Sitting pretty for now, but insurance industry in deep digital doo-doo

• Not quite hit by fintech-type disruption, but internal and external challenges
• Still finding its way around cyber-insurance, cybersecurity, and the IoT

 
SO far, the insurance industry seems to have been spared the disruption that emerging technologies are wreaking elsewhere, but that won’t be for long.
 
Insurance companies would soon need to navigate new trends such as cyber-insurance and usage-based insurance, while juggling concerns such as cybersecurity, which has an internal as well as an external aspect.
 
In terms of cybersecurity, insurance companies not only have to deal with their own defences, but also need to understand what’s happening ‘out there’ so that they can provide appropriate policies, notes James Maudslay, global head of the insurance division at US interconnection and data centre company Equinix Inc.
 
“They must contend with potential threats such as cyber-attacks that are directed at them, as well as formulate cyber-insurance policies for potential customers,” he says, speaking to Digital News Asia (DNA) recently via email.
 
The data breach at US health insurer Anthem Inc in 2015 jolted insurance companies into the realisation that they need to secure their data.
 
“Insurers are starting to regard cybersecurity as a complex area that is best handled by specialists instead of inhouse IT staff,” says Maudslay.
 
“Regardless of the strategy, whether it is perimeter defence or otherwise, data breaches are a huge concern. Transactions and data in transit need to be protected, and insurers need to be able to detect and stop any suspicious activity,” he adds.
 
As for cyber-insurance, companies are still finding their way around this nascent market.
 
“There still isn’t that much information on the topic currently,” says Maudslay. “Without enough historical information, it’s very difficult for insurers to price or evaluate risk properly while providing coverage.
 
“Insurers need to ensure that they are not jeopardising their own balance sheets by giving disproportional coverage at an unsustainable rate.
 
“There is also a concern that products are offered without a clear understanding of how they work, but insurers will evolve as they learn,” he adds.
 
At this stage, when the market is still in its infancy, insurers are merely responding to customer demand, but Maudslay is confident that this market is here to stay and will mature.
 
“[Cyber-insurance] will be a major line of business – the field is a very fluid and fashionable area that cannot be ignored, from the perspective of either buyer or seller,” he declares.
 
The IoT and calculating premiums
 

 
Usage-based insurance has also changed the way companies craft their premiums, and the Internet of Things (IoT) brings a new layer of complexity.
 
“The IoT gives insurers access to a richer data pool to work with,” says Maudslay (pic above).
 
“With a significantly larger data volume, it becomes essential to ensure that insurers are using data analytics effectively to mute the white noise and obtain useful information,” he adds.
 
That is, if they even get to the point of making use of the IoT – this remains an area that many insurance companies are struggling with.
 
“This can largely be traced back to an issue of cost – given how the current price tag of IoT devices remains too high, insurers face an issue of whether it is indeed cost-effective to employ these products in situations where the premium values are calculated to be low,” says Maudslay.
 
“As such, the impact of the IoT on the insurance industry is limited at present,” he adds.
 
But if done right, the IoT would allow insurers to precisely calculate individual risk levels, argues Maudslay – which may present the industry with a different problem.
 
“In fact, in theory, this could even result in some individuals becoming effectively uninsurable given their high calculated risk.
 
“This situation, although unlikely given that the IoT is still in its infancy stage, may not sit well with regulators,” he adds.
 
The A+A impact
 
Other technologies that will have a major impact on the industry are automation and analytics, the latter especially in risk assessment.
 
“In the coming years, the industry will become increasingly automated, and this will inevitably result in the shifting of resources for many processing jobs,” says Maudslay.
 
“Analytics will be much faster and take place even closer to real time, and will also become more connected to our daily lives and commercial operations – allowing unprecedented precision in the calculation of individual risk assessments.
 
“As such, the price people pay for insurance will depend heavily on their individual risk profile as policies become even more customised,” he adds.
 
With the growth of the so-called sharing economy, Maudslay also sees a rise in ‘micro-insurance’ – short-term policies that cover specific services or risks such as ride-sharing.
 
Fintech lessons

The banking industry is beginning to realise the advantages of working with the financial technology (fintech) companies that are disrupting their business, rather than competing against them.
 
Likewise, the insurance industry will also see partnerships as key in this new, digital era.
 
These partnerships can be with external suppliers or specialist companies to “provide the additional (and non-insurance) benefits that the modern consumer expects,” says Maudslay.
 
“By doing so, insurers will be able to improve product offerings to meet changing customer demands while remaining competitive and efficient,” he adds.
 
Ultimately, what will drive digital disruption in the insurance industry is the same factor that hit the banking industry: The changing consumer mindset.
 
“Up until now, insurance was widely considered to be a purely risk-transfer mechanism,” says Maudslay.
 
“More recently, specifically amongst the younger generation, we are seeing a notable swing in insurance expectations towards products that resemble a return on investment rather than a risk transfer.
 
“This is a trend that is gaining visibility globally,” he adds.
 
This is where customised offerings like micro-insurance come in, according to Maudslay.
 
“Buyers expect policies that are flexible and which allow them to make changes instantaneously,” he says.
 
“For example, when in a shared ride, consumers may want to be able to invoke certain changes in their policy – such as the number of passengers in the car – instantly via an app on their mobile phone.
 
“To cater to these needs, insurers are increasingly working with external partners and putting systems in place to get a better view of customers, so as to serve them better,” he adds.
 
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