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The Geneva Association - Insurance and the digital economy: The future is here

Source: Asia Insurance Review | Feb 2018

Rapid technological developments and a growing urban middle class are driving insurance market growth in the Asia-Pacific region. Mr Christian Schmidt of The Geneva Association, gives an overview of how the digital transformation is likely to have significant effects on the insurance business model in Asia. 
A doctor does not need to meet a patient to give him a prescription, because he already knows the patient’s heartbeat and blood pressure—such data is transmitted by a device (a watch, actually) fitted on the patient’s wrist. 
   A technology company uses Big Data to predict when certain devices used for consumer transactions will fail, by receiving telematics data from those same (or other) devices in the field. An automotive producer uses data gathered by a car to monitor the driving behaviour of the driver. 
   Are these three cases examples of a hypothetical future? No—they are here and now. They exemplify how society’s health and motor liability risk profile can be—and is being—modelled. 
Technological advances and available data affect the entire insurance value chain 
It is clear that technology and Big Data are having a profound impact on the insurance industry – the Internet of Things and the rise of digital platforms are enabling new insurance models and value propositions that affect the status quo. 
   Distribution channels are responding to shifts in consumer preferences. While traditional intermediaries, such as agents and brokers, still dominate distribution for most insurance sectors around the world, an increasing amount of standardised insurance is gradually moving over to mobile and internet channels. 
   Online aggregators that enable customers to compare prices and purchase insurance products online are gaining importance and may in the future displace traditional distribution channels, as customer preferences adjust and more insurance products are commoditised. 
   The ever-increasing amount of available data and new data management techniques provide insurers the opportunity to radically refine risk underwriting and pricing. Insurers’ risk models can become more accurate as individual, empirical and (almost) real-time data is used and combined with historical predictions based on segmentation of customers. Premium pricing is likely to more accurately reflect risk behaviour. 
   The digital transformation of the insurance industry could enable a significant reduction in transaction costs, such as claims settlement and administration. These cost items absorb about one-third of the insured’s premium payments and are perceived as a major inefficiency in insurance, which deters many potential buyers from seeking insurance cover. 
   Technology applications like blockchain can also be effective in identifying and mitigating insurance fraud. The FBI estimates that the cost of insurance fraud in the United States, excluding health insurance, is as high as US$40 billion (FBI publication).
Implications for the Asia-Pacific region
Rapid technological developments and a growing urban middle class are driving insurance market growth in the Asia-Pacific region. Asia is expected to account for the lion’s share of insurance premium growth in emerging markets through 2020, contributing nearly 90% of the total (EY 2016). 
   In Asia, the uptake of digital technologies has grown rapidly, to the point that it is already the largest regional e-commerce market (Naomi Canton 2015). The digital transformation has the potential to spur innovation and productivity growth in the Asian insurance market, as information, knowledge and data become more widely available.
   In 2016, there were approximately 330 million insurance customers in China, an increase of more than 40% from the year before (EY 2017). AXA, MetLife, and Aviva have all launched labs in Singapore, a hub where the government has backed the development of an InsurTech industry and from which companies have access to the Asian markets (McKinsey 2017). 
   In emerging Asia, more than 80% of economic losses from natural disasters are uninsured (Swiss Re 2015). Technology can tackle some of the root causes of underinsurance of property risks. In fact, the first experience of low-income population with formal and individual insurance is through insurance schemes linked to mobile phone subscriptions (The Geneva Association 2016). Thus, innovative mobile insurance can help to boost awareness and narrowing protection gaps. 
The flip side of the coin
A consequence of the rapid digital transformation process is that cyber threats are also evolving. The developing cyber insurance market is still limited in scope relative to the total exposure, and heavily skewed towards the US. 
   The speed and scope of digital transformation, and the expanding sources of vulnerability stemming from increased IoT connectivity, leave the Asian region particularly vulnerable to cyber threats (Marsh 2017). Asia is 80% more likely to be targeted by hackers than other parts of the world (Financial Times 2016). Yet companies in the region appear to be less prepared, despite potential new and more complex cyber threats. 
   A lack of transparency has resulted in low levels of awareness and insufficient investments in cybersecurity. Detailed and clear data breach notification laws, supported by enforcement, and a culture of compliance within organisations are critical to improving transparency and risk mitigation. Beyond legislation, governments can further mitigate cyber risk through public-private information sharing, and development of cybersecurity knowledge hubs. 
Implications for the role of insurance 
Technological advances and Big Data are increasingly having an impact on the insurance industry, although without changing the fundamental pillar of insurance: the pooling and carrying of risk. 
   However, even if the fundamentals remain, the digital transformation is likely to have significant effects on the insurance business model:
  •  Price signalling can be helpful to encourage safer behaviour and reduce or even prevent risk. This may ultimately change the business model in certain lines of insurance, from risk indemnification (the traditional premium/capital model) to the provision of risk management services in a new fee-for-service, and thus capital-light, business model.
  •  More sophisticated price analytics may give rise to specialised and more custom-tailored lines of business. Another potential outcome is that digital technologies and the availability of new data sources will trigger new types of insurance that are currently not feasible due to information constraints, create new markets for risks that are currently underinsured or uninsured, and thereby close some of the protection gaps. 
  •  Market participants with access to customers, devices and data can position themselves as an aggregator. For insurers, this would mean further loss of the customer relationship and data control position. The insurance industry may be pressured to give away parts of the value creation and, with this, also parts of the profit margin to other industries. The automobile industry, for instance, might be inclined to take over parts of the sales and claims settlement processes. 
  •  New and massive data-driven analytics may lead to a wider dispersion in risk-commensurate prices, and poor risks may no longer be able to purchase adequate cover at affordable prices. This raises complex ethical issues of fairness that policymakers, supervisors and industry will have to jointly address in order to arrive at mutually beneficial solutions that are accepted by society as a whole. 
  •  Ultimately, private insurance will continue to rely on risk pooling as long as individual risks retain some level of uncertainty, even when more sophisticated data analytics allow for improved risk assessments. Private insurance will also continue to depend on risk diversification across lines of business and geographies.
   Technological advances and Big Data offer enormous benefits for society, thanks to improved risk management and insurance premiums that reflect more accurately the insured’s risk behaviour. The gathering and analysis of more detailed data may also have the positive effect of reducing risk in society. 
   However, although consumers are expected to benefit from more refined risk underwriting, governments may have a role to play when competitive insurance markets do not deliver adequate cover at an affordable price for all. A 
Mr Christian Schmidt is Director, Financial Stability and Regulation, at The Geneva Association. 
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