Insurers should be looking through binoculars rather than a microscope when assessing the potential impact of technology in transforming their business, focusing on the long term opportunities and threats posed by emerging exposures rather than concentrating only on how the latest hardware or software might help them incrementally improve internal systems and performance.
That was one of the key takeaways from presentations and informal discussions at what I like to refer to as the industry’s “annual family reunion” in New York City — the Property-Casualty Insurance Joint Industry Forum, where the heads of primary carriers, reinsurers, brokerage firms and their association leaders gather to consider the state of the market and direction of the business.
Will a whole new insurance niche be needed?
There was much talk at this year’s forum about how the industry still primarily thinks of technology as a tool to enhance efficiency and accuracy, when the more pressing challenge going forward will likely revolve around how tech is fundamentally changing the economy and the risks they cover. So while it’s important to take advantage of new operating systems and data sources to improve business processes, it’s critical to also consider how insurers might remain relevant and profitable in an increasingly tech-centric and connected society.
Tech is transforming not just the insurance industry’s operations, but the very nature of the businesses and properties they cover. One key test will be how the industry adapts its products as more people use personal property — such as their homes and cars — for commercial purposes as part of the “sharing economy.” Beyond the need to make clear to policyholders that such business risks are not generally covered by personal lines policies, a whole new insurance niche will likely need to be cultivated, perhaps by offering hybrid products blending personal and commercial coverage on the same properties.
Meanwhile, new safety technologies becoming more common in vehicles could drastically reduce the number of accidents — a positive development for society, but a conundrum for personal Auto insurers, which account for a substantial share of the premiums written by the overall property-casualty industry. One analyst speculated that tech-driven loss control trends (including the development of autonomous vehicles) could cut the auto insurance industry in half over the next 25 years. The management of a shrinking line of business will be a major challenge for many carriers, particularly smaller (and especially mono-line) companies without the diversification and scale to cushion the blow, likely leading to greater consolidation.
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The "Internet of Things" may enable carriers to become primarily the ensurers of safety and productive use of properties, rather than just the insurers of damages should a loss occur. (Image: Shutterstock)
However, others at the Forum emphasized that most downside tech threats will also offer upside opportunities. In this case, as personal auto shrinks, commercial product liability insurers may pick up at least some of the slack by covering vehicle manufacturers and makers of safety software in case system failures (or hackers) cause accidents.
The expanding “Internet of Things” (IoT) also presents intriguing risks and growth potential, but once again carriers should have a different mindset when considering how to capitalize on this phenomenon. With IoT, underwriters will be able to base decisions on actual experience rather than proxy correlations (such as credit scores), as well as provide more customized coverages. But more importantly, the availability of real time, sensor-based data in millions (and eventually billions) of products and properties will likely put proactive loss control in the driver’s seat (literally, in the case of auto telematics for usage-based insurance).
Indeed, IoT may enable carriers to become primarily the ensurers of safety and productive use of properties, rather than just the insurers of damages should a loss occur. If IoT detects the imminent failure of a $100 compressor in a $1 million piece of equipment that prevents a $100 million business interruption loss, an entirely new value chain is created. Concerns were raised during the Forum that if carriers don’t seize the moment, outside tech firms could launch IoT platforms that already have an ingrained risk-transfer component, thereby beating insurers at their own game.
In an increasingly connected economy, the nature of the exposure that needs to be managed will more often involve digital assets, rather than just tangible properties. That means there should be a corresponding rise in demand for Cyber insurance coverage, although thus far the market has been slow to develop. In part, that’s likely because insurers don’t feel they have a good handle on the exposure and fear its potential severity. The result has been relatively low limits and tight coverage terms, so it’s no surprise the take up rate by consumers has been rather limited.
But that dynamic should change as more data is collected and awareness grows about the rising cyber exposure facing businesses and individuals. Insurers should be up to the challenge, especially since this a very familiar risk to them, given that they are prime targets of hackers themselves and could leverage their own risk management experience to underwrite other industries.
It’s a brave, new world
In short, as those at the industry’s family reunion made clear, it’s a brave, new world out there thanks to technology, which can be the best friend or worst enemy of insurers. It all depends on whether carriers are quick to capitalize on the changes occurring and yet to come, or end up being victimized by more proactive competitors inside and outside the industry.
How do you think the industry will respond? Will new financial technology firms and more established digital natives beat insurers to the punch? Or will the industry adapt and take their game to the next level?
Sam J. Friedman (email@example.com) is insurance research leader with Deloitte’s Center for Financial Services in New York. For many years, he was editor-in-chief of National Underwriter. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.
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