Insurers Ignore Disruptive Technologies At Their Own Peril

Editor's Note: The following article has been provided by Adrian Guttridge, the executive director of global insurance services at Xchanging.

The ways in which technology can both transform and destroy traditional mechanisms for providing services to customers are far-reaching. Disruptive technologies specifically need to reshape the insurance industry. Failure to adapt to these technologies can leave a major insurer looking as obsolete as brands such as Kodak or EMI do today.

Disruptive technology is rapidly advancing, its impact has a broad scope and it has a significant and profoundly changing effect on the global economy. These disruptive technologies that supplant older processes, rendering old skills and organizational approaches irrelevant, need to be encouraged to advance the insurance industry as they will result in significant economic value. Indeed, disruptive technologies, such as the increasingly established telematics, must be welcomed and have a definite place in the insurance market. Examples of disruptive technology include mobile Internet, cloud technology and 3D printing. For example, Rolls-Royce recently announced that it was preparing to use 3D printers for producing parts for its jet engines. High-value, low-volume industries will be the earliest adopters and they are the ones that will ultimately benefit. Indeed, it is counter-intuitive that today the biggest provider of cloud technology IT services is a book and CD retailer and that the largest seller of music is a computer company.

Using Big Data

There are two specific disruptive forces that are very close to home for the insurance industry. One is Big Data. The ability to harness this will have a significant benefit for those insurance businesses that can use it effectively. Insurers already use new data sources and sophisticated analytics for more accurate pricing of risk and in turn use this information to drive new loss-prevention measures. Where risk has always been priced on the basis of probability, this exponential growth in data and the ability to personalize risk to a more accurate degree takes away that broad brush of probability based loosely on geographic data or mortality tables. This means that premiums can now be priced to every person's or business's risk profile. From a convergence perspective, the data being collected from a black box in someone's car could be just as useful to a life insurer as it is to the property/casualty insurer. If you're a high-risk driver, prone to speeding, or driving late at night, your life is likely to be more at risk than someone whose driving habits are more sedate and whose car is safely garaged overnight.

The second significant disruptive force to the insurance industry is what will come from the wealth of alternative capital in the reinsurance market. There are estimates that US pension funds alone could inject up to $100 billion into the reinsurance market by the end of the decade. This wall of capital is going to be looking for innovative ways to be deployed and reach the end customer and it won't respect traditional distribution networks. This will lead to commodity capital insurance trading platforms seeking to bypass the traditional broker role and break up the current supply chain.

The need for businesses to move with the times and turn disruptive technology to their advantage, in the process transform their operating model, is not a new concept. IBM used to sell commercial scales and punch-card tabulators, now it deals in software, consulting services and IT services. Nintendo started out by selling gaming cards, now it's video games. Unfortunately, one company failed to change with the times: Kodak. It originally produced photographic film, now it is bankrupt. Kodak was unsuccessful because it stuck too rigidly to its traditional model. So, will the insurance players of today soon look as obsolete as, say, HMV? The simple answer is yes, unless they deploy disruptive technologies in their favor.

Telematics is an obvious and well-established example of a disruptive technology which the insurance industry is trying in earnest to adopt. By 2017, it's estimated that more than 60 percent of the world's vehicles will be connected, actively monitoring the safety and security of vehicles and drivers. Research carried out in the UK expects that by 2017, 57 percent of all drivers in the U.K. will switch to a telematics-based car insurance policy. Any new disruptive technologies will have a huge effect on consumer expectations. The creation of these new insurance products, which were not possible before, opens them up to potential for new markets such as the burgeoning middle-class areas in Latin America, Asia and Africa. To many of these, insurance is becoming more accessible and desirable, thus opening up new revenue streams.

It is clear that disruptive technologies have the capability to transform industries; wipe them out; grow them; shrink them; turn them upside down and back to front. Industries such as publishing, travel and music have been completely transformed by technology. We in the insurance industry must ignore these examples at our peril.