I had an interesting conversation this week with Towers Watson senior consultant Stephen Lowe regarding research his company released. Lowe said that he was "shocked" at how much more energy insurance executives were expending worrying about regulation and capital management as opposed to looking at ways to incorporate new data and analytic technology into their business, or to address what Towers Watson termed the "increasing power of the consumer as a result of social media."
Lowe says that insurers who aren't already prioritizing the incorporation of technology into their business processes at a high level are losing the first mover advantage for the insurance market of the future.
"Even in the longer term view, respondents stayed focused on more mundane issues like changes in regulation, changes in legislation, volatility in the economic environment," he says. "But there's technological innovation that's creating new data, and that data has tremendous potential to revolutionize insurance around the world."
Lowe envisions a future where the bigger insurers have overwhelmed smaller ones with data-driven pricing superiority. And it's not just in personal lines auto, where the impacts of things like telematics are most visible. Insurers of all lines must be ready to embrace the disruptions caused by technology.
"The larger companies are using data and predictive analytics to refine their pricing and underwriting models, they're extending that into commercial lines as well as auto and homeowners, and it's allowing them to do a better job at picking the right risks," he says. " The insurance industry moves at a more deliberate pace in terms of change, but you don't have to look far for examples, like Apple's impact on the music industry, that show you don't have much time."
After talking to Lowe, I thought back to a presentation Novarica's Matt Josefowicz gave last month titled "Underwriting in the Age of Data Super-Abundance." As our Kathy Burger reported:
The traditional underwriting process, Josefowicz argued, "was designed for a world of information scarcity and is trying to adapt now to information super-abundance." The potential threat to insurers, he predicted, is that "someone with a blank sheet of paper will come and say, 'We're trying to price risk -- how do we balance the cost of information against the quality of models we can build from that?'" The solutions they develop "will not look like underwriting process as we know it."
Like Lowe, Josefowicz warns that the disruptive effects of technology are impacting all areas of the insurance delivery chain, from distribution to underwriting to claims. He echoed that warning in a recent report for Novarica, "Direct Online Small Commercial Insurance: Preparing for the Inevitable." He writes:
Novarica believes a small but significant portion of the small commercial insurance market is likely to embrace direct and online sales within the next five years. The same developments that drove direct sales in personal lines are starting to affect this market. ... Insurers must choose whether they will address this growing segment directly as Hiscox does, through online agencies like Insureon or BOLT, or not at all -- and prepare accordingly.
In his report, Josefowicz discusses how to allay agents' fears of disintermediation and the need to redesign commercial products so they are easier to purchase through the online channel, all the while citing insurance buyer research that hammers home his point: This change is coming to the market whether you like it or not. (I wrote about one survey he cites: Deloitte's "Voice of the Small-Business Insurance Consumer" survey, which found that about half of potential small business insurance buyers are somewhat to very likely to explore buying coverage online.)
Josefowicz admonishes insurers who are ignoring the sea change in commercial lines. If current market participants don't court this business now, they risk being upended by new entrants to the market who will innovate the product and customer experience for the uncontested market segment -- then bring that credibility into the wider market.
Despite traditional insurers' protestations that the entire market wants to use their legacy channels and processes because "that's the best way for customers to buy," it has been clearly demonstrated that a significant portion of the market does not agree. Entrenched providers in any industry must guard against confusing "the only way we know," with "the best way."
That conclusion may seem to be at odds with Lowe's assertion that bigger companies have the bandwidth to innovate more than smaller entrants, therefore they are able to select the best of the new kinds of risks. The truth is, innovation can come from anywhere -- as long as the culture facilitates it. Certain established companies, like Progressive, have already begun to take notice of the similarities between their commercial and personal customers' preferences. Progressive had also been around for decades when it began courting nonstandard auto customers with online sales. Clearly, some insurance companies are better positioned to take advantage of technological disruption than others. What's your company's status?