackers to access their systems. To protect against this risk requires preparation and diligence to design appropriate security and control measures.

Wearable technology is an additional aspect of big data that can aid an insurer in product development, pricing and many other areas. Wearable technology can be described as “miniature electronic devices that are worn under or on top of clothing or are somehow attached to the body” (Johnson, 2015), and has the potential to transform the insurance industry within three to five years (Flinders, 2015).

Wearable technologies are also improved data analytics allowing an insurer greater insight to the customers and their behaviours. It means that insurers have the opportunity to move from fact-based underwriting to behavioural underwriting. The move towards behavioural underwriting allows an insurer to price their risk based on the customer’s behaviours, rather than simple facts (e. g. gender, age, postcode, etc). A successful insurer here can gain a greater risk pool and pass the rewards back to the customer.

The Accenture Technology Vision Insurance Report (2015) stated that 63 % of respondents believe wearable technologies will be adopted within the upcoming two years, with 31 % currently using wearables to engage customers, employees or partners. Additionally, 73 % consider a personalised customer experience as a top three strategic priority, and 50 % claim to have seen a positive impact and return from their investment in personalised technologies.

Despite the many opportunities of wearable technology an insurer must also consider the risk attached. In 2015, Zurich released a report highlighting three major risks that insurers face with regards to wearable technology. These concerns surround underinsurance, data security, and the loss of personal information. With the increase in big data that an insurer will hold if it implements new technology platforms insurers need to ensure their systems are increasingly secure.

If you are interested in additional information, please do not hesitate to get in touch with your local contact person.