The insurance industry has been doing the same things for the last 100 years and has still managed to remain one of the most free-cash-flow-rich industries in the world. Having emerged unscathed from multiple economic cycles, the industry is now facing perhaps one of the most formidable economic tectonic shifts yet. With the rise of cutting-edge technologies like blockchain, artificial intelligence, on-demand thin-client-type technologies, among others, insurance industry giants must awaken from their slumber if they are to avoid disruption by nimble and highly innovative insurtech startups. This is a discussion we had with Dr. Robin Kiera, founder of DigitalScouting.de. He has studied the insurance industry in Germany and wider Europe and sees three areas insurance companies can begin to experiment with on their journey to digital transformation.
“The new way is to think every day; how could I provide the customer as many services, as much convenience as possible?” Dr. Kiera is referring to the need for insurance companies to adopt a digitally-enabled customer-centric approach to handling customers. He feels the current status quo does not support customer-centricity as most insurance companies only care to interact with customers when renewing policies. Dr. Kiera sees this as a missed opportunity. The question he thinks insurance companies should be asking is, “How can I conquer the algorithm (habits) of the person and become a partner of the customer in everyday life?” This integrated approach mirrors apps from tech companies like Google, Facebook, and Microsoft that have become essential aspects of people’s lives.
Insurers collect tons of customer data and this data could be used to empower customers to make better choices in life. Consider the insurtech startup Embroker based in San Francisco, California. The company uses data analytics to help crunch policy numbers for businesses to help them see if they are overpaying for insurance. This contrasts with traditional brokers who provide little to no insight into the policies they sell to businesses. This level of data-driven transparency is one that customers have come to expect, especially as the world moves towards digital-first experiences. Dr. Kiera sums this up, “I’m so passionate because I think the potential is gigantic if insurers and banks would really share their knowledge, what they have about risk, about financial planning, retirement.”
Business Model Innovation
An EY paper on digital transformation in insurance notes that insurers today must offer a wider portfolio of products for them to stay relevant to consumers who are looking for high degrees of personalization. Such a level of personalization can only be made possible through digital transformation-fueled business model innovation. Dr. Kiera delves into this issue. “Insurers know a lot about major life events (like having a child). Insurers are baby experts. They have accident insurance… they have health insurance records to give tips on how to increase the health of a child. There are a million things that they could provide to customers. They don’t.”
However, as no market can exist as a vacuum, there are startups that are rising to fill in these gaps left by traditional insurance companies. One example is Trov, another insurtech startup based in San Francisco, California. The company, through business model innovation, provides on-demand insurance for just the important things customers want to insure and just for the times they want them insured. For instance, a customer can choose to switch on insurance for a camera when they are out on the beach. Once they get back home, they can switch the insurance off. This allows the users to pay less than traditional insurance, which provides a blanket rate with no options for personalization.
Insurance process optimization is an area Dr. Kiera sees as ripe for disruption. He provides context by explaining that current actuarial matrices see insurance companies working with combined ratios of 98-95%. What this means is that when a customer pays $100, the insurance company is happy to spend $95-$98 on the costs of doing business and keep $2-$5 as revenues. Through process optimization including risk calculation, customer empowerment, and predictive maintenance and interventions, Dr. Kiera sees a situation where combined ratios can fall to 20%, allowing insurance companies to significantly lower their rates while still making more money than the competition.
Metromile is pioneering such process optimization in auto insurance using smart sensors to calculate cost-per-mile policy rates. By attaching a smart device to vehicles of customers purchasing policies, the company bills each customer based on the number of miles they drive daily. This approach allows the company to charge less but also allows it to collect data that goes towards lowering combined ratios. “If an insurance risk carrier is able to calculate risk better than somebody else, he can give the product away cheaper and make the same money,” says Dr. Kiera. Metromile, by collecting data other insurance companies do not have, is building a competitive advantage that will soon allow it to beat other insurance companies through data-driven risk calculation.
The Future of Insurance
Asked whether advances in technologies such as self-driving cars and improved health care will reduce the need for insurance, Dr. Kiera was adamant that insurance will still be needed. Emerging technologies present a new set of threats, he explains, threats to digital goods and personas, threats to shared resources like Ubers and Airbnbs, threats to digital currencies, among others. These threats will be insured against by the tech-enabled insurance companies of the future. Current insurance companies must, therefore, embrace a future of not only new threats but also one of ever more demanding digital-native customers. If such companies are wondering how to achieve this, Dr. Kiera has one simple formula, “Fall in love with your customer, and not with your product.”