Data is Changing Everything for Insurance

The word “tradition” isn’t going to carry much weight in the insurance industry for very long. Outlooks and trends for the next five to ten years project significant changes in the entire structure of risk analysis, which will lead to a business model overhaul for just about every insurance firm.

One doesn’t have to look very far to learn what is driving all the change – it’s data. Or, more accurately, it’s an “explosion of data” that will result from an increasing level of connectivity between people and their devices. In 2017, there were about 27 billion connected devices in use, according to MarTech Advisor, a California-based marketing and technology publication. By 2030, this number is expected to be over 125 billion, or roughly about 15 connected devices per person.

That, potentially, is a lot of valuable information for the insurance sector, enabling risk to be qualified and quantified down to the individual. How is this emerging level of precision going to reshape the industry over the next five years? Ten? Separate reports from two leading international organizations can help us understand what’s coming.

Five-Year Outlook

The IBM Institute for Business Value (IBV), a global business research organization, published a report that described some of the near-term changes coming to the insurance industry and the uncertainty that many companies are experiencing. The report itself was built using several IBV studies from the past few years, and largely focused on the foreseeable impact of two key innovations: the expanding use of cognitive computing (AI) and the decentralization of systems and decision-making.

• The decentralization of systems refers to the use of a vast network of sensor-equipped devices that use local information to achieve overall global goals.
• Cognitive computing refers to systems that can learn, reason, and interact with humans. According to IBV, technology such as this can remake business processes and is expected to reach maturity by 2025. An earlier survey found that about 90% of top-performing insurers say they expect cognitive technologies to have a strong impact on their revenue models and 71% say they have already started using these technologies.

Based on the way these two elements evolve, the outlook for 2025 could be one of several different scenarios. Since no one can be sure which, the authors recommended several “no-regret” recommendations:

• “Build a war chest by embracing cannibalization.” (Yes, that’s how they said that.) Basically, it means that existing systems will need to be broken down into components, reducing expenses and building flexibility.
• Prepare for partnerships.
• “Build high-beam headlights.” Know where you need to bring together tech, capability, and investment.
• Embrace innovation.

Ten-Year Outlook

McKinsey & Company, a global management consulting firm, published a report that described an almost science fiction-like future for insurance wherein risk assessment and pricing could occur almost instantly on an individual customer basis. Authors imagined a scenario wherein an individual with a self-driving automobile decides to switch to a manual driving mode. Instantly, the mobility insurer provides a potential route with a lower likelihood of accidents while simultaneously calculating his risk adjustment and auto-billing his bank account, adjusting his life insurance premium, and more. It might sound crazy, but it could be a reality by 2030. Four trends could make this a reality:

• The “explosion of data” from connected devices. Authors said that increased data from more and more devices will “allow carriers to understand their clients more deeply, resulting in new product categories, more personalized pricing, and increasingly real-time service delivery.”
• Robots will change risk. More robots in industry and our daily lives will change risk and customer expectations, enabling new product channels.
• Data will be shared. More data will mean more sharing opportunities between public and private networks. So, data could have multiple use cases under common regulations.
• Cognitive tech. With models that constantly learn and adapt, new product categories will be able to respond to risks in real time.

To prepare for all of the change that’s coming in the next decade, McKinsey authors outlined four key strategies that companies should begin now:

• Get smart on AI. Now is the time to be investing in and developing your firm’s cognitive technology to build a greater understanding of what disruptions may occur. Pilot projects are recommended.
• Begin a strategic plan. Decide how you’re going to use technology to support your business strategy. The plan should outline a roadmap of AI pilots.
• Create a comprehensive data strategy. Data will be your most valuable asset. A multi-faceted procurement strategy will be needed, likely involving several partners.
• Create the right talent and tech infrastructure. In addition to reskilling programs, companies will likely need external partners on this front as well to develop their new workforce.

This Race Has Begun

The insurance innovation arms race has already begun and it’s going to move fast. Ten years from now, insurance will be a completely different ballgame than what we see today, likely more integrated with technology than previous generations ever thought possible. To get your company ready for whatever the future brings, you’ll need lay the groundwork for flexibility and adaptability today.