By Thibault Dubois, Henning Heckman & Daan Vansimpsen (Vlerick Business School)
Technological evolutions and socio-economic changes are disrupting industry after industry and are about to make their way into the insurance industry. It has been predicted by most leading strategy and consulting firms that 2017 will be marked as the year of the insurance revolution.
“The insurance industry is ripe for disruption”, says Rachel Botsman, recognised expert on digital technologies and visiting academic at the university of Oxford. This statement is based on her theory of collaborative consumption that identifies four root causes that are putting the insurance industry at high risk for disruption.
Although insurtech’s have not yet managed to deliver substantial impact in the industry, they are growing fast and could potentially capture a meaningful share of the value chain within a few years. A PWC study even shows that nine out of ten executives acknowledge that at least part of their business is at risk of being lost to challenging insurtech companies.The first cause is the complexity of the experiences people have when engaging with insurers. The processes consumers have to go through are usually far from user-friendly, entail a lot of paperwork and are cumbersome.
The second cause is the lack or the low level of institutional trust in the entire system. The global financial crisis is often pointed out as a reason for this lack of trust, but there are two other major drivers. First, there is a lack of transparency in the insurance industry which creates uncertainty. Second, peer trust is preferred above institutional trust.
The third cause is the high amount of middlemen and the inability to operate and react in a lean and agile way due to the longevity of the relationships existing with these middlemen. Customers experience these layers of intermediaries as something that ultimately does not add real value to the product, although they account for an estimated 15 to 20% of the average P&C insurance premium.
The fourth cause is the limited access to insurance. While insurance coverage rates are very high in Western Europe and the United States, in other parts of the world large amounts of people have restricted or no access to insurance at all. From the point of view of new market entrants this is reflected in the dense set of regulatory frameworks, creating high barriers to entry and making it extremely difficult to build up market share.
These four factors cause many customers to be left unsatisfied, however, new entrants have been able to pick these customers up. Technological innovations are what enabled them to bypass regulations and resource requirements. As of now, insurtech is starting to steal revenues and increase market share, making insurance companies uncomfortable. The question is, in what kind of technologies do these challengers invest into? McKinsey’s 2017 global digital insurance report sheds more light on this matter. It shows that 85% of insurtech’s are focusing their innovation efforts on one of the following six domains:
1) Software as a Service (SaaS) & Cloud Computing - 21%
2) Big Data & Machine Learning - 20%
3) Usage-based insurance - 13%
4) Internet of Things (IoT) - 12%
5) Digital insurance & Robo-advisory - 10%
6) Gamification - 9%
Other top ten innovation domains include more complicated and comprehensive themes such as the usage of blockchain technology, peer-to-peer insurance, and the improvement of micro-insurance through the use of technology.
The next most important question is, whether insurance companies should also start investing in these technologies or keep close to their core activities.
Thinking. Botsman R., 2017, available online.
Digital Insurance: facing digital reality - The Age of Innovation. McKinsey & C., 2017, available online