The Third Wave of Innovation
A new report from Aon Benfield points to the on-demand economy, cyber risks and Insurtech as areas of potential growth opportunities with big impact on brokers, insureds and their clients going forward.
Have you ever headed out to the airport or for a night on the town in the care of your friendly neighborhood Uber driver? Perhaps you skipped the vacation tourist traps and spent your last getaway in a quaint cottage you found through Airbnb.
If so, you’re part of the on-demand, or gig, economy — a sector that presents opportunity and disruption to the traditional insurance model, according to Aon’s report, entitled “Global Insurance Market Opportunities: Re-Imagining Risk Management.”
As more of these on-demand services populate the marketplace, insurers will need to rethink how assets such as cars or homes are covered under a policy, said the report.
The industry projects that, by 2020, 40 percent of the total U.S. workforce will be independent workers in the gig economy. The increasing commercial use of cars and houses enables insurers and reinsurers to start developing new and enhanced products and to engage more creatively in the thought process behind insurance product development.
“The true transformation will happen as we re-imagine risk management altogether,” Paul Mang, Aon’s Global CEO of analytics, said in a statement released alongside the report.
Consumer trust, safety, consistency in service quality and data privacy pose risks to the on-demand worker and business. On-demand transactions are temporal, episodic and small compared to traditional insurance, and insurance products are geared toward specific coverages.
Aon Benfield believes the insurance industry can play an important role by promoting standards for security and risk mitigation across on-demand economy platforms. Technology, the report said, plays an important role in addressing on-demand insurance.
Mang said that collaborations, or “open architecture innovations,” will be key in creating net new growth, even though it may be difficult to streamline in the current insurance environment. This type of system, Aon suggests, would set operating standards while allowing for a great deal of flexibility and permutation.
Take Google Play and the Apple Store for example. These platforms, while servicing different industries, are held together by a set of rules and norms to provide sufficient security to their many buyers. Aon believes successful insurance agencies would treat open architecture in much the same way — servicing individual clients while remaining invested in a set security model.
Cyber Risk Spreading
Cyber, the report said, is a “far-reaching, enterprise-level” risk. Despite best efforts and effective security programs, hackers continue to infiltrate companies via the digital, connected world. A most recent example would be Equifax’s data breach in late May, which compromised Social Security numbers, driver’s license information and credit scores for nearly 143 million Americans.
Aon reports 45,000 known cyber incidents this year alone. Cisco Systems detects 1.5 million different kinds of malware daily. According to AM Best, insurers wrote more than $1.35 billion in cyber insurance policies in 2016 — a 35 percent increase from 2015.
In the past, cybersecurity has been viewed primarily as a technology issue. But cyber impacts every avenue of a business — from finance, operations and human resources to customers, brand and regulatory compliance. Therefore, Aon suggests a holistic approach to managing cyber risk and a move toward cyber resilience; traditional means will not cut it.
“Cyber risks continue to evolve, and insurance coverages keep changing along with them,” reads the report. “This continued evolution creates challenges for modeling, and nowhere is this more important than in the work of aggregation management.”
Cyber risks, casualty catastrophe risks and pathogen risks become increasingly insurable through collaborations with Insurtech companies, said the report.
The Move Toward Insurtech
CB Insights, which collects and analyzes data to predict emerging trends, has dubbed the current era of technological advances the ‘third wave of innovation,’ citing that the industry will likely see more change in the next 10 years than it saw in the last 100.
“The pressure on insurers to innovate is clearly growing and capital is flowing into the insurance sector as investors see an opportunity to disrupt the more than $5 trillion marketplace.” — “Global Insurance Market Opportunities: Re-Imagining Risk Management,” 12th Edition, Aon, September 2017.
The first wave came with the creation of the Internet, connecting people from across the world and supplying users with knowledge at their fingertips. Next, the birth of fintech democratized financial data, making it easier for businesses to utilize tech when creating better financial services for consumers. Now, we are turning to Insurtech.
“The pressure on insurers to innovate is clearly growing and capital is flowing into the insurance sector as investors see an opportunity to disrupt the more than $5 trillion marketplace,” read the report.
In the Insurtech realm, the report highlights that this fast-growing entrepreneurial segment could act as an enabler rather than a disruptor of traditional insurance. In 2016, more than 200 Insurtech startups gained $9 billion in investment. The report noted that today more than 550 Insurtech startups attracted nearly $14 billion in investment.
Insurtech utilizes technological innovations, such as artificial intelligence or wearables, to insure “ultra-customized” policies. Using data from Internet-enabled devices, Insurtech startups are able to price premiums according to observed behaviors.
In other words, Insurtech uses technology to save as much as possible.
Of course, growing technology brings its own share of growing risks. But the Aon Benfield authors believe that this uncertainty of technology acts as a driver of industry growth.
“We know that the insurance sector is facing challenges in the current macroeconomic environment, so we should expect leading organizations in the industry to drive change,” Mang said in the statement. “We are already using technology to make us more efficient as a sector and to expand into emerging risk markets.”
In addition to cyber, Insurtech and the on-demand economy, Aon points to autonomous vehicles as another area for both growth and disruption. U.S. motor pure premiums are expected to decrease more than 40 percent by 2050, the same point at which driverless cars are expected to be fully integrated.
The report projects that the driverless technology may transfer accident liabilities from the owner to the manufacturers and software providers. &