The offensive by digital disruptors on the financial services industry is about to launch on an entirely new front — insurance.
"Unlike their cousins in the banking sector, insurers have been largely untouched by the digital revolution."
Sam Stewart, Partner, Financial Services, The Boston Consulting Group
Unlike their cousins in the banking sector, insurers have been largely untouched by the digital revolution.
Many providers have built customer-friendly websites to allow online claims and payments but the core business of general, motor, health and life insurance is much the same as a decade ago.
Step back for a moment however and look at the insurance industry from the perspective of a digital disruptor with the technological tools already available.
Let’s start with the so-called “Internet of Things”. The number of internet-connected devices has grown exponentially over the past decade from less than one billion desktop computers to many billions of smart phones and tablets.
Over the next decade, the number of connected devices will be measured in the tens of billions. This will encompass small, low-cost sensors that can be placed in homes and cars to provide data that will allow much more accurate information about insurance risks.
For example, a sensor in the home will be able to detect a water leakage in real time. Sensors in cars will provide data about the location and usage patterns of the vehicle and therefore a more accurate fix on the risks of theft and accidents.
The Internet of Things also extends to people. Wearable technology such as the Apple Watch opens the door to mass-market availability of real-time data on health and fitness and new insights on risk for health and life insurers.
The idea of consumers embracing this technology is not a futuristic pipe dream. A recent survey by The Boston Consulting Group and Morgan Stanley of 500 Australian consumers found 80 per cent would be willing to share data from these kinds of sensors in exchange for a reduction in their premiums of about 10 per cent to 15 per cent.
Australians were more willing to share data than consumers in a number of other developed countries, including Germany, France, Japan and the UK, which perhaps reflects our disposition to be early adopters of technology.
The digital disruptor also has Big Data at is disposal to analyse all this new data and build powerful models for pricing risk. Digital technology has the potential to replicate many of the skills of the actuary and place under attack the core competitive advantage of insurers.
We’re not suggesting a doomsday for the global insurance industry but we do believe it is on the brink of major technology-driven change.
Technology will structurally change the types of data to assess risk and on our estimates could ultimately shrink the size of risk pools by up to $US109 billion worldwide — equivalent to 9 per cent of global non-life premiums.
In Australia, a number of our largest insurers have the advantage of having parents in the banking industry which has travelled much further than insurers along the digital journey. These insurers will be able to leverage their parents’ capability.
But the starting point for insurers is strategy. Technology will mean new types of players, a big departure for an industry that traditionally had very few adjacent entrants.
We believe insurers will need to orchestrate or join ‘ecosystems’ (networks of companies, individuals and institutions that interact and provide services) in order to promote, supply, install and service connected devices.
They will also need to ensure harmonious development of insurance offers, together with new applications and services to link with those devices.
An example of this trend is the partnership between Illinois-based State Farm and ADT for protected, connected homes.
Technology companies are moving in this direction to build connected-home offerings – for example, Google has acquired smart-home device maker Nest Labs and Samsung recently purchased home-automation company SmartThings.
The shift towards ecosystem-based insurance also reinforces the risk of adjacent entrants where non-insurers with key consumer insights from their own core operations seek to leverage that competitive advantage and offer their own insurance products.
From a strategic perspective, the key questions for insurers are ‘who will have the data I need in 10 years’ time?’ and ‘who will have the primary -, and more valuable - customer relationships?’
The time to start developing these strategies is now. While the technology-led revolution insurance is just beginning, experience in other industries shows it can be difficult to predict the pace of change in the business landscape.
Insurers also need to be mindful that there is a finite number of relevant potential partners for the new ecosystems that will shape the future of their industry.
Sam Stewart is a Partner, Financial Services, at The Boston Consulting Group