Talk of insurance industry digitalization is often focused exclusively on technologies. Automation and straight through processing will increase insurance industry efficiency in the future. But what are the effects of digital transformation on the business models of insurance companies and their role in society?
For more than 40 years, The Geneva Association, a non-profit organization, has been researching the changes in the insurance industry, monitoring the trends and societal changes, and analyzing the effect of the social and economic framework. Currently, this also includes the impact of digitalization on the insurance industry.
Insurance companies in the digital age
In its latest report "Insurance in the Digital Age," the organization addresses the question of what effects digitalization will have on both the business models of insurance companies and on the industry's role in society.
The study's authors expect that insurtech companies will pose clear challenges for established insurance companies at the interface with customers. The jury is still out on whether the partnerships with startups will be positive in the long-term for established companies. There is an undeniable risk that this will only increase competition.
New digital technologies, such as the Internet of Things, will change the business models of insurance companies and give rise to new products.
- Consumers will be able to insure risks just before incurring them. Instead of maintaining a policy for years to insure a risk that exists for just a few weeks, there will be offers that can be accepted easily on short notice on a smartphone or another device.
- Insurance rates will be guided by consumer behavior. Consumers who drive their car just a few hours a month will have to pay less than others who use their car daily. This will be made possible by the connection of cars to the Internet.
- Insurance will possibly be part of another business model. Cuvva, from the United Kingdom, offers its customers the option of lending their car to friends and acquaintances even for just a few hours, and offers appropriate insurance coverage for this period of time.
Digitalization is also a question of ethics
Digitalization results in tons of data. With it comes not just the question of compliance, such as with the GDPR regulations, but ethical questions as well.
If the insureds provide information about their habits, as, for example, is the case with health apps, the insurance company can also try to influence consumer behavior. Then, insurance companies may transform from purely loss-adjusting service providers to consultants and lifestyle coaches that provide consumers with tips on a better lifestyle, and thus ultimately minimize risks.
The downside of data collection could also be that insurance companies reject certain risks or refuse to keep insuring them faster. In this case, automated decision processes will make it difficult for consumers to take out new policies. Although the rejection of risks is nothing new in the insurance industry, the study assumes that these questions will become even more exacerbated in the future.
The flood of data will even have an impact on potential risks. The more knowledge there is about usage habits, the better the risks can be kept under control. Some will also disappear entirely in the course of time, for example, with the increase of self-driving cars that recognize each other and thus avoid accidents. But other risks will emerge as a result of digitalization. Consumers will expect, and rightly so, that modern insurance companies will have an answer for these risks. Identity theft insurance is just the start of it. "Digital burglaries" of smart homes or cyberattacks that cripple the infrastructure, as burst water mains do today, cannot be ruled out.
Insurance companies as well as fintech and insurtech or IT companies will compile data from various sources. We can assume that legal practice will lag behind technical possibilities, as is the case today, to some extent. This poses concrete questions about ethics, within the economy as well. How should we handle an imminent "monopoly status" of a market player, which appears to have collected more information about consumers than all the other players?
Consumer trust will start to gain importance. To win over and keep the trust, it will be fundamentally important for insurance companies to create maximum transparency about the data that is being collected and processed, to document the responsible handling of information, and to use data only for the purposes disclosed to customers. In this context, one should not forget that, in the future, disappointed customers will be able to find another insurance provider of their choice with one click on their smartphones.