New Research from BCG and Morgan Stanley Finds That Emerging Technologies Are Disrupting the Insurance Sector, Forcing Insurers to Develop Business Models That Drive More Frequent Consumer Interactions
LONDON—The insurance industry is on the brink of a major technology-driven change, which has the potential to fundamentally change the business model of insurance companies across the globe. These are the findings of a new joint report published today by The Boston Consulting Group and Morgan Stanley. The insurers that embrace these disruptions will see major opportunities; those that lag behind in adapting to the new digital environment face significant risks.
Although the insurance industry has been slow to react to emerging technologies, insurers’ inherent strengths—strong brands, ownership of distribution, and expertise in pricing and underwriting— position them to use technology to successfully create more engaging and compelling customer offers. The report’s findings are the result of extensive research by both the insurance and technology groups at Morgan Stanley and BCG globally. Over recent months, the authors interviewed 56 senior executives of insurance companies and technology providers and surveyed global insurance consumers in 12 countries to assess perceptions about technology.
“While some aspects of technological change—such as improved operating efficiency, the need to engage creatively with customers digitally, and increased disintermediation—are common to many industries, we see several insurance-specific challenges,” Jon Hocking, head of the European insurance equity research team at Morgan Stanley, commented. “Insurance is fundamentally about the pricing and selection of risk. We believe that the Internet of Things and big data will change the types of data that insurers use to assess risk, the way in which it is analyzed, the way claims are notified and managed, and ultimately the size and structure of the actual risk pools.”
The research finds that home and motor risk pools could fall by $62 billion to $109 billion—equivalent to 5 to 9 percent of global nonlife premiums (excluding health). However, emergent risks (such as cyber security) and more flexible insurance contracts could offset some of this decline.
Property and casualty (P&C) insurance is likely to see the biggest long-term impact from technology disruptions. “We expect that the P&C industry will move from actuarial risk assessment using statistical techniques to structural risk modeling based on real-time observations,” said Michael Niddam, a partner at BCG. “Similar changes are likely to be seen over time in health insurance and life protection, while in the savings business online distribution will create greater price transparency and erode margins.”
Driving a Step Change in Customer Engagement
The global survey revealed that more than 50 percent of consumers interact with their insurer either once a year or not at all. “While there are some positive areas, consumers’ overall digital experience with insurers lags that of other industries—particularly when it comes to ‘moments of truth’ such as paying claims,” said Jean-Christophe Gard, a partner at BCG. The survey also highlighted significant unmet needs, as consumers regarded many current products as expensive and inflexible. There is some encouraging news, however, as consumers expressed willingness to consider innovative products, with younger and more affluent customers most inclined.
Despite the challenges, the research identified ample opportunities for insurers. For example, it finds a significant number of applications in insurance for the connected sensors and devices that comprise the Internet of Things. “The Internet of Things is likely to radically reshape product propositions in insurance, more so than in asset management and banking, and reduce the size of global risk pools,” said Adam Wood, head of Morgan Stanley’s European technology software and services equity-research team. “Inexpensive connected sensors have the potential to transform offerings in motor insurance and in the home, health, and industrial settings. Insurers will be able to collect new data sets and assess risk in completely different ways. In some instances they will be able to act upon a risk in real time. We also see the potential for the Internet of Things to help insurers change the frequency and methods they use to communicate with customers—driving cross-selling or retention rates. Partnerships are likely to be critical here, since new ecosystems will be needed in, for example, home and health. Finally, there are significant financial implications for insurers. Our model of a ‘digitally born’ insurer suggests that embracing digitization could significantly reduce both expense and loss ratios.”
Many of the emerging technology-led products in insurance—such as the connected home and telematics—lend themselves to an ecosystem approach in which insurers form partnerships with technology providers. However, insurers are not necessarily the natural hosts of these ecosystems. For example, the report notes that several technology companies are developing connected-home solutions. “Ecosystems are likely to become increasingly important for connected devices in the car and home and in health care, and insurers risk being left out if they don’t move rapidly to build partnerships,” said Morgan Stanley’s Jon Hocking. “There is a risk that new entrants will come into the insurance industry—potentially leveraging far more detailed customer insights than are currently available to insurers. We see already a lot of innovations showing the way, as well as a few significant moves in this direction. The long-term result could be lower returns as insurers lose control of the customer and become more marginalized providers of capital.”
The report also provides an in-depth discussion of the implications for technology spending. “We expect technology spending to increase modestly, with most insurers looking to reallocate spending from legacy to digital initiatives,” said BCG’s Michael Niddam. “Software providers have opportunities in interaction and distribution channels, as well in core systems. Analytics also has major potential, particularly in contextualising data collected via telematics and the Internet of Things.”
To defend their markets, insurers must build new business models focused on meeting consumers’ expectations for digital interactions. The report emphasizes the importance of increasing the industry’s agility. Inflexible legacy systems—which make it hard to interact with customers through digital channels or to incorporate new types of data feeds—will increasingly become a competitive disadvantage. Insurers also need to identify and sign up suitable partners to develop more immersive ecosystem offerings based on the Internet of Things. “The biggest winners will be insurers with the foresight to identify new game-changing technology that may not be ready for immediate commercialization but could have a significant long-term impact on the industry,” said Jean-Christophe Gard of BCG.
A copy of the report can be downloaded at www.bcgperspectives.com.
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