One of the oldest industries in the world, the insurance industry is also one of the largest with just over $5 trillion in premiums held globally. While the traditional insurance business model has proven to be resilient in the face of various industrial revolutions, the digital revolution currently underway may change that.
According to a PwC insuretech report (PDF), three in four insurance companies, some of which are up to 300 years old, believe that some part of their business is at risk of disruption. The report also found that the biggest challenge established insurance companies face from disruption are margin pressures and loss of market share to insurtech startups.
Established insurance companies, while protected by massive balance sheets and legacy customers, are right to be concerned about the dual threat and opportunity posed by disruptive technologies in the insuretech space. For instance, an Accenture report found that 86% of insurers believe that they must innovate at an increasingly rapid pace to maintain a competitive edge.
How and where to innovate, however, remains the biggest dilemma insurance companies face. In this article, we look at three key technological advances that are reshaping the insurance industry. These technologies represent a strong starting point for traditional insurance companies considering a digital transformation strategy.
Artificial Intelligence (AI) and Machine Learning (ML)
With other industries rapidly adopting AI and ML capabilities to keep up with increasingly digitized customers, the insurance industry cannot afford to be left behind. A recent YouGov survey (PDF) found that 72% of respondents believe insurance companies use confusing language. A further 43% do not trust them, believing their services are self-serving.
To meet this challenge, insurtech startups are using AI and ML technologies to unravel these complexities. By integrating complex procedures and documents into AI-enabled tools like chatbots and robo-advisors, customers can easily delve into complex issues without having to go through copious amounts of documentation.
Consider the Silicon Valley insurtech startup Carpe Data. The company, recognizing the increasingly disparate sources of data that can be used to assess risk, provides insurance companies with data transformation tools built on AI. Such a company represents a valuable strategic partnership opportunity for an established traditional insurance company to leverage next-generation AI tools to build the policies of the future.
As AI is today considered an imperative that every business must undertake to maintain relevance, partnerships with leading Silicon Valley insurtech startups like Carpe Data remains a valuable means to bridging this widening chasm.
Sharing/ On-Demand Economy
BCG, in an industry opinion piece, notes that $23 billion has been invested in the sharing economy since 2010. Also noted is that Airbnb, which owns no hotels, is valued at $31 billion, the same as Marriott International, which owns thousands of hotels. What these two facts point to is the significance and influence of the sharing economy.
In insurance, this means more customers are looking for solutions that distribute the cost of insurance more effectively. For instance, many customers today are looking for insurance solutions that let them pay on demand. That is, a person wants to insure a camera only when they are at the beach and then switch off the insurance as soon as they get home and put the camera back in storage.
Trov, an insurtech startup based in Silicon Valley, offers this. As the sharing economy explodes, more people are choosing not to own expensive assets and instead rent them, creating a situation where a person renting an item does not want to buy comprehensive long-term insurance for it. Trov solves this challenge through an app that lets the user buy, cancel, switch on and switch off policies at any time, easily eliminating complex and lengthy processes that traditional policies would require.
It is easy to see why such a solution would be extremely attractive for a rising generation that has grown accustomed to taking Ubers and living in Airbnbs. Traditional insurance companies will do well to take note of this emerging trend of in-demand insurance and take the necessary steps to capture the opportunity.
Internet of Things (IoT)
IoT holds the biggest opportunity for insurance companies in the area of risk assessment and claims reduction. Current risk assessment models utilize historical data to predict the amount of risk a certain policy carries, resulting in risk prediction inefficiencies that cost the firm dearly in the form of claims.
IoT, on the other hand, promises to give insurance companies real-time data of insured assets, allowing for more accurate, predictive risk assessment. For instance, by installing a telematics device on a vehicle, an insurance company can vary policies upwards or downward based on how the vehicle is being driven and maintained.
Metromile, an insurtech startup headquartered in Silicon Valley installs a telematics device on vehicles it insures and then charges premiums based on miles driven. By approaching insurance in this way, the company allows users to make massive savings while still charging the same rate as a traditional insurer.
Another example of how IoT will influence insurance is the rising use of wearables by health insurance companies to track customer vitals and offer rebates for healthy habits while penalizing unhealthy habits. Insurance companies interested in including IoT capabilities in their offerings should consider visiting Silicon Valley to interact with and learn from insurtech startups harnessing the power of IoT.
Next-Generation Insurance Ecosystems
Innovative insurtech startups pose a clear and present danger to traditional insurance business models. With technologies like AI, ML, and IoT relentlessly transforming the emerging insurance ecosystem, insurance companies must also transform or risk losing market share. Key areas they will need to focus on include customer acquisition and engagement, an area insurtech startups are currently excelling in.
By adapting, insurance companies can unlock operational gains related to cost improvement, capital allocation and revenue generation. Doing this effectively will require insurance companies to constantly monitor emerging innovations in the industry and determine what best way to integrate these advances, whether through in-house development or acquiring or partnering with Silicon Valley insurtech startups.
Visit Silicon Valley Insurtech Startups
Silicon Valley Innovation Center understands the transformation the insurance industry is currently undergoing and helps corporations respond effectively by partnering with insurtech startups in Silicon Valley. To find out more about how you can visit Silicon Valley and experience, first hand, the groundbreaking insurtech innovations emerging in the area, click here or call us on +1(650) 274 -0214 to speak to an SVIC innovation tour specialist.