How digital is changing the face of insurance
“The literature is unanimous,” says Bjorn Cumps, Professor of Digital Banking. “The changes brought about by the digital economy are far greater for insurance companies than for banks. The insurance industry has always been rather slow to innovate. Advances in digital technology may not alter the insurance métier, but they will have a significant impact on their business model.”
First, digital technology is facilitating the trend towards personalisation. “The Internet of Things, sensors and all sorts of devices that capture data provide information on our behaviour, enabling insurers to better gauge the risk and to adapt their contracts and premiums accordingly”, explains Bjorn. He believes this will also change the role of insurance companies in the ecosystem as they will have to interact with new parties in the healthcare and mobility sectors.
Second, insurers are looking for ways to interact more frequently with customers. “If you’re lucky, you only have to deal with your insurer once a year, when you pay your annual premium. And otherwise only in case of a claim. But insurers want to move from mere selling & handling to a more active and proactive risk management, offering advice on how to reduce and prevent risks. They’re analysing and modifying the customer journey in order to optimise the customer experience.”
Real-time and usage-based insurance
A third trend identified in literature is that of on-demand, real-time, usage-based insurance. Instead of paying a large premium for a standard, one size fits all cover, you take out an insurance as and when needed. “Imagine you’ve just booked a flight. Your insurance company sends you a message via an app, asking if you’re leaving on a holiday. And with one push of a button, you’ve taken out your travel insurance. Several start-ups are working on apps like this.”
Another trend is the emergence of aggregators. “The insurance business is notoriously intransparent. Comparing policies and premiums is extremely difficult. By offering detailed overviews and comparisons of the individual risks covered in different contracts, aggregator start-ups want to provide transparency. Not only does this help customers compare different options, it also enables them to create modular, usage-based insurance policies.”
These four trends are not only driven by advances in digital technology and the availability of data. “Customers have become more empowered. They no longer accept having to pay for coverage they don’t need.”
“A final trend worth mentioning, mainly in the US and the UK, is that of data commercialisation. Insurance companies and start-ups are sharing the gathered data – aggregated and anonymised – with retailers, for example.”
Bjorn points out that the digitisation of the sector also bears certain risks. “What about privacy? Also, while personalisation may be advantageous for some people because they get to pay less, high-risk profiles will have to pay more if they can get any insurance at all. The very basis of insurance – subsidisation – is under pressure.” And he adds: “Moreover, technology isn’t infallible. In-car monitoring systems sometimes inadvertently encourage undesirable driving behaviour. If sudden braking causes you to lose points, then you’ll hit the gas when the light turns orange. And remember how the Google driverless car caused a crash? If driverless cars become a reality, who or what will have to be insured? The car? The chip manufacturer? The assembler? These are all fundamental issues that deserve to be discussed.”
We are seeing an explosion of start-ups, but Bjorn feels it is too early to tell which business model will succeed. “During the FinTech wave thousands of start-ups emerged. Five percent at most will survive and we’ll have the same shake-out in InsurTech.”
Interestingly, there is one big difference between the banking and the insurance sector, as he explains: “In banking, digital apps remove the barriers to shop around. In insurance, digitisation will have the opposite effect. The more data insurance companies have and the better they know their customer, the more personalised their offer can be and the greater the chance this customer will stay.”
Learning from practice
Tryg, number one insurer in Denmark, has taken the bull by the horns. Mikael Hvolgaard, director and head of portfolio management at Tryg and an alumnus of our MBA in Financial Services and Insurance, explains how they embraced the digital transformation and why he believes Tryg stands a good chance of beating the InsurTech start-ups.