Insurance Digital Transformation: Preventing, Not Compensating, Loss
This blog posted on the Digitalist 9.14.2016
In 1666, the Great Fire of London swept through central London, destroying much of the city over a three-day period. Amidst the rubble, a new business emerged: insurance sales for loss compensation.
Over the last five centuries, this business model has remained virtually unchanged: The vast majority of today’s insurance companies still focus on loss compensation. But thanks to disruptive technology, this model is finally changing. The digital economy is rewriting the rules of insurance. The new business model is “digital first, customer first.” Insurance companies can no longer focus on products and risk. They must embrace lifestyle and opportunity, moving from loss compensation to loss prevention.
How the digital economy is reshaping insurance
For centuries, insurance sales have followed a simple business model: The consumer has an ongoing relationship with their agent or broker, but very little contact with the actual insurer. Insurance offerings are notoriously difficult to understand. Insured objects like homes or vehicles are disconnected from the insurer. The policy itself is a conditional promise to make monetary compensation in the event of a loss. Historically, this approach makes sense. Loss compensation and risk protection were the only way to offer insurance. Insurance was reactive rather than proactive.
The digital economy is shifting insurance from a reactive to a proactive mode with a new focus on risk prevention. Thanks to rapid technological advancement, it is now feasible to actually increase wellness and safety. Customers and their digital lifestyles are now real, and constant connectivity to objects being insured is becoming the norm.
From fitness trackers to auto telematics, real-time data is here. At the same time, customers are relying on technology to make purchases and plan life events. This increased demand for personalized services is creating opportunities for new revenue channels and disruptive business models. Business models are being transformed to offer new products and services, such as “pay as you behave” tools. Driverless cars and fitness-based health insurance is on the horizon.
Consider the following:
- Esurance insures 5 million people with its online-only business.
- Haven Life now approves consumers for term life policies in 20 minutes.
- State Farm is partnering with ADT for enhanced homeowners insurance and connected homes.
- Volvo, Mercedes Benz and Google have all announced they will cover damage caused by self-driving cars, effectively cutting traditional auto insurance providers out of the loop.
Big Data drives loss prevention innovation
By 2019, an estimated 2.5 billion people will be connected on personal and business social networks worldwide. An estimated 200 billion devices will be linked to each other through the Internet of Things. Already, connected cars, homes, and health are enabling a connected digital economy that’s changing how we work, live, and function as a global society. Consumers expect insurers to address all their needs while securing their safety and improving their wellness.
The ubiquitous adoption of digital technologies is providing new opportunities for additional premiums, improved customer experience, increasing governance, and better risk selection and loss prevention. To compete, insurance companies must find a way to access and process telemetric data from devices and sensors, stream real-time data from social media and external sources such as weather, and monitor data from the explosion of wearables in the public and industrial domain. In short, insurance companies must use this explosion of information to turn data into insights.
So what does this new world of loss prevention look like? Insurers will use claims-management automation to help predict and prevent damage. They will apply real-time algorithmic computing technologies to process data from GPS, mobile, and wearable devices. They will rely on continuous algorithmic analysis to search for sales opportunities, manage risk, and ensure consumer loyalty. They will provide personalized pricing based on underwriting activities.
Next steps: Achieving operational agility for Big Data management
Insurers know the IoT is radically changing the nature of risk coverage, but many remain unsure how to transition from risk protection to risk prevention. The new insurance business model not only requires a shift in business mindset and model, but also requires new operational agility to manage big data. Agile Big Data management is essential to better risk management and delivering the products and services consumers demand. But older IT systems were developed in a world that “simply could not envision the volume, velocity, and variety of this data,” warns TIBCO.
Reimagining business models and transforming business processes cannot be accomplished without a data management partner that can supply innovation allowing real-time access and processing across this sea of new information. These innovations are transforming restrictive legacy environments into modern connected platforms that help insurers leapfrog the market. Big Data management is key to achieving operational agility and shifting to loss prevention.
Download our insurance white paper How Insurers Can Prepare for the Digital Revolution today to see how you can develop an insurance business that’s ready to meet the needs of the digital world.