When I was asked to prepare for my 9-minute TED-style talk at a recent Digital Industries Summit, I thought that in order to look at the future of insurance, it might be instructive to look at the past. I didn’t realize that looking back would take me all the way to the 1600s.
Where it all began
This year, on the 30th of August 2016, there was a celebration in London to commemorate the 350th anniversary of the Great Fire of London during which a large wooden floating replica of London as it was in 1666 was built and floated on the Thames – and then set on fire! The original Great Fire of London destroyed most of the city, and most people and businesses lost everything they had. Almost nothing was insured. Insurance had existed before but it was designed around large commercial risks such as shipping. It was a catastrophe that changed the course of English history and also led to the set up of the world’s first personal-lines insurance company: ‘The Insurance Office’. (It was also the birth of the first fire brigade.)
The Insurance Office devised a business model that studied risk very closely (not just fire – also storms, flooding, burglary, accidents, property damage, injury, death and many other risks) and through some pretty fancy mathematics (now called actuarial science) calculated the probability of something very bad happening and pricing that risk. They could thereby sell a policy to cover the risk and the costs to the insurer (plus a margin of profit for the insurance company.)
Reducing versus preventing risk
Ever since then people have felt much safer and the insurance industry has done a tremendous job of raising the quality of life and of enabling modern business to hedge risk. People take insurance for granted today– but it is indeed one of the great inventions of mankind without which our modern society would not function. For example, we wouldn’t be able to get onto an airplane, build a subway or take a loan on a home – no one would carry that much risk.
But are we really safer?
The risk of a house burning down is still the same whether it is insured or not. The only thing insurance actually does is compensate you in the event of a loss – it does not physically prevent the fire. That is why we call insurance a financial service – it deals primarily with the financial aspect of risk.
But what if your insurance policy actually made your home physically safer, your driving safer, made you healthier and live longer and could actually reduce physical risk?
Is that science fiction?
I believe we are at the dawn of such an age. Modern digital technology has the ability to make our lives and business much safer and will likely change the insurance industry more over the next 5 years than it has changed in the last 350.
Imagine if instead of just selling a policy to a customer and waiting (hopefully) for nothing to happen, we actually have the customer in the middle of a connected risk-reduction experience, with whom the insurer is in constant contact and servicing all security needs. All of the objects that the customer has insured are smart objects (smart homes, smart cars, smart appliances, smart health devices…) that can actually detect, alert, and mitigate risks automatically. The insurer and the objects communicate across all of the channels that the insured person prefers – digitally, in person, through social networks, or other channels. Providers such as police departments, security companies, sensor device manufacturers, risk experts, repair services, fire departments and car companies would all be networked into this context and could provide instant preventive risk reduction and mitigation services. Of course, risk cannot be completely eliminated and in the event of a catastrophe or accident, the insured person can still be indemnified financially to cover the loss.
This is not science fiction. It has already begun. We are starting to see many such models emerge. Insurance is evolving from pure financial loss-compensation to physical risk prevention.Insurers who manage to profitably establish and scale the next-generation business models centered around the consumer’s risk experience will change the industry forever.
Stay tuned for what will be a very exciting time in insurance.