The Internet of Things (IoT) and the connected car look to become a catalyst and disruptor in the property and casualty insurance business model, and may prove to be the impetus P&C insurers need to evolve into a new way of serving customers.
In previous articles, we provided a perspective on how the IoT will affect P&C insurance overall and then went deeper into the connected home. In this article, we explore the evolution of the connected car and the implications for insurers.
The growth in the number of connected devices has been truly breathtaking—in the next five years, the number of connected devices will increase more than tenfold, from less than 3 billion worldwide today to 30 billion by 2020.
Three domains—telematics, automotive safety and infotainment—to drive more than 15% year-over-year growth in the connected car market over the next decade. Examples of all three are already appearing. Connected sensors are appearing in vehicles—from telematics devices such as Progressive’s Snapshot, to safety sensors that automatically apply the brakes before a collision. These safety technologies will improve in number and sophistication, and they will also continue to spread beyond premium vehicles into mass-market brands. Some automotive manufacturers (OEMs), such as Ford with its Sync platform, have embedded ways for customers to user their own devices for a personalized in-vehicle experience. Most 2015 GM vehicles in the United States are equipped with advanced 4G LTE connectivity and a built-in Wi-Fi hotspot. The Tesla goes much further, with software features that are updated over-the-air, allowing the cars to get “faster, smarter, and better … while you sleep,” as the carmaker puts it.
Connected car-related offerings have evolved in fits and starts, largely limited to specific, self-contained services (such as telematics) that are “pushed” to customers. Eventually, however, we expect to see a broader, modular set of value-added services that integrate seamlessly into the lives of connected consumers, allowing them to do whatever they need inside their cars without restraints. Non-traditional sources such as Google and Apple are already making emerging plays in this space, going head-to-head with OEMs in the “battle for the center console.”
Longer term, tech giants are likely to be at the center of two other mega trends that will eventually have a radical impact on the connected car—and even more so on Auto insurance. While many companies have been testing fully autonomous vehicles (AVs)—Daimler recently tested a self-driving Freightliner over the Hoover Dam—the wider-scale penetration of AVs will happen in the 2030s or later. However, when this does occur, along with the continued rise of the sharing economy, there will be an increase in shared vehicles. This will lead to a significant slowdown in car parc (the number of cars and other vehicles in a specific region) growth beyond 2030 (see figure below).
Figure 1: Advanced safety penetration through 2050
These trends will create seismic shifts in the P&C insurance industry landscape, from redefined industry boundaries and adjustments in product portfolios to changes in the very nature of risk (for example, source of liability in collisions involving AVs).
The IoT’s impact on P&C insurers occurs along four key dimensions:
1. Changes to the core business model. New sources of data allow better customer intelligence for segmentation and risk understanding. Technological advances will allow better management of losses. For example, insurers will receive faster notifications and deeper understanding of incidents (today’s telematics in Europe), and they will be able to better evaluate catastrophic losses (for example, with drones). As technologies advance in cars and homes, the sources of liability may shift away from individuals to product makers.
2. New business models. Insurers will have opportunities to provide additional solutions to customers, thanks to more frequent engagement and deeper customer knowledge. Beyond that, alternative models to monetize insurers’ data and analytics will emerge.
3. Changes to the customer value proposition. These will range from reactive restitution to proactive risk prevention. For example, IoT devices could sense moisture levels and automatically shut off water valves to prevent flooding.
4. Changes in the market structure. Successfully addressing preventable risks means a shift in the overall portfolio toward higher volatility from major events (such as severe weather). Product portfolios will likewise shift as fewer, safer and self-driving cars reduce the amount of auto risk—and as new risk types, such as digital assets, emerge. Players from other industries will shift the boundaries for managing overall risk, using the same information to engage customers in dialog that include aspects of risk management, and also providing solutions. For example, a utility may offer installation of a water shut-off valve, 24/7 monitoring and a certain amount of damage coverage, thereby reducing the consumer’s perceived need in the context of the traditional home policy.
As IoT fundamentally alters the landscape of P&C insurance, incumbents need to determine their future course of action before it’s too late, and avoid the fate that Kodak, Blockbuster, and other giants of yesteryear faced when they failed to act at key inflection points in their industries.
While there is a high degree of uncertainty about how the landscape might evolve, insurers must prepared for three potential scenarios:
1. A vehicle-centric scenario in which OEMs play the dominant “gatekeeper” role
2. A device-centric scenario in which large tech firms such as Google and Apple (or, less likely, telcos that own the connectivity) become the gatekeepers
3. A scenario where insurers are the integrators.
OEMs or even tech giants may have some inherent advantages (for example, natural “rights” to orchestrate the overall in-vehicle experience), but they have limitations in that their customer relationship is mostly transactional. Insurers, on the other hand, have existing relationships with their broad customer base and a heritage of data and analytic capabilities that will enable them to create an end-to-end, integrated consumer experience. This experience is focused on pivotal customer episodes—those times when the customer’s experience has a disproportionate effect on long-term customer loyalty and value, when an insurer’s ability to meet a deep underlying need creates real value for the customer and earns the insurer a special role going forward.
Specifically, insurers need to focus on six specific imperatives to sustain their success:
- Engage the customer. Understand pivotal customer episodes and build around a deep understanding of customers and their needs
- Allow risk taking. Develop superior innovation and delivery capabilities; cultivate a culture that embraces risk taking: test, fail fast, and learn
- Structured yet flexible innovation. Develop a structured innovation strategy, with a flexible action plan with near-, medium-, and long-term objectives
- Revise partnership approach. Collaborate and co-create with multiple partners across the Connected Car ecosystem
- Enhance big data and analytics capability. Harness internal and external data to provide timely, sophisticated, and relevant insights to generate customer and business value
- Build and sustain a flexible IT platform. Create an environment that is simple, modern, secure, and agile—with the ability to integrate with emerging technologies that enhance/disrupt industry norms
A great deal of uncertainty remains about when and to what extent the potential of the connected car is likely to materialize. Nevertheless, insurers must act now. They must define a flexible path that incorporates the ability to be informed and adjust direction, and that includes the flexible investment and resource planning needed to navigate a new and evolving landscape.
Joseph Reifel is a partner at A.T. Kearney, a global management consulting firm, where he leads the Financial Institutions practice for the Americas. Alyssa Pei is a partner and Neeti Bhardwaj and Shamik Lala are principals with A.T. Kearney’s Financial Institutions Practice. Mike Hales is a partner in the strategic operations practice of A.T. Kearney.