The global insurance protection gap is one of the most pressing issues facing our society. With this in mind, The Geneva Association has analysed the potential contribution of digital and mobile technologies to narrowing protection gaps in both mature and developing markets, through enhancing the awareness, affordability and appeal of insurance products and solutions. Dr Kai-Uwe Schanz and Dr Fabian Sommerrock share the Association’s recent research report which was complemented by and validated through 23 executive and expert interviews.
Rapid advances in connectivity, mobility, cloud computing, Big Data analytics and social networking offer a tremendous potential to narrow insurance protection gaps.
Another area where technology has proven effective in addressing protection gaps is behavioural insurance. This innovative form of insurance has helped address long-standing obstacles to efficient markets such as moral hazard and adverse selection. Peer-to-peer insurance, as offered, for example, by Friendsurance, goes in a similar direction by mitigating moral hazard and insurance fraud.
And, last but not least, parametric insurance, leveraging mobile and meteorological technology, can enable breakthroughs in agricultural insurance.
Mr Rolf Hüppi, Founder, Chairman & CEO, ParaLife said: “I see four main areas where technology has already contributed to narrowing protection gaps: firstly, in climate insurance based on parametric covers, secondly through mobile distribution of microinsurance, thirdly through enabling points of sales such as retail networks and, fourthly, through Internet-driven product design and sales in more mature markets.”
Towards the virtual value chain
Reaping these benefits on behalf of their customers requires insurers to digitise their existing value chains (see Figure 1).
The impact of digitisation across the value chain is pervasive, permeating the areas of pre-purchase, sales and operations. Firstly, it reshapes the way customers discover and perceive insurance propositions pre-purchase. Secondly, sales are enhanced by dropping costs as a result of disintermediation, and increased conversion of leads on the back of tailored solutions and ‘digitally enhanced’ physical distribution channels. Thirdly, the adoption of straight-through-processing can lead to a massive reduction in back-office costs. Coupled with Big Data and predictive analytics, it can also translate into significant improvements of the claims ratio.
Addressing moral hazard
As many case studies demonstrate, digitisation makes it less likely that an insured will be more careless, behaving against the interest of other insureds, simply because they are protected. Big Data-enabled pricing based on risk sends a strong signal to the insured about their riskiness which is likely to encourage behavioural changes.
Currently, most insurers still use traditional actuarial methods and proxies for risk that rely on generalisations, for example, premiums that depend on age and gender. Modern technology, however, enables insurers to gauge individual, behavioural and real-time risk much more accurately, not only through monitoring devices but also through social media. As such, Big Data can mitigate moral hazard for those risks that can be controlled by the policyholder and, hence, make insurance markets operate more efficiently.
However, differential pricing in insurance markets can raise fundamental concerns about solidarity in society when major risk factors are outside an individual customer’s control. Life and health insurance are obvious examples.
Another intriguing notion is that Big Data might even be harnessed to expand the limits of insurability. It can kick-start new types of insurance that are currently not feasible due to informational constraints and moral hazard. Think of sophisticated index-based products, for example, where individual behaviour and the uncertainties surrounding it are no longer a road block.
Removing information asymmetries
In the digital age, traditional information asymmetries in insurance are bound to disappear, with both insurers and policyholders benefiting from much improved information and data sources at much lower cost.
Mr David Shrier, Managing Director, MIT Connection Science said: “By using behavioural indicators as a more meaningful way of assessing riskiness, insurers could safely and responsibly extend coverage to significantly more people, without assuming disproportionate risk, and narrow the insurance protection gap.”
Cutting transaction costs
By lowering first and foremost the cost of information gathering and processing, digitisation enables insurers to administer, underwrite and price risk as well as settle claims more accurately and efficiently. In competitive markets, insurers will have to pass their cost savings on to policyholders in the form of lower insurance premiums.
As insurance becomes more affordable, the digital revolution is set to allow for more insurance to be purchased.
The all-important regulatory response
Regulators, largely inexperienced in the digital space, are faced with a daunting challenge: how can one promote the development of financial technology, enhance traditional as well as facilitate new business models in the sector without conjuring up the prospect of failures and a loss of public confidence? How can a balance be struck between innovation and safety?
More specifically, regulators need to reconcile data protection and usage; they must define insurers’ scope for price differentiation in the age of Big Data and decide on the treatment of non-insurers engaging in insurance sales. The establishment of ‘regulatory sandboxes’ can go a long way for both regulators and regulated entities in building experience in this unchartered territory.
Conclusion and recommendations
Digitisation is a unique lever for insurers to develop more affordable, efficient and customer-centric products and solutions, thereby enhancing the societal value of insurance.
However, in order to achieve this – and pre-empt potentially disruptive new competitors – insurers need to step out of their comfort zone. The imperative of digitising the value chain is bound to present major challenges and even tribulations to incumbents, from managing channel conflicts to implementing headcount reductions in administrative functions.
Even though the insurance industry’s digital (r)evolution has just begun, technology has already contributed to narrowing protection gaps. Examples, as presented in the case studies of this report, include climate insurance based on parametric covers, mobile distribution of microinsurance and web-based product design and sales in more mature markets.
Dr Kai-Uwe Schanz is Special Advisor and Dr Fabian Sommerrock is Deputy Secretary General and Head of Insight, both at The Geneva Association.