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Blog October 5, 2021
4 min read

Rethinking Insurance Dynamics in a Changing World

The insurance industry grapples with disruptive forces – Insurtech, climate change, and the COVID pandemic necessitate digitalization and dynamic underwriting. Loss prevention now drives innovation, redefining insurers as proactive partners. The future hinges on a data-driven approach, driving industry evolution beyond financial protection.

The ‘new normal’ in Insurance

Come 2021, and the three major factors that are challenging traditional insurance value chain are Insurtech, climate change, and the ongoing COVID pandemic. Amid lockdowns, floods, forest fires, and a digital-first world, the industry is having its watershed moment (we briefly touched upon this in our earlier blog). On the one hand, risks that need to be insured are becoming complex. On the other hand, data and technology are enabling insurers to better understand and influence customer behavior.

Given the disruptors are here to stay, insurers are being forced to evolve and be creative every step of the way. Insurance companies now have the opportunity to become something much more than just financial protection providers. A deep dive into the challenges within the insurance value chain sheds light on the innovations being made to not only assess the risks to be covered, but also to mitigate that risk for the customer and the insurer.

Product Design and Distribution

In the current environment, products such as home or property insurance must be designed to mitigate the long-term effects of climate change. Companies, for example, are launching efforts to help clients strengthen their insured assets against extreme weather conditions. Offering climate-proofing of homes and catastrophe-specific coverage for customers living in a risk-prone area are examples of ways in which insurers are moving towards offering more sustainable policies. Adopting geospatial solutions can play a vital role in helping insurers understand environmental risks with precision.

The pandemic has also, undoubtedly, increased the interest in life and health insurance. This has forced insurers to design products that ensure long-term financial and health benefits, all while following a digital-first module. Here, incentives such as virtual gym memberships or a free teleconsultation with a nutritionist integrated into the policy, are being used to attract customers.

Usage-based insurance products are also growing in popularity in 2021, wherein premiums are payable based on the extent to which an activity is performed. The best real-world example of this is motor insurance, where a customer is charged based on the number of miles they drive, rather than paying fixed premiums over a certain period of time. This confronts the COVID and climate conundrum all at once — lockdowns have forced customers to stay indoors and use their cars less, and insurance companies are able to promote themselves as being sustainable, adjustable, and allies in the war against rising carbon emissions.

While the demand for insurance is going up, the pandemic has imposed restrictions on traditional distribution channels for insurance. Insurers and agents, who were accustomed to in-person interactions, had to quickly adopt digital tools such as video chats, chatbots, and self-service websites to sell insurance. The industry is also moving away from captive agents to independent agents and digital insurance exchanges are accelerating this trend. Platforms like Semsee, Bolttech, Bold Penguin, and Uncharted pull data from many insurers, allowing agents to see multiple quotes for policies, similar to how travel agents see competing airfares.

Pricing and Underwriting

Historic data, which forms the basis of pricing and underwriting, needs to be re-examined in the COVID era, and beyond. With the threat of future pandemics and increasing climate change-related disasters, assessing the risk level of customers, whose needs are getting more varied, is going to get more challenging.

One of the ways insurers are tackling this is by moving to a continuous underwriting model from a one-time pricing model. This involves using regularly updated or real-time policyholder data to continuously assess the risk and update the policy terms and premiums accordingly. In addition to providing a better estimation of risk, it helps insurers to adapt to evolving customer needs and influences customers to reduce any risky behavior.

The pandemic is also forcing companies to reduce the physical interactions needed for underwriting. Take life insurance, for example. Given the constraints on in-person medical tests, concepts such as ‘fluidless (no lab tests) processing’ are gaining traction.

Loss and Claims Management

The initial innovations in these last steps of the insurance value chain were primarily focused on post-loss scenarios with the objective of increasing the efficiency of the claim assessment process. Across property and auto insurance, image analytics enables insurance companies to remotely and more effectively assess the loss and identify possible fraudulent claims.

However, the focus is now shifting to loss prevention. Across all types of insurance products, the aim is to track risky behavior and intervene at the right moment to prevent a loss event. This strategy has existed in Health insurance for a while where insurers have tried to ensure medication adherence and a healthy lifestyle through data-driven interventions. Now, thanks to IoT, it is finding its place across other areas like property insurance (detecting water leak or low pressure in a water sprinkler), workers compensations (identifying workers without adequate equipment or unsafe lifting by an employee), and auto insurance (sensing erratic driving behavior). An interesting example from auto insurance is the BlaBlaCar Coach, an app-based service that comes with certain car insurance products and offers drivers personalized tips for safer driving.

This focus on loss prevention is also having an impact on other parts of the insurance value chain like product design and pricing. It is allowing insurers to provide expanded coverage at affordable rates, even for previously uninsurable risks.

What the Future Holds

Risk analysis and crisis aversion were always at the core of the insurance industry. However, what the industry was not prepared for, much like the rest of us, was a global pandemic and coming face-to-face with the effects of climate change. On the other hand, these disruptions may have proven to be the catalyst for innovation in the industry, which was long overdue. One thing is clear – a successful transformation cannot be achieved by technology alone. A data-driven approach will be crucial in effectively leveraging this technology.

Stay tuned for more details on the role of data and how innovative data science solutions are driving value for both insurance companies and their customers.

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