The coming revolution in insurance
Posted by hkarner - 11. März 2017
Source: The Economist
Technological change and competition disrupt a complacent industry
IN THE stormy and ever-changing world of global finance, insurance has remained a relatively placid backwater. With the notable exception of AIG, an American insurer bailed out by the taxpayer in 2008, the industry rode out the financial crisis largely unscathed. Now, however, insurers face unprecedented competitive pressure owing to technological change. This pressure is demanding not just adaptation, but transformation.
The essential product of insurance—protection, usually in the form of money, when things go wrong—has few obvious substitutes. Insurers have built huge customer bases as a result. Investment revenue has provided a reliable boost to profits. This easy life led to a complacent refusal to modernise. The industry is still astonishingly reliant on human labour. Underwriters look at data but plenty still rely on human judgment to evaluate risks and set premiums. Claims are often reviewed manually.The march of automation and technology is an opportunity for new entrants. Although starting a new soup-to-nuts insurer from scratch is rare, many companies are taking aim at parts of the insurance process. Two Sigma, a large American “quant” hedge fund, for example, is betting its number-crunching algorithms can gauge risks and set prices for insurance better and faster than any human could. Other upstarts have developed alternative sales channels. Simplesurance, a German firm, for example, has integrated product-warranty insurance into e-commerce sites.
Insurers are responding to technological disruption in a variety of ways. Two Sigma contributes its analytical prowess to a joint venture with Hamilton, a Bermudian insurer, and AIG, which actually issues the policies (currently only for small-business insurance in America). Allianz, a German insurer, simply bought into Simplesurance; many insurers have internal venture-capital arms for this purpose. A third approach is to try to foster internal innovation, as Aviva, a British insurer, has done by building a “digital garage” in Hoxton, a trendy part of London.
The biggest threat that incumbents face is to their bottom line. Life insurers, reliant on investment returns to meet guaranteed payouts, have been stung by a prolonged period of low interest rates. The tough environment has accelerated a shift in life insurance towards products that pass more of the risk to investors. Standard Life, a British firm, made the transition earlier than most, for example, and has long been primarily an asset manager.
Meanwhile, providers of property-and-casualty (P&C) insurance, such as policies to protect cars or homes, have seen their pricing power come under relentless pressure, notably from price-comparison websites. In combination with the stubbornly high costs of maintaining their old systems, this has meant that profitability has steadily deteriorated. The American P&C industry, for instance, has seen its “combined ratio”, which expresses claims and costs as a percentage of premium revenue, steadily creep up from 96.2% in 2013 to 97.8% in 2015, and to an estimated 100.3% for 2016 (ie, a net underwriting loss). Henrik Naujoks of Bain & Company, a consultancy, says this has left such insurers facing a stark choice: become low-cost providers, or differentiate themselves through the services they provide.
One fairly simple way to offer distinctive services is to use existing data in new ways. Insurers have long drawn up worst-case scenarios to estimate the losses they would incur from, say, a natural catastrophe. But some have started working with clients and local authorities on preparing for such events; they are becoming, in effect, risk-prevention consultants. AXA, a French insurer, has recently started using its models on the flooding of the Seine to prepare contingency plans. Gaëlle Olivier of AXA’s P&C unit says the plans proved helpful in responding to floods in June 2016, reducing the damage.
Tech-savvy insurers are going one step further, exploiting entirely new sources of data. Some are using sensors to track everything from boiler temperatures to health data to driving styles, and then offering policies with pricing and coverage calibrated accordingly. Data from sensors also open the door to offering new kinds of risk-prevention services. As part of Aviva’s partnership with HomeServe, a British home-services company, the insurer pays to have a sensor (“LeakBot”) installed on its customers’ incoming water pipes that can detect even minuscule leaks. HomeServe can then repair these before a pipe floods a home, causing serious damage.
The shift towards providing more services fosters competition on factors beyond price. Porto Seguros, a Brazilian insurer, offers services ranging from roadside assistance to scheduling doctor’s appointments. In France AXA provides coverage for users of BlaBlaCar, a long-distance ride-sharing app. The main aim of the policy is to guarantee that customers can still reach their destination. If, say, the car breaks down, it offers services ranging from roadside car-repair to alternative transport (eg, calling a taxi).
Insurers face many hurdles, however, to becoming service providers and risk consultants. Maurice Tulloch, head of the general-insurance arm of Aviva, admits that such services are yet to catch on with most customers. So far, his firm, like its peers, has focused on enticing them to adopt the new offerings by cutting insurance premiums, rather than on making money directly from them. It reckons it can recoup the cost of, say, the HomeServe sensors and repairs from the reduction in claims.
One example of what the future may hold comes from the car industry. Carmakers have traditionally bought product-liability insurance to cover manufacturing defects. But Volvo and Mercedes are so confident of their self-driving cars that last year they said they will not buy insurance at all. They will “self-insure”—ie, directly bear any losses from crashes.
Some think that such trends threaten the very existence of insurance. Even if they do not, Bain’s Mr Naujoks is not alone in expecting the next five years to bring more change to the insurance industry than he has seen in the past 20.
Source: The Economist
Subject: A New York startup shakes up the insurance business
Is the future of insurance named after a soft drink?
When insurance quickened the pulse
IT IS not typhoons or earthquakes that insurers should fear most, but geeks alert to their businesses’ inefficiencies. Daniel Schreiber and Shai Wininger, tech entrepreneurs with no insurance background, spotted that the industry is huge (worth $4.6trn in global premium income a year, reckons Swiss Re, a reinsurer), distrusted, antiquated and hopelessly unreformed.
In September they started Lemonade, a New York-based insurer for homeowners and renters. Some describe it as a peer-to-peer insurer (“Spiritually we’re a tech company,” says Mr Schreiber). Most agree that its app makes insurance a lot easier. This appeals to the digital generation: of 2,000 policies sold in its first 100 days, over 80% were to first-time buyers.
Insurance, the founders reasoned, suffers from misaligned incentives. Every dollar paid out comes from insurers’ pockets, encouraging poor behaviour. Normally upright people have few qualms about defrauding their insurer (as 25% of Americans do), pushing up premiums. Lemonade’s solution is to take 20% of premiums as a fee and to reward under-claiming customers by giving a share of unused income to a chosen charity.
This brings good publicity. But just as important is how different Lemonade looks behind the scenes. Instead of underwriters it uses algorithms; and instead of expensive brokers and salespeople it uses chatbots. It even uses AI and machine-learning to handle claims, a job typically seen as needing a human touch.
Late last year a customer called Brandon claimed for a stolen coat. He answered a few questions on the app and recorded a report on his iPhone. Three seconds later his claim was paid—a world record, says Lemonade. In those three seconds “A.I. Jim”, the firm’s claims bot, reviewed the claim, cross-checked it with the policy, ran 18 anti-fraud algorithms, approved it, sent payment instructions to the bank and informed Brandon. The real-life Jim (Hageman), Lemonade’s chief claims officer, was driving home for Christmas at the time.
Lemonade’s bots are still learning and pass more complex claims to humans. It is hoped that one day they will handle 90% of claims. In an industry with expense ratios as high as 30% this could offer huge savings. But there are limits to the claims that bots can be let loose on. And insurance dinosaurs have one advantage: data. For bots to get really clever they need lots. If Lemonade’s customer numbers remain small, they will not learn fast enough to stay ahead of the big boys using the same technology.
But insurance moves slowly. Miguel Ortiz from BCG, a consultancy, says that the big bet for Lemonade is that “it can stay ahead of a sleepy industry by doing standard insurance processes better than everyone else.” Already, the shake-up it promises has added some fizz and zest.