Will You Survive the Great InsureTech Disruption?
In insurance, whoever holds the data, holds the power.
That’s because data is the key to effective risk assessment and underwriting.
Big Data and analytics are forcing insurers to adjust their processes when it comes to collecting and using data. With the expansion of the Internet of Things, sensor technology, machine learning and artificial intelligence, there is more information available than ever before.
The abundance of data – and the technology used to capture it – is driving profound disruption in the relationship structure of the insurance industry. As the traditional gatherers and guards of massive amounts of data, insurers face threats from new, tech-savvy competitors who can adapt to changes more quickly.
“There are very powerful trends coming together to cause serious industry disruption. That can be a big threat, but if insurers start responding now and embracing the change, it could also be a big opportunity,” said James Dodge, Senior Consultant, Advanced Analytics & Data Solutions, Milliman.
InsureTech Overturning the Status Quo
Technologists, data scientists and their deep-pocketed capital backers are jumping in with both feet. Though lacking insurance expertise, they see the vast opportunity to harness the data that insurers need. In doing so, they present a threat to traditional insurers, especially smaller and mid-size companies who lack their own large data stores.
“Not a lot of Insuretech companies actually want to be in insurance,” said Robert Meyer, FCAS, MAAA, Principal, Consulting Actuary, Milliman. “It’s a highly regulated industry that requires a lot of capital, and few have actually jumped into the pool of taking on risk. But they are positioning themselves as the purveyors of data.”
Distribution is a key area of focus for many Insuretech startups. Specifically, the new players think they can disintermediate brokers for small and mid-size accounts.
But there are other ways that technology can profoundly change insurance distribution.
Original equipment manufacturers (OEMs), especially in the case of IoT-enabled ‘connected cars,’ are one example of a new competitive threat to traditional distribution. Instead of providing auto coverage through a traditional carrier, they may try to capture more margin by partnering with an InsureTech startup.
“Say, for example, a young InsureTech firm builds a great app and sells it to a reinsurer. The OEM may decide they want to offer that as a value-added bundled offering to their customers,” Meyer said. “In doing so, they bypass the middleman, save costs, and create a more modern, digital experience for their customers.
“Insurers will then have a disintermediation problem, along with a new emergent competitor they never thought was their competitor before.”
Other insures could take a similar tactic by white labeling their products and selling them through InsureTech firms to trim expenses and expand their market share.
Insurers who are too slow to digitize or update their process could be pushed out altogether. They’ll lose customer loyalty to competitors who have refined their customer experience and engagement and fall behind those competitors who reduce their costs faster.
The flipside to the threat of competition is that insurers who manage to stand out from the crowd win over customer support.
Small insurers, for example, are better positioned to adopt new technology and build ecosystems that are flexible enough to adapt to shifting trends and further technology advancements. Large insurers relying on legacy systems will have a harder time making that change and staying up to date.
But larger insurers can leverage their resources by directly investing in or acquiring InsureTech firms. Even if they can’t build the platforms themselves, partnering with InsureTech companies provides a closer look at their infrastructure and allows them to reap the benefits of access to data without storing or managing the data themselves.
“Using these firms as a stand alone data vendor also helps insurers avoid some regulatory overreach,” Dodge said.
Regulatory obstacles in the use of data science in underwriting often leave insurers unsure of how to apply new data sets, and therefore hesitant to embrace the new, interconnected technologies that help collect it. It’s a fear based on a limited view of data analytics.
“Insurers really do six major things. There’s product design, marketing and sales, pricing, underwriting, claims, and services,” Dodge said. “Regulators may not allow data science in setting rates if they perceive it as discriminatory, but you can absolutely still apply data analytics to the other five processes.”
Carriers can target marketing and distribution with demographic data, enhance their claims experience with user-friendly portals, improve claims handling through predictive analytics, and perhaps most importantly, incorporate data into the underwriting process.
“If regulators will not allow data to dictate pricing, you can achieve a similar effect in underwriting, outside of the rate structure,” Meyer said. Collecting data about a potential client’s financial reliability, exposure to different types of risk, and risk mitigation strength can guide underwriters to, for example, offer premium discounts for positive marks, or perhaps reduce sub-limits for higher-risk insureds.
“By taking in as many data elements as you can and applying them in other areas of your business, your organization will learn an awful lot about managing a high volume of data, learning from it, and then acting on it,” he said.
Digitize or Die
To reap the benefits of data and analytics technology, insurers have to act now. Taking a reactive instead of a proactive approach could do irreparable harm long term.
But throwing the latest technology at a problem without adjusting an accompanying process isn’t the answer.
“Clients are asking how they should embark on their own digital transformation. Not only do we have expertise in managing large data sets, but we can also advise on how to adjust relationship management within the industry along the way as the market undergoes continual disruption,” Meyer said.
Milliman is focused on working with both Insuretech players and traditional insurers to create a technology ecosystem built to adapt to continuing changes. They have dedicated themselves to staying at the leading edge of technology and the Insuretech trend.
“We are branching out from actuarial work and consulting into Big Data, machine learning, and analytics. We’re not focused on client-facing platforms, but rather building ways to combine human and machine learning to get the best outcome,” Dodge said. “We can help clients take advantage of the opportunities and plan for the future as changes continue.”
To learn more, visit http://us.milliman.com/.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Milliman. The editorial staff of Risk & Insurance had no role in its preparation.