In the financial industry in general and the insurance sector in particular, traditional business models are increasingly coming under pressure – a trend that reflects technological, economic and social changes. At first glance, this represents a risk for insurance firms, since conventional business models such as life assurance are hardly profitable in this new environment. However, these changes can also be interpreted as creating an opportunity, making it possible to strike out on new paths.
Which innovative business models are already being used in the insurance sector and what sort of changes are set to follow? This article examines these questions.
THE CAUSES OF INSURANCE FIRMS’ BUSINESS MODEL-RELATED CHANGES
The transformation which is underway in the insurance sector is mainly attributable to three factors: technological, economic and social changes.
In terms of the technological environment, the development of digital channels is the main force driving this change. In the economic environment, the central banks’ persistently low interest rates in particular are putting pressure on the industry to adjust to this trend. Insurers are increasingly struggling with generating adequate returns on the capital market and offering life assurance policies with an attractive guaranteed interest rate. As a result, there has been a strong decline in life assurance portfolios, insurance contracts and new contracts over the past few years. In terms of the social environment, customers’ changing needs are driving this transformation, above all the increasing acceptance and use of digital communication. An empirical study has shown that most customers place the highest value on Internet-based communication channels (cf. Bain, p. 4). This reflects the need to be able to contact their insurance firm at any time and to be able to decide themselves when and where contracts are signed. Traditional forms of acquisition/marketing and customer management are unable to keep up with the online portals in this regard. The increased comparability of data which is associated with the emergence of comparison portals and customers’ increased demand for transparency is leading to increased price sensitivity and reduced levels of loyalty. The industry has to respond to this. Customer demands in the area of product design have also increased: customers now expect insurance products which are tailored to their needs.
A focus on cost alone on the part of insurers will hardly do justice to these changes. Instead, the key to sustainable competitive advantages lies in the capacity for innovation and, above all, in the ability to develop new business models that fit the changing environment. This will be all the more important since traditional insurance markets are showing signs of saturation and market entry barriers are declining due to digitalisation, thus resulting in increased competitive pressure.
CHANGE AS AN OPPORTUNITY: NEW BUSINESS MODELS IN THE INSURANCE INDUSTRY
Conversely, customers’ changed needs and new technologies offer the potential to successfully develop and implement new business models in the insurance sector.
In particular, this includes:
- telematics insurance
- short-term insurance
- “smart contracts” or parametric insurance products
Telematics, which is generally understood to mean linking up telecommunications with information technology, has recently become increasingly important in the development of new forms of insurance, particularly in the field of car insurance. In cases of “usage-based insurance” or “pay-as-you-drive”, premiums are individually calculated on the basis of the policyholder’s driving style. Data relating to the driver’s driving behaviour (e.g. speed, braking, night-time driving, acceleration, etc.) are saved, transmitted and evaluated in order to calculate a risk-adjusted premium. Additionally, this can also contribute to safe driving and a reduced accident rate. Telematics services can also be used in other areas of insurance, such as health insurance. Under the motto “pay-as-you-live”, health apps store data concerning the policyholder’s nutrition, exercise habits, sleeping patterns, etc. and transmit them either to service providers or directly to the insurer. They then evaluate this data and produce a health rating which is directly factored into the calculated premium. These IT-innovations make it possible to collect and evaluate customer data in order to satisfy the customers’ changed needs via individual premium calculation.
Short-term insurance policies are one way of combining data provided by social media with customers’ demand for online services. Within the scope of marketing and sales activities, (publicly accessible) social media posts (e.g. relating to holiday plans) can be taken into consideration when identifying customers’ needs so that tailored insurance policies can be offered accordingly. By using either an app or a website, customers can spontaneously satisfy their situational, short-term insurance needs through short-term insurance policies for a weekend trip or the like. In cooperation with various insurers, the InsurTech “AppSichern” offers products such as a 24-hour insurance policy to cover a car lent to a non-insured third party or a foreign health insurance for last-minute foreign trips.
Since short-term insurance policies are less complex and require fewer pages of contract text than conventional products, the former are also better suited for a contract entered into via smartphone, while still maintaining the necessary level of transparency.
New technologies (apps enabling policyholders to use their smartphones to submit damage claims) also enable efficiency gains and increased transparency in the claim notification and settlement process, thanks to “smart contracts” and parametric insurance products which are based on blockchain technology. A blockchain is a database which continuously registers and stores measurement data for transactions made by various parties. Since each transaction is based on the previous one, this enables verification of past transactions.
At the same time, manipulation of the data is difficult as the blockchain can be viewed by everyone involved. In the insurance sector, blockchains are being used to record insurance-relevant incidents in order to provide an automated, externally verifiable claims process.
The technology can be used in many different areas of the insurance industry. Regarding property and casualty insurance, for example, firms can process insurance claims against crop failure using the technology. Sensors on agricultural land measure rainfall over a particular period of time, sending their data to the blockchain. If the volume of precipitation falls short of a certain level, a damage claim will be submitted and processed. Payment will be made automatically, without the need for an expert’s involvement. This saves time and money, since verifying the claim internally is unnecessary due to the information already stored in the blockchain. Another way of using blockchain is demonstrated by the InsurTech firm “InsurETH”, which offers flight insurance policies. Here, data relating to flight delays and/or cancellations are collected for automatic claims processing. Household device and home contents insurance policies can also make use of this blockchain technology. The “Internet of Things” lets us connect our household devices, such as fridges, to the Internet, record data about them and send this to the database. The insurer can then identify, verify and pay out damage claims automatically.
THE RISE OF INSURTECHS
Together, the changes discussed above are leading to the increasing importance of InsurTechs for the insurance sector and existing insurance companies. Global investment in InsurTechs grew to a total of $ 985 million in Q2 2017, significantly more than the three preceding quarters combined ($ 784 million for Q3 2016, Q4 2016 and Q1 2017). In conjunction with this, many InsurTechs are beginning to launch business model-related partnerships with traditional insurance firms.
This represents a marked difference to the FinTechs in the banking sector, which are more often seen as disruptors. By partnering with traditional, trusted insurers, InsurTechs can make their innovative insurance products appeal to a wider consumer base. InsurTechs are taking on the role of “enablers”, helping the insurance companies to improve their products and processes.
Allianz, for example, is working with Simplesurance, a company that offers software for providing immediate insurance for products purchased online. InsurTech firm “One” offers completely digital insurances. According to the InsurTech, consumers can choose, arrange and pay for their policies within three minutes; algorithms are used to pay out on claims (see above). Another big name working with the InsurTechs is Munich Re, which now offers reinsurance policies for Simplesurance. At Wefox, an independent service platform with more than 100,000 customers, customers can use an app or web solution to manage their contracts/insurance policies, compare them and make changes. For products where further advice is needed, Wefox offers a personal consultation service, as the InsurTech firm integrates digital technology with the existing expertise of insurance brokers and insurance companies. These examples show that partnerships between traditional insurers and InsurTech firms are set to further increase in the fast-growing digital insurance market.
The examples above show how technological changes and partnerships with InsurTech firms can be used to develop efficient insurance products that are tailored to customers’ needs. Yet, despite the wide variety of options this is creating, traditional business models in insurance are not yet obsolete. Digital communication channels should be seen as an addition in the form of an omnichannel approach, rather than as something that will completely replace traditional direct selling via brokers, for the foreseeable future. It is simply not possible to arrange every kind of insurance policy via an app, especially when it comes to more complex products that require more in-depth consultation. Nonetheless, insurance companies must now make the effort to establish the internal organisational, technological and staffing conditions that will ensure they remain players in the constantly growing digital insurance market.
A German version of the article can be found here.