Opportunities and Threats to the Insurance Industry in the Digital Age
A recent study of insurance companies by McKinsey & Company  found that while digital technology may make some companies market leaders, it, for the most part, depletes the earnings and overall value of the industry in general — consumers not companies are usually the winners.
The traditional insurance business model has proven to be resilient but is feeling the “Digital Effect”. Specifically, customers’ expectations are being transformed by digital advancements in other industries and communication channels, such as online retail, banking and social media. Based on their experiences elsewhere, customers have come to expect:
- Simplicity – 1 click shopping
- Convenience – 24-hour access and quick delivery
- Clarity – clear and relevant product information such as pricing, innovation and tailored services
In other words, they now expect digital online delivery to be first-rate, regardless of the industry. Companies who recognise this, and who move quickly to meet customers’ digital expectations are likely to be the ones that grow, while those who don’t will find it much more challenging to do business.
Most insurance companies have generally been slow to deliver on these customer expectations, and will need to address their customers’ demands quickly. Fulfilling these demands by digitising business can have both short-term and long-term benefits. Short-term benefits include:
- Improved customer satisfaction and retention through better service and faster processing times
- Reduced costs of a claims journey by up to 30% through automation
- Higher profits through digital analysis allowing for more accurate pricing and underwriting and the ability to identify fraudulent claims
- Increased growth through the ability to use customer data to tailor products to individuals and to offer them in a timely manner
Long-term benefits include:
- Opportunities for new and innovative insurance products and protection services. For example, the growth in cybersecurity means there is room for insurance products that prevent and protect against breach or loss of data and identity theft.
- Potential insurance services and products centered around the burgeoning sharing economy. As ordinary people become vendors through platforms such as AirBnB and Uber, there are many uncharted insurance details to address.
While this is all great news for insurers, especially considering market conditions have suppressed productivity, they’re not the only ones who see opportunity. Despite the significant barriers to entry, (customers’ tendencies to not switch providers; incumbents’ large cash reserves to absorb risk; and years of underwriting experience using proprietary data), new market entrants are now populating every part of the value chain.
Insurers are currently threatened by three trends:
1. The shift to prevention rather than insurance
Digital technologies now help prevent accidents and losses. For example, there are collision avoidance systems, self-driving cars that make driving safer, and smart home technology that warns property owners of flood risks (this technology can also automatically shut-down the water supply if necessary). Advancements like these help reduce premiums through risk prevention, so many predict that insurance companies will play more of a risk avoidance role than risk mitigation role. This, in effect, will reduce the value creation of underwriting.
2. Data and analytics
While insurance companies have hordes of historical data today, they are struggling to keep up and compete with companies and industries who collect up-to-the-minute real-time data through the Internet of Things (IoT), social media, credit card histories and other digital records. For example, car technology can now gather information such as driving speeds and how hard drivers brake. This is more insightful and relevant than historical information about age and past accident records.
The threat to insurance companies comes not only from FinTech startups but also digital giants, such as Google or Amazon, who combine data and analytical skills with platforms that reach millions. Companies like these offer precisely targeted offers to a low-risk customer segment based on their data and analysis. This threatens the existing insurance model because without the low-risk customers offsetting high-risk ones, the whole model falls apart.
A much closer threat comes from auto manufacturers and their developing ‘connected car.’ This would provide them with unique access to data that they could use to very accurately assess the risk of the driver. Armed with this knowledge, they have the ability to offer a uniquely tailored insurance product.
3. Institutional investors
Given the economic climate of low interest rates, large institutional investors have put their money into mainly insurance-related instruments on capital markets. But, this is changing as institutional investors focus on the primary market and, more specifically, on ventures that vertically integrate monitoring, analysis, prevention and loss mitigation. In other words, they are looking to offer the full value chain, instead of just the mitigation component — this is worth much more to an investor.
However, even in the face of these threats, insurance companies are well positioned to take advantage of this digital transformation. They have proprietary expertise and knowledge that no one else has (for now). They have large reserves to underwrite large pools of risk, and they have the trust of their customers, who (for now) are confident that the company will still be around when their policies mature decades into the future. But, as we have seen in the music, book, retail and travel industries, digital transformation will disrupt this sector. The big question is: will market outsiders become better at it before the incumbents do?
 McKinsey & Company. “Facing Digital Reality,” March 2017. Retrieved from https://digitalinsurance.mckinsey.com/facing-digital-reality/