Insurance is perceived by both individuals and businesses as a necessary “annual tax”.
Unlike other financial service products, an insurer sells an insurance policy and a customer buys a policy with both hoping that the same is never used as using the policy means there has been an accident or loss. Well, that is the case today when the insurance model is one of “repair and replace”.
Insurance premiums in this traditional model are based on historical data. Underwriters and actuaries use past data sets to look for loss patterns and make projections about future outcomes. Digital innovation in such a model is thus largely limited to making the purchase and claims process “easier”.
But what if technology was able to radically change the insurance model itself? What if the insurance industry was able to predict and prevent losses from happening, thus becoming a force for good, rather than just reimburse for losses and damages? Such a shift would be a holistic one, as it would not only benefit the insurance industry, but society at large.
The technology to enable this radical shift already exists. The advent of connected (IOT) devices and powerful analytics using convolutional neural networks and artificial intelligence has opened the door for insurance providers to innovate to “smart policies”. Emerging data sources can now be leveraged to provide a continuously updated view of the underlying risk. Insurance providers can now make dynamic projections about future outcomes and develop consumption based pricing models that are calculated based on this new approach.
Personal lines, especially car insurance, have already been impacted by these technologies. However, the current adoption is being driven by the insurance companies wanting to “increase profitability”. Telematics has thus largely been focused on young drivers who were previously perceived as a “bad risk” and loyal customers are still “penalised” for not switching insurance providers every year. Aggregator websites are fuelling a race to the bottom. The industry as a whole is focusing on the wrong metric – price.
What if the focus was changed from “price” to “prevention”? What if your car insurance policy was helping prevent accidents, not merely pay claims?
This will require car insurers to move away from their existing insurance models and adopt dynamic risk-based pricing. A “smart insurance policy” that shifts in price based on driver data feed. Data that provides insights about not just when, what distance and where a driver drives but HOW they drive. Insights that improve driving habits, promoting safety for everyone on the road. A policy where rates increase if a driver goes over speed limits, posing a risk not just to themselves but to the larger ecosystem. Most of us are “not happy” when premiums increase in year 2 just because the first year discounts are no longer applied by the insurer. However, very few amongst us would challenge an increase in premiums for a journey where we were consciously breaking speed limits.
With “smart policies”, when accidents do happen, associated data feeds will not just automate claim adjudication and payments but also prevent fraud, saving the insurance industry millions, thus also improving profitability.
All insurers need to do is change their focus on the right metric – prevention. Contact us to know more about the technologies mentioned.
A blog article on how smart policies can be introduced in Marine, Aviation, Energy Generation, Workers Compensation, Property and Construction insurance is to follow.
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