In any industry today, we often see new entrants disrupting existing business models in pursuit of growth. Most often, these new entrants follow one of two growth strategies: growth by increasing their share of the pie (e.g. Netflix disrupting through online on-demand video streaming, taking away market share from traditional movie rental stores) or growth by expanding the scope of offerings and increasing the size of the pie itself (e.g. smartphones expanding the size of the phone market by catering to more customer needs).
However, in the insurance industry today, we see quite a few new entrants driving the cost equivalent of the latter: using various innovative means to decrease the overall cost base required for risk cover in insurance. This is being done specifically by addressing and mitigating the moral hazard and morale hazard aspects to customer behavior and through that, reducing instances of preventable claims. This consequently reduces the actual overall capital required for risk cover.
As with most new models, technology is the key enabler to this trend, making customer relationships more virtual and, therefore, more accessible and manageable at the level of an individual or a small group. AI, RPA, and advanced analytics, particularly, are the catalysts that make these more real-time and personalized insurance models possible. Here, I would like to discuss two emerging models that are helping shrink the cost of risk cover in insurance today:
- Proactive risk mitigation through connected devices: Traditional estimates of risk capital were based on the law of large numbers and proxy variables, with little insight into what the risk pool exactly constituted at any given time. Such an estimate would inherently be more on the conservative side and therefore premium prices would be higher. With connected devices, however, more accurate risk assessments are possible at an individual level and insurers are able to distribute lesser penalties on customers showing safe behavior. Customers are being incentivized to display more safe behavior in health and driving through discounts on premiums based on real-time data from their connected devices. In the long run, this helps mitigate preventable claims incidents by effectively addressing the morale hazard aspect of customer behavior. This will ultimately benefit both insurers and customers through lower claims costs and lower prices.
- Social risk pool models: P2P insurance start-ups such as Friendsurance and Lemonade are forming social risk pools and generally following a fixed margin structure wherein the unclaimed premium amount above the insurer’s fee is returned to the customer as cashback or in another form. In these models, the lower the claims raised in a particular risk group, the more the members of the group stand to benefit. Such models, thus, address both moral and morale hazards since customers are more careful about raising claims when it affects their social group. Customers, on the whole, will be motivated to display more safe behavior and also refrain from fraudulent behavior. Some firms, such as InsurePal, have even based their entire model on social proof, bringing a revolutionary approach to insurance and risk management—it will be interesting to see how this picks up! The only challenge with P2P insurance models is their scalability and how to avoid fraud which can be possible at a group level. However, by reimbursing the unclaimed amount, such models also reduce the overall “cost of insurance cover” for insurers as well as customers.
Thus, even as insurers explore new revenue streams through innovative products and services, a sizeable innovation effort is being directed towards improving the bottom line by reducing the overall industry cost base as this is one of the top challenges the industry has traditionally grappled with. As we speak to leading insurers for the upcoming World Insurance Report 2018, we see how margin pressures are one of the top-most concerns in the mind of executives when they look to the near future. In this context, it is heartening to see that these new technology-enabled models, which are driving down the industry cost base, will not only lower costs for insurers but also render insurance more affordable and accessible to customers.