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We’re well past simplistic disruptive thinking, where startups would present themselves as the Uber of X. The insurance sector is facing unprecedented change in a rapidly evolving environment. Energy transition, circular economy, urbanization, digitization: These trends have far-reaching consequences for the way we live and work. From sustainable investing to healthy living, from sensor revolution to climate change, the playing field has become incredibly varied and complex over a relatively short time. How is this playing out for the insurance sector?
Amid the abundance of sector reports by industry analysts, reinsurers, sector associations and consultancies, we provide you with a recap of what we believe are the key trends to monitor closely for 2022 and beyond.
Trend 1: Insurtech has matured and gains even more momentum
While insurtech has been around for some time, the past year's growth has been picking up substantially. We’re well past the days of simplistic disruptive thinking, where startups would present themselves as the Uber of X. Traditional insurers clearly understand the importance of becoming digital. And insurtechs have learned the underlying complexities of the insurance business model they aim to renew. It’s not all that easy, otherwise it would have been done by now!
The opportunity to transform traditional, legacy-driven processes remains massive, as is reflected in global investment transactions in insurtech – by the end of the third quarter of 2021, up another 23% from the year before and hitting $10 billion. The largest financing deals were Wefox (Germany, a digital insurance carrier, $650 million) and Bought by Many (U.K. pet insurance, $350 million). Compared with overall fintech data, insurance actually still remains an underinvested sector.
Reinsurers are increasingly become active through their own venture capital arms. Their urgency to develop solutions to build resilience in our turbulent environment (pun intended) is clear. In October 2021, Munich re-announced a $500 million fund to invest in early/growth stage companies across insurance and climate technology, cybersecurity and privacy (more on that later!), commercial and industrial equipment tech and the future of transportation.
Insurtechs will provide a continuous stream of innovative products and services to the sector, working with (re)insurers to improve their products or to access markets. Insurers will have to monitor closely how they can tap these opportunities to enhance their competitiveness, through incubation, partnerships or investment funds (e.g., the Achmea Innovation fund). We expect to see more collaboration between incumbents and new entrants as they often complement one another. At the same time, just as in other sectors, new entrants will continue to shake things up and trigger the incumbents to take action.
See also: How to Work With Insurtechs
Trend 2: The past is gone – the present is the best indicator for the future
Insurance is a long-term numbers game carefully balancing risks and premiums, traditionally using data sets with limitations in accuracy, reliability or predictive power. In a turbulent environment, historical patterns will no longer be a reliable predictor. This has implications for the way insurers collect their data for risk assessment and policy pricing.
Enter IoT, smart sensors and telematics -- and the ability to harness the data and link this to alerts, warning signs or smart workflows. Being able to register, connect, collect, analyze and understand data in often near-real time is a game changer for a data-driven sector like insurance.
The number of devices connected to the internet is expected to triple over just a few years – from 20 billion in 2017 to 60 billion in 2025 -- enabled by cloud computing, exponential growth in computational power and ever more powerful mobile internet (5G).
The Internet of Things (IoT) generates vast amounts of data through sensors in networks, cameras, industrial sensors, mobile phones, traffic lights, cars, bicycles, smart home appliances and devices, sea containers and postal packages. Sensors help to reduce failures, incidents or accidents. There are endless possibilities and of course all kinds of privacy concerns that require attention. Still, looking at personal lines: Each year the proportion of customers willing to share data (home, car, health) in return for rewards or value is increasing as the digital lifestyle becomes more widespread.
Harnessing real-time alerts in the context of comfort, safety and insurance will become a key capability for insurance providers. Data may serve to boost customer engagement, nudge customer behavior (e.g. safer driving) and trigger rapid response services. Telematics and fleet management solutions have become mainstream, but every other insurance sector will become smart or connected – there are simply too many benefits. This way, insurance becomes augmented, providing prevention and mitigation of a wide range risks while closing the engagement gap to customers. Insurers that are not able to process the new data streams will find themselves at a disadvantage.
There are not only benefits, there are also serious concerns and risks with these developments. There will be a continued discussion on the ethical framework for leveraging ubiquitous sensor data. Where lies the balance between personalized profiles and solidarity? The technological possibilities are taking us into uncharted waters, and we have to find our bearings to plot a course.
There is also the necessity to deal with a parallel increase in cybercrime. Insurance solutions are augmented with a wide range of IT security services to prevent or mitigate cyber-related incidents. Cyber resilience is a critical element as countermeasure against deliberate cyberattacks (ransomware, phishing) but also prevents unwanted incidents causing business interruptions. The cyber insurance market is expected to grow at a record pace in the coming years, and insurers need to arm themselves and their policy holders.
Trend #3: Insurance is more attractive when embedded in something else
Insurance has always been a necessity -- either by law or because it’s simply smart to have. It's not particularly appealing or attractive, but if you add insurance to an existing transaction where people buy or rent something they actually want, that helps a lot!
Embedding insurance has been around for decades: Think bancassurance or travel insurance you bought when booking a flight. What has changed is that this has now been digitized, turned into a fully automated workflow, reducing unit costs to an absolute minimum and being incredibly scalable through modern technology. So it now becomes viable to offer day-to-day travel insurance or extended guarantees right in your digital shopping cart. These policies can be switched with a swipe or even automatically. Embedding insurance solves the typical drawbacks of traditional insurance: It’s fast, easy and personalized. And becoming an additional revenue stream for all kinds of organizations.
Leveraging driver data to make better underwriting decisions is done by Tesla. Now that people are increasingly shopping online (COVID-19 being one of the drivers), there will be a wide range of opportunities for embedding insurance in trusted digital channels.
While embedded insurance is focused on the point of sales, parametric insurance is a similar way simplifying the claims process. If a certain index (wind speed, rainfall, water level, crop index) reaches a threshold, a payout is triggered automatically.
Trend #4: (Re)insurers accept their responsibility to build climate resilience
The reality of climate change and the need to increase resilience against extreme weather events is something that is becoming a hot topic for the insurance sector. Insurance Europe, the European insurance and reinsurance federation, issued a statement for COP26 expressing their unequivocal support to the collective global momentum to combat climate change, in line with the Paris agreement, the European Green Deal and Europe’s targets to reduce its greenhouse gas emissions by 55% by 2030 and achieve a net-zero economy by 2050.
2021 is expected to become one of the costliest years in terms of weather-related losses following floods, wildfires, hurricanes, hail and extreme cold, with tremendous human costs but also affecting economies for years to come. Insurability is already becoming problematic in some coastal regions, suffering from more frequent and extreme disasters. The moment that an insurer and its reinsurer will not be able to fulfill their obligations following a catastrophe is getting closer.
The insurance sector has a pivotal role in dealing with the effects of climate change, well beyond disaster recovery -- from an investment perspective, by adopting environment, social and governance (ESG) strategies; by developing solutions that provide protection against climate-related events; by providing investment capacity for the transition toward a more sustainable economy; and by offering risk management expertise to build awareness, reduce exposure and increase resilience. The insurance sector has a clear understanding of the long-term costs of unmitigated climate change. With a direct financial interest to act, the industry will be an important element in the transition to a more sustainable planet.
See also: Insurtech Is Much More Than Just Hype
It may sound counter-intuitive, but digital technology may just be the thing to restore or enhance the customer relationship. Digital flows can reduce the friction in quoting and binding policies or radically reduce lead times in handling claims, replacing on-site with remote inspections. This does not mean the end of personal channels. There are complex situations and products that call for advisers and face-to-face discussions. And while personal contact may have become too expensive or time-consuming, having a brief online meeting can be an excellent alternative. But simple, administrative tasks need to be automated, as there is no sustainable competitive advantage in performing these by hand.
We’re living in a world of digital transformation, with insurtechs looking to exploit inefficiencies across the insurance value chains. It’s critical for all players to improve their digital capabilities. Insurers have essential qualities: capital, distribution channels, talent and a huge repository of knowledge and expertise. It’s becoming increasingly important to be able to harness those assets. The cost of falling behind isn't because you witness a sudden drop in revenues but because, to remain relevant in the long run, you must provide a great place to work for top talent and foster your position and relevance in today’s society.
We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run (Amara’s law). In other words: Change happens gradually, then suddenly. Do you also feel we’re now getting to the sudden part? We’re interested in your thoughts!
By Onno Bloemers (founding partner at First Day Advisory Group), Jochem Davids (CMO at CCS), Robbert Witteveen (founding partner at First Day Advisory Group). All authors are Insurtech Lead at Holland FinTech. Also published by Insurance Thought Leadership (ITL).