I’ve never seen so much evidence from within the Insurance industry that we’re on the cusp of a fundamental change. Given the disruption we’ve witnessed over the last 12 months, and the level of uncertainty that persists, it’s very difficult to generalise and predict how the industry will change as a whole. However, one thing that is for certain is that the industry is already in the eye of the storm. Change isn’t on its way, it’s arrived.
General insurance will look very different come 2025. The big question becomes whether firms are ready to face up to the challenges and opportunities that lie ahead. As Charles Darwin said: ‘It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change.’
Insurers will achieve joined-up customer understanding
A typical insurer today is set up in a very traditional manner. There remains distinct, separate departments for the key functions: including assessing risk, acquisition, customer engagement, claims handling, customer protection and renewal. This is in addition to maintaining the operational, financial and organisational support structure that’s needed for the firm to survive.
Yet very few insurers have a truly joined-up view of a customer’s full journey with their organisation, let alone what can be done to optimise each interaction. What’s needed is the ability to understand each customer’s touchpoint as they traverse through their journey, as well as the ability to make decisions as to how best to engage them.
This imperative is more urgent than it might appear. One example of a forced change for insurers is the recent FCA final report on home and motor pricing that was very critical of ‘complex and opaque’ pricing processes. In particular, it criticised the industry’s ‘loyalty tax’ on customers that renew with the same providers each year. With this regulatory mandate for change, insurers will be forced to take a more holistic approach to the way they price policies for their customers, across both new business and renewal processes.
Insurers often cite legacy policy admin and claims systems as the biggest barrier standing in the way of this approach being adopted. By 2025, however, the most successful insurers will have broken those barriers down, gaining an unprecedented understanding of their customers’ needs and preferences, and the ability to offer pricing plans that are both fair and competitive.
Insurance will transition from a digital business to an algorithmic business
We’ve long heard of ‘digital transformation’ being a key objective for insurance executives. However, by 2025 it’s expected that successful insurers will have completed this transformation. Digitalisation will no longer be the differentiator, it will be the default. As a result, a new way to drive business advantage will have to emerge – and it will be centred on the use of algorithms to drive business decisions.
This is not a new concept. Gartner describes ‘algorithmic business’ as the ‘industrialised use of complex mathematical algorithms pivotal to driving improved business decisions or process automation for competitive differentiation’.
We’ve already seen some insurers start this journey in their claims function. Companies, including Aviva, have long automated decisions concerning whether a vehicle is deemed a total loss or not. However, the trend will become much more prevalent, with Gartner research predicting that, by 2023, over 33% of large organisations will have analysts practicing decision intelligence, such as decision modelling.
Customer interactions will change
It’s clear by now that COVID-19 will fundamentally change how insurance is done – both in terms of how customers want to interact with insurers, and also how insurers need to adapt. While we hope this pandemic won’t be with us forever, it has opened the eyes of many executives to what is possible within the customer-facing parts of their organisation.
From my discussions with insurers, many have commented on how well employees and customers have adapted to the new normal. While there were initial logistical hurdles in virtualising contact centres, they’ve been impressed at how well staff have adapted under pressure to deliver what customers and shareholders expect . Many are likely to follow the approach of Lloyds in allowing staff to work remotely for the foreseeable future.
Indeed, the previous months have exploded the myth that minimal policyholder interaction is a barrier to customer experience innovation. Technology can more than fill the gap. As companies like By Miles have shown, on-demand or telematics-based products can deliver an insightful monthly, weekly or even daily dialogue with customers.
Risk prevention will become the norm
Insurance has long been society’s safety-net, protecting us when something goes wrong in our lives. Yet, it would be to everyone’s benefit if risk could be avoided altogether. The use of telematics to assess the risk of younger drivers was the first big industry push here, but by 2025 we will see this becoming ubiquitous across many other products and customer demographics.
The recent example of Munich Re’s acquisition of IoT service provider Relayr will benefit manufacturers with a ‘pay as you use’ model. This will enable them to be more flexible and react faster to market changes. The IoT Observatory is also exploring new ways that data extracted from connected sensors and devices can help to transform risk assessment and empower insurers with data.
This is no small step for any traditional insurer. But it is one that puts a truly customer-centric lens on the service that insurers deliver. Data-driven risk prevention allows for significant product differentiation, taking insurers out of their comfort zone and enabling them to explore whole new opportunities.
Looming recession will be a breeding ground for new fraudulent activity
Come 2025, we will be living in a very different world with new risks that require novel insurance solutions to resolve.
One of the largest looming threats is insurance fraud. Recent analysis from the Insurance Fraud Bureau shows that fraudulent claims rose by 5% in 2019, and there are concerns the current economic climate could see this rise even further. In the aftermath of the 2008 Financial Crisis insurance fraud rose by 17%, and there’s no guarantee this won’t happen again on the back of growing practices like crash for cash fraud and ghost broking.
Putting in place an effective defence mechanism to intelligently detect, prevent and investigate potentially fraudulent claims will be an essential requirement by 2025. Fraudsters are nothing if not resourceful and they regularly target the weaker insurers. A soft defence is a liability while those that take fraud detection seriously will drive a more profitable outcome. This is especially true when it was announced recently that close to 20% of each policy premium is goes to cover the cost of fraud.
So, there’s plenty for insurers to ponder and get right if they’re to be competitive in 2025.
By Adam Goldsmith, insurance specialist at SAS UK & Ireland