Behind the Curtain, Insurance is Changing Without Insurers

Behind the Curtain, Insurance is Changing Without Insurers

Source: The Economist

Most, if not all, large insurers today have a Chief Innovation Officer, innovation labs staffed by highly skilled data scientists, and make frequent appearances at seminars and events geared towards the insurance industry of tomorrow. There was a record number of insurtech deals in the first quarter of 2019, totaling $1.42bn.

But appearances can be deceiving, especially when one considers the following two facts:

  1. Not one insurer ranks among the world’s top 1,000 public companies by amount invested in research and development, according to a Boston Consulting Group study.
  2. Insurers allocate an average of 3.6 percent of their revenue to computing technology, roughly half of what is typical for banks.

Innovation theatre’ just isn’t cutting it anymore. The insurance industry in developed countries is slowing down or, in some cases, backtracking all together. Total non-life insurance premiums have grown by an average of only 1.2 percent a year since 2008. Life insurance has declined an average of 0.5 percent in the same time period. While emerging markets are beginning to pull more weight in the market, global premiums grew in real terms by only 1.3 percent annually over this period, half of the growth experienced by the world economy.

Enter the “protection gap.” Over the past ten years, only 30 percent of catastrophe losses were covered by insurance. In the US, the measure of underinsurance in life is upwards of $25 billion. According to Swiss Re, who conducted the study, “the gap will widen in the coming years if current economic and insurance market trends continue.”

These trends speak the key issue, the reason why insurers MUST begin to change the way they approach customers, innovation, and the industry itself: people don’t see the value anymore. Research from Capgemini, shows under 25 percent of businesses feel their insurance coverage is adequate. For personal lines, it’s under 15 percent. For health, cyber,  and political risks, the number dips even further.

Despite these alarming findings, or perhaps because of them, there is a significant change happening in the insurance industry, it’s just happening without insurers. Insurtechs are tackling long standing industry issues, like the painful claims process, microinsurance, risk pricing, and how to approach climate change issues. These new companies provide insurance for modern lifestyles, focusing on gig-workers, renters, and luxury items - and customers are responding.

Reinsurers and Asian insurers are also innovating ahead of the industry. Reinsurers, like Swiss Re and Munich Re, are ramping up investments in data science and innovation. They’re also pushing products like ‘parametric insurance’, which pays a pre-agreed sum when a clearly defined parameter, like rainfall or seismic magnitude, reaches a pre-agreed threshold, rather than compensating for losses post evaluation. This is especially important today, since parametric insurance has mostly been confined to the reinsurance of catastrophic events.

Asian insurers, which are working with a vastly less-developed market, have less regulations, legacy systems, or complicated products than their Western counterparts. BCG’s Pia Tischhauser believes they are “15 years ahead” on innovative ways to price risk. China’s Ping An, the most valuable insurer in the world after only 30 years, boasts 23,000 researchers, spends 1 percent of revenue on innovation, and has over 12,000 patent applications. According to a study from Swiss Re, APAC will account for 42 percent of global premiums by 2029.

But change isn’t only happening in the east. America’s Big Tech is gearing up to enter insurance, and companies like Amazon, Apple and Google certainly have the data and capital to do it. An adviser to tech titans is adamant. “We’re seeing what’s happening behind the scenes. They’re on the path.”


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