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  • December 2017
  • 10 minutes

Insurance of the Future – Where are we going?

  • Jaya Aiyappan
  • Patrick Reen
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In Brief

What disruptive forces will insurers need to confront to compete? And what changes are already upon us? A summary of the changes afoot and the transformations ahead, from consumer engagement and underwriting to claims.

Brian Johnson, founder of neuroscience start-up Kernel, states it best when describing the impact of digital transformation: “The future is like a category five hurricane that’s going to bear down on us with so much force the single greatest thing we can do as a species is work on our adaptability to change.”

Disrupters are not necessarily a bad thing – throughout history, it is the human ability to deal with disrupters that has resulted in some of mankind’s greatest innovations and adaptations. As significant as societal changes were, the Industrial Revolution, for example, resulted in the growth of cities, the creation of new occupations, the ability for mass production, and the growth in banking and finance.

So what does this mean for insurers, and what are some of the disruptors we are currently dealing with? This article summarizes some of the changes we anticipate occurring in consumer behaviour, underwriting, claims and the competitive environment in the future. But first, let’s look at change that has already occurred around us.

  • Changing demographics and evolving consumer needs. The Japanese population is aging, while segments of the populations in China and India are surging. Meanwhile, there are decreasing levels of insurance cover globally. In Australia and New Zealand, we are seeing greater consumer awareness of the need for cover in both the retail and group space, perhaps along with the frustration that it isn’t affordable. This leads to an increased demand for super-based insurance products, tailored to customer needs – and at a price that doesn’t erode retirement savings. In addition, consumer expectations regarding service offerings have increased as insurers have moved to offer greater, and more diversified, customer-focused services.
  • Changing competitive marketplace. There has been a torrent of change in the marketplace as mergers, divestments, new entrants, regulatory modifications and increasing self-regulation have taken place. Several banks with subsidiary life and wealth management divisions have already divested from developing life insurance products, or are considering doing so. Instead they are looking to distribution via specialist life insurance providers and underwriters who may be better able to understand and manage evolving risks and provide a more specialised service to their customer. At the same time, one super fund has started its own life business, underwriting its customer base directly.
  • Emerging challengers. New challengers to the traditional life insurer are emerging. Some of these start-ups are building on the moral foundation of the insurance industry – reminding consumers that when it works well, insurance is a social good provided in times of great need and uncertainty. The sharing economy is rediscovering the peer-to-peer nature of insurance, which has been around since the very early days of the world’s first modern life insurer, Amicable Life (founded in 1706), where member fees were divided among the heirs of the deceased.
  • Medical advances. New capabilities in diagnosing and treating illness mean that events once considered significantly traumatic are now less so, or are likely to become chronic conditions instead of terminal ones. Advances in genetics1 translate into a more refined understanding of the risks faced by individual consumers. This may create a potential asymmetry of information between the applicant and the insurance company. Placing unreasonable constraints on the insurer’s access to this information may limit the opportunity to provide tailored products to individuals and more appropriate risk pricing.
  • Technological changes in the nature of work. The nature of work is changing. A high proportion of tasks performed in technical occupations and some traditionally middle-class jobs are expected to be automated, changing the nature of risks faced by workers by removing some dangerous or sedentary functions. Work functions are changing so rapidly, in fact, that some jobs that didn’t exist 10 years ago (think: Uber driver) might cease to exist in another 10 years’ time. The risks faced by workers in new or as yet non-existent jobs continue to evolve and will take time to understand and insure.

With so much change already, what could the future look like?

The future of the consumer

Companies such as Amazon and Alibaba have revolutionised customer interaction and what consumers expect in terms of response rates and customer turn-arounds. The array of goods and services, available in a short period of time, with multiple offerings is continually expanding.

Flexible product and service offerings are now the expectation, not the exception, and consumers are accustomed to making decisions for themselves using data available to them in real time. Insurers must adapt to these changing expectations and not only develop products that address the consumer need, but also deliver these in a timely manner. How products are delivered to the consumer is also changing.

Consumer interaction with insurers will be a significant disrupter. There has been a 36% decline over the last six years in the number of U.K. consumers using independent financial advisors or mortgage providers when buying life insurance.2 The number of people buying insurance directly has doubled since 2011, with 29% of people making decisions independently. This U.K. survey by Direct Line shows a typical consumer decision hierarchy exhibited when considering insurance providers:

  1. If insurer can meet their coverage needs
  2. Trust
  3. Budget compared to cover
  4. Healthy living rewards
  5. Payout rate
  6. Services
  7. Financial incentives

Findings from an internationally focused report entitled “World Insurance Report 2017,”3 which covers developments in both the life and general insurance industries indicate:

  • “Consumers prefer digital touchpoints when making insurance transactions… and value services that are convenient, agile and personalised”
  • 42% of tech-proficient customers say they are likely to buy another insurance product, compared to 20% of other customers

The future of underwriting

Traditional underwriting practices involved paper applications, medical examinations and then a decision. While insurers have recently been providing quicker reviews and decisions via tele-underwriting and online applications, can we anticipate a time when application and acceptance are instantaneous, without the need for blood tests/results? Insurers can also take advantage of the connectivity between people, the sharing of information, and the merging of data for new sources of information from which to stratify mortality risk.

In an interconnected world, new sources of information such as a person’s social media posts may be utilised in the future by companies to further assist in assessing an individual’s risk, rather than relying only on data available from the usual databases. A recent report in the U.K. newspaper The Guardian projects the future impact of automation and customer connectivity on a range of different industries and jobs .4 It explains how, even in the sectors of insurance advice and operations, companies such as Aviva are exploring different means of both interacting with customers and utilising data which may become available. The Guardian reports that Aviva’s chief digital officer, Andrew Brem, says that the company “has investments in tech start-ups which are using Artificial Intelligence (AI) to speed up how Aviva might amass information about people.” He says he can’t give away the details, but one start-up is working on applying AI to selfies. “From the selfie, the software can, for example, make judgments about your body mass index,” he says. “So you don’t have to get someone to measure you. These are experimental things, but we want to experiment.”

Within the context of providing cover, insurers must demonstrate they are agile enough to take advantage of the new technology to deliver faster decisions and engage on an ongoing basis with the customer. As an example, some insurers are already utilising data to reward customers for undertaking programs that enhance their health, e.g. getting points allocated via Fitbit for walking a minimum number of steps per day, or receiving a discount on their premiums if their annual BMI is within the healthy range. 

The future of claims management

As with all insurance opportunities, things are moving quickly and problems are not being broken down into the traditional spheres of distribution, claims management and underwriting. Solutions are often being considered in tandem and innovative proposals are emerging. New Zealand5 and Australian6 start-ups are separately piloting technology that allows consumers to apply for a policy and make a claim by interacting with a chat-bot, which asks a series of questions in order to appropriately underwrite at the sales stage and/or detect fraud at the claims stage. Local start-ups such as these appear to be replicating the much-hyped journey of the U.S.-based Lemonade,7 which promises “instant everything,” including issuing a policy in 90 seconds and paying out a claim in 3 seconds. Of course, the work of this U.S. disruptor is primarily in the area of general insurance. Due to the different nature of the products, it is currently regarded as being harder to underwrite applications and assess claims on life insurance than on general insurance products, and consequently many of the solutions being piloted are currently focussed in the general insurance space. Nevertheless, the situation is constantly evolving, and what is now seen as too difficult may, in a few years, be readily achieved.

The future of competition: what may incumbents and new entrants be doing in the future?

At a 2017 ANZIIF conference8 on Insurtech earlier in the year, George Kesselman from Insurtech Asia suggested that the logical space for innovation in the next five years will be around the problems of:

  • Customer acquisition and engagement
  • Underwriting process
  • Fraud detection and prevention

Willis Towers Watson in its 2017 second-quarter Insurtech briefing9 highlighted that some industries are rediscovering that the customer is central to their value chain. As a result, in the insurance industries the focus seems to be shifting even more rapidly towards the core business of managing the customer experience. In his introduction to this Insurtech report, Willis Towers Watson Securities’ Chief Executive Officer, Rafal Walkiewicz, noted: “In the search for value, investors are first asking questions about where the revolution will begin. Is it the new approach to distribution that will make the industry unrecognisable in the future? Or is it a different approach to underwriting? Or is it the ability to effectively securitise risk and find access to the cheapest possible capital?”

Incumbent life insurers in Australia are arguably recognising this challenge and increasing their focus on distribution and customer satisfaction. In this way, some banks that had previously developed life products and managed and priced for the underlying risks believe that they can outsource these functions and instead focus on using their wealth of customer-specific data to target specialised insurance products and services to their customer base.

Life insurers are also looking at opportunities to market/cross-sell products. AIA Australia has already ventured down this path with a partnership between AIA, not-for-profit health fund GMHBA, and South African financial services provider Discovery with the launch of myOwn, which offers a broad range of health insurance cover options bundled together within AIA’s Vitality health and wellness program. Other insurers may follow such changes, seeking out other opportunities to cross-sell insurance.

Insurers also have opportunities to utilise their digital platforms to cross-sell. Rakuten, a Japanese e-commerce company,10 has been selling life insurance for a few years now, leveraging its customer data and digital platform, while Air Asia is utilising its strong digital platform to cross-sell insurance products through Tune Insurance.

Insurtech is a hot-topic with seminars occurring regularly throughout the insurance world. There are several incubators for start-ups in Australia, many pairing with incumbents for guidance and funding. While it remains hard for new players to enter the insurance space due to the stringent capital and regulatory requirements, many still remain interested in the opportunities to engage with the industry. Funding and interest in developments have increased. According to the 2017 Q2 Insurtech Report, insurtech funding exceeded USD$1 billion for the first half of the year, with the majority being in the life and health sectors. This level of activity includes 31 investments in the second quarter by incumbent insurers and reinsurers in private technology-related transactions, which was the highest level since the survey commenced in 2012.9

What all of this means is that the pace of technological change for the life insurance industry is likely to become even more rapid and that if any problems develop they may need to be tackled through trial and error (a process that can also be expedited via technology). As we mentioned at the beginning of this article, though, major disruptions typically lead to greater quality of life. This future calls upon us to be at our best in adapting and in embracing innovation, and guarantees that it will be exciting!

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Meet the Authors & Experts

Jaya Aiyappan
Jaya Aiyappan
Claims Specialist Support Team Manager (former), RGA Australia
Patrick Reen
Research Actuary, RGA Australia