What are some of the key factors that will compel insurance companies to incorporate IoT data into their offerings?
1.) Downward pricing pressure and fierce competition
In personal lines insurance, competition has always been fierce, and technology and comparison services have only made it easier to compare pricing and switch providers. A deep understanding of customer behaviour in order to understand your exposure and losses, as well as offer outstanding customer experience, is the best and only way to remain sustainable in this environment.
The way to gain this deep understanding is through behavioural data gathered from IoT devices - the easy example is in health insurance with wearables. Once an insurer has access to this information, they can differentiate and personalise insurance policies and, through technology, offer an individually tailored experience for each customer. They can also begin to understand the behaviour that correlates to claims and suggest changes to behaviour that might lower their exposure.
In marine insurance - a major focus for Concirrus - it’s really not that different. We are talking about streaming data from devices on ships that track things like movement, speed and machinery health, as well as environmental data such as hyper-local weather and port safety. All things which can indicate risk. With access to this data, not only can the insurer gain a much greater understanding of their risk and therefore mitigate losses and lower claims, they can also begin to offer their clients a much better customer experience through tailored policies.
It is also interesting to note that it’s estimated only 10% of the world’s risks are currently insured - much of the global risk is considered to be too small, or too risky. However, it is possible that insurers could turn these into profitable opportunities by bundling many of these risks together and pricing them appropriately dependent on the risk. This is only possible if the insurer has the ability to understand, on a large scale, the ongoing behaviour of these fleets - the only way to do this is through harnessing IoT data.
2.) Consumer demand
In the age of Uber and Airbnb, consumers, particularly those in younger generations, expect personalised products and services and a digitally powered customer experience. We have seen digitally savvy insurance companies crop up and dominate the market - companies like Vitality and Lemonade.
These same pressures are beginning to translate into commercial insurance.
Already in marine, ship operators are investing heavily in digital to manage things like engine performance, Co2 emissions, navigation and cargo supply chains. All of this investment increases the safety of vessels and therefore lowers risk and, as a result, there is pressure from the ship operators for insurers to reward them for this safer behaviour. Only through harnessing IoT data can insurers begin to understand how to do this.
How soon will they need to accommodate this change in their approach?
Very quickly. In the case of marine syndicates within Lloyd’s, they are under significant pressure to become profitable or they risk being asked to leave.
Gaining insights from IoT data will give these insurers a way to quickly understand the risk in their portfolio at a granular level and begin to make plans for mitigating their risk and identifying new profitable opportunities. There is really no such thing as ‘bad’ risk, it is all about pricing accurately, so with a deep understanding of the portfolio, insurers can price appropriately depending on the level of risk.
What are your suggestions for CDOs, CTOs or CIOs of insurance companies for creating a roadmap to help their employees access and use IoT tech data in their everyday functioning?
1.) Redefine culture
Culture change is the biggest hurdle to adopting a more digital approach and culture change has to start from the top.
In the past few years, we have seen innovation labs popping up in insurers everywhere tasked with driving the company’s innovation and digital agenda, and working out how to either build internally or partner with Insurtechs. While there are some cases of successful labs, such as Munich Re’s aptly named ‘The Lab’, we have also seen a number shut down in the past 12 months, for example Allianz X, after they’ve seen little success in changing the way their company drives innovation.
The problem with setting up a separate innovation agenda is that it deflects responsibility and buy-in from business unit employees who are the ones that need to change their behaviour to truly embed innovation. The way to truly drive cultural change is making it everyone’s responsibility, right from the senior executive team, through middle management to general staff.
So, the suggestion for Insurance executives is to embrace innovation as part of their business unit strategy, empowering all employees contribute to, and adopt digital and innovation strategies.
2.) Remember, it’s less about the data and technology than the business model it enables
Insurers needn’t understand blockchain, AI or Machine Learning to be able to reap the benefits from these incredible new technologies. What’s important is that insurers focus on what they are very good at, understanding insurance, and work with technology companies that know technology.
If you look back to when the internet dot.com era was really booming, everyone was focused on how technology would be used to impact existing industry; but when evaluating the most successful companies to emerge from the dot.com era, it was those that put technology at the core of their proposition and used it to be more customer-centric that emerged as the iconic brands we recognise today.
Successful online brands like Amazon recognised that it’s much more than becoming “X but for the internet”, it’s about building a customer-centric brand that leverages technology to empower its value proposition.
Looking at an example in the insurance industry: when Direct Line developed their proposition to sell insurance products over the phone they did more than just employ larger teams at call centres — they re-imagined the entire purchasing experience and optimised it to be done over the phone; an approach that has proven wildly successful.
Technologies like AI, machine learning and blockchain will play a part in the future of the industry, but these are enabling technologies. The truly successful insurers of the future won’t provide insurance ‘but for’ blockchain, or insurance ‘but for’ artificial intelligence, they will be companies that leverage these powerful technologies to redefine the insurance business model.
As a comparison to the insurance market, the London Stock Exchange processes more transaction by midday on its second day of trading than Lloyd’s does in their entire year. Stocks are bought and sold in open, digitised, and regulated marketplaces in real-time, and I believe that new technologies will facilitate the emergence of a new business model for insurance — one that allows risks to be written and placed in near real-time and traded like stock.
The same can be said about data - it is not only having access to the data that will create competitive advantage, it is what an insurer does with this data. Therefore, insurers should be less worried about who has access to what data and, once again, focus on what they are really good at, using this data to drive product differentiation.