At a time when the financial sector is racing to embrace digital technology to boost sales and drive profits, the traditionally staid insurance industry is in danger of falling behind.
Some insurers are using developments such as telematics, or social media sources, to increase the amount of information they have about customers to reduce claims and theoretically make insurance cheaper for all.
Telematics uses aircraft-style “black boxes” that have been in Formula One racing cars for years to collect data about how policyholders drive their cars, so they can be rewarded with lower insurance premiums if they adopt a cautious style.
But an industry that has long relied on personal contacts – the Lloyd’s of London insurance market started in a coffee house in the 17th century – hasn’t been quick to embrace new technology or mine vast new data sets, or “Big Data.”
The reluctance to roll out technology with the same enthusiasm as banks and some investment managers is partly cultural, partly financial.
“Compared to many other industries, (insurers) are still playing catch-up. The sector has a very traditional culture,” said Catherine Barton, partner at EY.
Staff at Lloyd’s, home to more than 90 trading syndicates in London’s financial district, still trundle suitcases of claim forms for complex insurance transactions.
Function rooms in its flagship building are furnished with antiques, while be-suited underwriters swap ideas in local pubs and restaurants when the market closes for lunch.
Status Quo
Lloyd’s Chief Executive Inga Beale has said the industry needs to take technology on board to maintain its role in global business. The firm recently appointed a Chief Data Officer and Beale said the sector needs to attract new, tech-savvy talent.
Insurers already carry plenty of data about policyholders, and have started mining sources such as Facebook, to cut fraud or better estimate customers’ claims.
But a mass of different systems, often the legacy of firms being swallowed up by bigger insurers, makes it hard to streamline technology. Some firms have chosen the status quo.
“I have a very jaundiced view of the generation behind me, they are too reliant on technology,” one broker told Reuters. “I don’t believe this (face-to-face approach) will disappear.”
Even if firms want to harness technology, they may be unwilling to commit cash. Insurers are struggling to balance their books, with bond yields at record lows and slashing the returns they make on investing premiums.
Trendsetters
A report from Morgan Stanley and Boston Consulting Group says the first movers will reap bigger spoils.
They said that a full transformation to becoming a digital company could cut an insurer’s combined ratio by 21 percentage points, in other words making the firm more profitable. Expenses could fall by 10 percent of premiums and claims by 8 percent.
Germany’s Allianz is highlighted in the report as a good example of a traditional insurer working to enhance its digital capabilities and transform its business model.
It is investing €400-€500 million [$455.4-$569 million] a year in digital initiatives such as setting up an innovation lab to work with young companies on big data, mobile, social media and sponsorship, the report said.
Others are focusing on telematics, one of the industry’s brightest innovations. Britain’s RSA has a telematics product and underwrites business for specialist telematics insurer Ingenie. Direct Line also does telematics.
Belgian insurer Ageas, which has a British division and writes insurance for firms such as Tesco Bank, also underwrites Ingenie’s telematics car insurance, while Progressive is a frontrunner in the United States.
Still, the benefits sometimes seem unclear and the use of telematics remains low. Britain, Italy and the United States are among the most developed markets, but penetration is 3.5 percent in Italy, 2.5 percent in Britain and just 1 percent worldwide.
The black boxes are expensive for the insurer to fit into cars, only making it worthwhile for young or inexperienced drivers, whose policies are more expensive. Some insurers are waiting for the cost of the boxes to fall, or for alternatives such as mobile phone apps or Internet-connected cars.
Too Expensive
British insurer Aviva was one of the first to introduce telematics. Policyholders had 30 percent fewer accidents and premiums fell by the same amount.
Aviva has since pulled out because it was costing too much to buy and install the boxes, but it now offers discounts to drivers using mobile apps to monitor their driving habits.
The technology has also not yet arrived for telematics to be used in markets beyond motor insurance.
New uses for telematics could include an oven that tells your house insurer it has been left on, or a smartwatch that tells your health insurer if your blood pressure is too high.
“In the next few years, we’ll see a lot of change in (the way) technology will impact pricing,” said Rudi Van Delm, director for pricing and underwriting at Direct Line.
But until that technology becomes more cost-effective, insurers focused on retail consumers may invest more in their online presence and use of price comparison sites.
Even with the prospect of technological advances, insurers say there is still a need for human interaction.
Inside the “Walkie-Talkie” building, one of London’s newest skyscrapers, RSA offers its telematics-based insurance but also provides a meeting room where brokers can mingle and do business the old-fashioned way.
“More complex and more large-scale products are always reliant on some form of relationship management and negotiation,” said Tim Skates, RSA’s chief technology officer.
(Additional reporting by Richa Naidu; editing by Sinead Cruise and David Clarke)
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