Insurance predictions 2016. Part 1 – Man, machines and in between
The ever-changing nature of the insurance industry makes it incredibly hard to predict what’s in store for the future.
Some predictions from the last few years have never transpired, whereas others have taken off at great speed. But as hard as it is to foresee the future, there is nothing stopping insurers from creating their own destiny by practising the ‘forewarn is forearmed’ strategy.
So what factors will shape the future for insurers?
The human factor will always remain the most important and influential one. People can affect change whether this is positively or negatively. Here are some factors that may affect human behaviour.
Long-term changes in global GDP distribution means greater urbanisation and continued growth of the ‘consuming classes’. By 2025, the number of people making purchases beyond their basic economic needs is expected to rise by up to 100%. Mixed with profound technological and demographic shifts, this future is set to change significantly.
If it’s one thing humans can do, it’s over indulge and in an area like energy consumption, this can have a negative impact on the environment. Life and health insurers should closely monitor environmental trends for a more accurate risk assessment.
Black Swan events
Linked to overindulgence comes global warming and while the insurance sector seems to do a fair job predicting and taking measures against known high severity/low-frequency events like floods or earthquakes, most of these measures fail to be helpful when it comes to, so-called, ‘Black Swan’ events; abnormal and unpredictable. Over the next decade, the insurance sector may become overwhelmed with uncorrelated catastrophic events. These are set to reduce capacity and raising prices. There is a hope though that new sensing and monitoring technology, together with risk transfer mechanisms, will protect insurers against significant losses.
Even though customer experience across most industries, including insurance, has increased and continues doing so, Gen-Y consumers (born in between early 80’s and late 90’s) and Millennials are much harder to please than their predecessors. Their CX index – positive customer experience level – is much lower. This dictates a need for insurers to better understand behavioural patterns and expectations of these generations. Millennials want to engage with their service provider more regularly, in fact, twice as often than older generations, especially via new channels like social media. They are technologically advanced and comfortable with all things digital, so they are more likely to buy insurance from a technology company. We are steering towards the future where interactivity, proactivity (especially on claims), greater personalisation and transparency will be seen as the norm.
The technology-oriented environment is rapidly changing, and only the companies capable of keeping up will be insurers able to cope with increasing customer demand.
Attitude towards new technologies
- 8.7% love new technologies and are the first to experiment with them
- 16.1% like new technologies and use them before most people they know do
- 39.2% use new technologies under the peer pressure
- 26.8% consider themselves to be the last to know about new technologies
- 9.3% are sceptical of new technologies and use them when no other option is available
At the moment 24% consumers are willing to buy insurance from a technology brand like Google but this number is expected to grow. (source: Capgemini voice of the customer survey 2015)
When the US Defence Advanced Research Projects Agency (DARPA) ran its 2004 Grand Challenge for automated vehicles, no car was able to complete the 150-mile challenge. In fact, the most successful entrant covered only 7.32 miles. The very next year, five vehicles completed the course. Now, every major car manufacturer is planning to have a self-driving car on the road within the next five to ten years and the Google Car has clocked more than 1.3 million autonomous miles.
Britain is leading the way and the Department for Transport has launched a nationwide consultation on driverless cars with views sought on how car insurance will be changed and what the future Highway Code may look like. The consultation has started on July 11, marking the start of a rolling programme of reform on the roadmap to fully automated vehicles. On 30th July the UK Government announced that driverless cars will be permitted on public roads from the beginning of next year. So what opportunities and challenges are in store for insurers?
Fewer accidents, more claims
Human error is the reason behind 90% of road accidents, according to the Thatcham Research Centre. Driverless cars can potentially remove the human error element of risk, increasing the country’s road safety. Google’s redesigned Prius has driven more than 700,000 autonomous miles without a single accident. This reduction in risk could cause third-party damage insurance to largely disappear and Forbes has estimated that premiums could be reduced by as much as 75% as a result.
This technology innovation, however, brings with it a whole set of legal questions. Is the driver or the vehicle manufacturer liable for the damages caused by an accident when an automated procedure is taking place? Should insurance companies be legally forced to provide insurance to automated vehicles? On which roads should automated vehicles be permitted?
The integration of completely self-driving cars into national transport networks is likely to take another decade but the sci-fi future is much closer than we think it is: in June 2016, Chinese company Ehang was allowed to test its prototype passenger drone, the Ehang 184. All the traveller needs to do is enter their destination into a dashboard app and the drone will take care about the rest. Driverless cars, crewless ships and pilotless planes have been looming on the insurance industry horizon for some years now. But their perception seems to have shifted from ‘not anytime soon’ to ‘really soon, anytime’.
Increasingly available data will help insurers to assess the risks more accurately, this way reducing fraudulent claims. According to Nick Beecroft, manager of emerging risks & research at Lloyd’s “Autonomous vehicles should mean that insurers will be able to get a more comprehensive and detailed picture of risk.” It will be much harder for consumers to exaggerate and lie about accident circumstances, therefore the amount insurers pay out on fraudulent claims is likely to reduce.
But who is to blame in case of an accident: the autonomous system or the ‘driver’? Road accident victims will be reimbursed by an insurer, but in the case of a faulty vehicle, an insurer will be able to claim the money back from the car manufacturer. Owners have to update the software and technologies to prevent cyber threats, though, otherwise, policies will not be valid.
Another problem for insurers rises when conventional and driverless cars start sharing the same roads. Dealing with these situations and determination of a responsible party may be very complicated. New cars are making up only 10% of the road traffic, and it will take another 20 years for them to replace all vehicles on the roads. Interestingly, not all of the potential users of driverless cars are that keen on giving up their steering wheels at the earliest opportunity. Some of their concerns are: Will the owner be against corporate monsters like Google in court if an accident happens? Will the bus drivers face unemployment? Do we need driver licences at all if a car can prevent all the accidents? 55% of the UK public says it’s not too keen on being a passenger of a driverless car. There will always be drivers who want to be in control of their vehicles and they will require third-party insurance to cover their risk, so personal motor insurance is likely to remain in demand.
The way to go for insurers is using the increasing volumes of data and building policies to recognise the shifts of risk. The ones who succeed will be able to overtake their competitors and find opportunities to make a profit in a very competitive market.
The Internet of things is big business and wearable devices and smart ecosystems will undoubtedly have a huge impact on consumer behaviour and their insurance needs in the not too distant future. Insurers need to stay savvy; don’t underestimate how quickly consumers will adapt to futuristic technologies. Driverless cars, affluence and the rise of the millennials will speed up the process of adoption. As society adapts to using new technologies, the most successful insurers will be those best prepared to make an investment and develop strategies to respond.
Historically, the insurance sector based their decisions concerning customers from in-house data but over the next decade, we should see the industry embrace real-time sensor data, unstructured data from social networks, and multimedia data such as text, voice and video. With the development of artificial intelligence, insurers will use their findings to influence strategic decisions. With ‘Big Data’ there is a great potential for insurers to establish a significant competitive advantage.
- 49% insurers expect new sources and techniques in the use of data analytics to be the key competitive differentiator. (Source: PwC Research from more than 150 C-suite executives polled at a presentation of the Future of Insurance to the International Insurance Society (IIS), June 2011).
Conventional insurance principles are likely to become less relevant when (not ‘if’) Internet of things becomes mainstream. Insurers will need to reinvent their business model and long-term strategies to successfully catering this new market because the nature of risk transparency, risk ownership and risk itself is going to change.
While IoT undeniably brings a lot of valuable information to insurers, how willing are customers to share their data in exchange for monetary benefits? According to Capgemini Voice of the Customer Survey 2015, 16.9 % wouldn’t mind sharing if it comes to driverless cars, 18.9% are willing to share their home sensors data and a staggering 21.9% are readily sharing whatever their wearables have to measure.
Wearables, however, also present a few challenges to insurers. Some of them are:
– Legal and privacy risk associated with the technology
– Unstructured data analysis and processing
– Infrastructure requirements for adaptive systems
– High initial costs and recurring charges for data access from device providers
When comparing the current situation to that of 2009, we have come such a long way. These days there are lots of options to choose from ranging from Apple Watch to Sentimoto and this growing trend doesn’t seem to be a fad. Wearable technology is not only a way to connect with peers, it can really help to promote a healthy lifestyle and even track and monitor medical issues such as blood sugar. Google are predicting contact lenses with blood sugar measuring capabilities will become common place. With better customer health, it is likely to reduce claims for medical insurance.