Transforma Insights identifies nine key ‘Domains of Change’ for the insurance industry, driven by the use of emerging technology

The insurance sector is going through a radical digital transformation, powered by the use of new technologies. This will have significant consequences for insurance products, the way customers are addressed, the structure of the insurance market, and the long-term financial viability of insurers. Transforma Insights’ report, ‘Digital Transformation in the Insurance Sector’ identified nine key domains of change in the Insurance sector that are enabled by disruptive technologies such as Artificial Intelligence (AI), Robotic Process Automation (RPA), Blockchain and the Internet of Things (IoT). In this article, we examine each of these domains and lessons learned from real-world deployments.

1. Claims automation

There are three main elements to the financial success of any insurance company: acquisition costs (to cost of securing new business), the loss ratio (the percentage of premiums paid out as claims) and day-to-day operating costs. Claims automation has the potential to beneficially impact all three areas. Automation techniques range from simple RPA-based solutions to automate repetitive tasks that may be undertaken by claims processing staff, through AI-based document recognition to assist with the ingestion of handwritten claims documentation into IT systems. More sophisticated solutions may import video evidence (for example from a dashcam) and automatically process this evidence to establish likely liabilities.

Fujitsu and Aioi Nissay Dowa Insurance found that its sophisticated claims processing system which uses AI, video and telematics data could reduce the time required to pay out property damage liability insurance by 50%.

A case study involving IBM and IFFCO-Tokio suggests that AI-based claim damage assessment can result in a 30% reduction in claims processing time, a 10% improvement in the efficiency of the claim settlement process and a 30% reduction in claim processing cost. In the case of certain automotive claims, IFFCO-Tokio found that the end-to-end claim settlement time could be reduced from 3-4 hours to just 15 minutes.

Digital transformation of automotive insurance claims can also increase customer satisfaction by 15%, indirectly retain existing customers and gain new customers.

2. Associated Services

The Associated Services domain of change considers the augmentation of core insurance offerings with associated services such as connected monitoring devices or monitoring services, potentially in association with a channel partner. Innovative insurance carriers are now experimenting with a diverse range of associated services that may position insurers as partners that enable risk avoidance, rather than the more traditional roles of simple risk mitigation. Such approaches can reduce costs for insurers and also assist in customer acquisition.

For instance, LeakBot offers a water leak detection service and partners with various insurers including Geico, Hiscox and Topdanmark. Its AI-enabled solution alerts users if water usage is abnormal, or the water pressure is continuously low, both of which can indicate leakage.

In another example, Vitality allows policyholders to earn ‘points’ for demonstrating activity with an activity tracker linked to their policy, which can later be exchanged for rewards through an Amazon Prime membership, or via discounts on certain foods at a supermarket.

While there may be costs associated with providing these additional services, they are often exceeded by the benefits in terms of reducing the expected level of claims, marketing (acquisition) costs for customers and customer retention (through regular rewards).

3. Parametric insurance

Parametric Insurance is an emerging type of insurance that offers pre-defined pay-outs based on trigger events, rather than the more traditional approach which is to compensate for actual losses. These solutions are ideally suited for IoT-enabled monitoring since such insurance pay-outs are based on the occurrence of specific events (which can be better monitored with remote sensors).

For example, Swiss Re’s drought solution pays out to farmers if the soil moisture deficit reaches a certain level. Soil moisture deficits are linked to reductions in crop yield and so Swiss Re’s approach significantly streamlines and simplifies processes associated with claims relating to drought.

Such digitally transformed insurance services can also be offered via channel partnes. For instance, a company that specialises in agricultural monitoring could offer (i.e. white label) a parametric insurance policy related to humidity levels. The impact for the insurance sector could be transformational, by catering to the underserved market.

However, it can be significantly complex for insurers to establish a mechanism for parameterising the risk and quantifying the likely associated losses, especially for insurers who do not possess extensive claims history available to ingest into AI models that establish links between parameters and outcomes.

4. Usage-Based Insurance

Usage-Based (automotive) Insurance tracks driving behaviour via telematics devices installed in the insured vehicle and potentially rewards users with a subsidised premium based on their driving behaviour. The telematics units often track speed, distance and time of the day, and wirelessly transmit the data back to the insurer in real-time.

The main benefits of usage-based insurance include the availability of more and better data about drivers, which allows more accurate insurance premiums to be set, speeds up claims and limits fraudulent claims. High-risk new drivers and those with low annual mileages stand to benefit from a pay-as-you-go style system that these solutions enable.

For instance, Amaline Assurances partnered with Scope Technology and adopted the DriveProfiler solution to power its UBI offering, and within 6 months, it reduced overall costs, improve the efficiency of UBI service, gained better information about vehicles and driver performance, and was able to offer value-added services to its customers.

5. Improved front office operations

During the past few years, the insurance industry has been increasingly focussing on the overall improvement of front office operations (especially customer interaction). This includes the use of AI-enabled chatbots for customer service, robotic process automation (RPA) to speed the ingestion and configuration of policy documentation and natural language processing (NLP) to assist with the importing of hard copy documentation into insurance carrier systems.

The adoption of new technologies to support front-office operations ensured reduced volumes, more efficient call processing and increased rates of first point of contact resolution in call centres. These technologies can also improve the value proposition for customers.

While many applications and solutions for improved front office operations will be intrinsically complex, many will be productised propositions available from specialist third-party providers.

MetLife uses Cogito’s AI coaching system to monitor customer service conversations, providing real-time feedback to agents on tone and delivery. This deployment improved first-call resolution by 3.5% and customer satisfaction by 13%, enabling more “human” interactions for agents handling 700 weekly calls.

6. Improved analytics

Assessment of risk lies at the core of the insurance industry. The two main ways through which such assessments can be improved are: gathering more information upon which to base an analysis, and application of improved analysis techniques to the available information.

Gathering better information could equate to larger volumes of data, collected in a more timely fashion and/or with greater accuracy. Internet of Things solutions can be particularly helpful here, providing information on things like air quality, people or traffic movement, or personal health monitoring. Increasing the quality of analysis typically involves the use of AI in the likes of image processing, natural language processing and robotic process automation.

To give a few examples, using DataRobot and Earnix software, Domestic & General (D&G) started providing product warranty plans based on customer attributes. Elsewhere, Agria (a Swedish pet and farm insurance company) used SAS software to help it calculate pricing and risk factors for its insurance products as well as to produce its breed profile reports more efficiently.

7. Servitised Asset Insurance

Servitisation is a fast-emerging concept in IoT, where high-quality, comprehensive and up-to-date information gained via an IoT connection can be used to transform the supply of assets into a supply of services. A typical arrangement might involve a change in commercial model so that what was previously the sale of a machine (like a sheet metal cutter) becomes the sale of services performed by that same machine (for example charging for each sheet of metal cut by a machine).

Many aspects of the adoption of servitisation give rise to an opportunity for insurance services, including policies covering repairs for those assets, and insurance for consequential losses in case the servitised assets malfunction. Direct opportunities for these solutions include insurance policies that pay out if a service level agreement or performance guarantee is breached, or that a machine breaks down and needs repair. Indirect opportunities include policies such as business continuity assurance that may pay out to cover consequential losses related to service breaches. Another benefit of these solutions is that they can bundle the cost of insurance and service support into the same ‘price’, incentivising service providers to invest more in service and maintenance for servitised assets associated with higher potential losses.

One particularly interesting vendor in this space is Relayr, which was acquired by the Munich Re Group in 2018. It has a range of insurance related propositions that highlight some new emerging insurance propositions in the XaaS space, including completion warranty, retrofit warranty, business outcomes warranty and service level warranty.

8. Supply chain insurance

Under this category we consider opportunities related to insurance services for ‘connected’ supply chains and related risk-management services.

Over the last few decades, supply chains have become both more complex and also more critical to efficient business operations, with lower tolerances for failure. The recent pandemic highlighted the unreliability of supply chains (for example, production of new cars was constrained due to the shortage of processors/chips, required for automated systems). Furthermore, increasing focus on Corporate Social Responsibility (CSR) and Environmental Social and Governance (ESG) goals provided a driver for more visibility in supply chains, and consequentially the use of distributed ledger. Collectively these changes have encouraged insurers to offer supply chain insurance and other related risk-management services. The availability of detailed, high-quality information in near real-time can allow for the creation of sophisticated insurance policies, and also enhance the potential for corrective actions to be taken to de-risk the potential impact of any identified emerging problems.

For instance, Rice Exchange is a blockchain-based rice trading platform, which automates and simplifies the complexity of rice trading and increases security, transparency, efficiency, traceability and trust for the world’s largest agricultural commodity, with insurance for containers and condensation damage to rice provided by Saici Saint Honore.

9. Smart contracts

The use of smart contracts eases the contracting process between an entity requiring insurance and an insurance carrier. These programs are stored on a distributed ledger (blockchain) that runs when predetermined conditions are met. Smart contracts can reduce the need for trusted intermediators, arbitrations and enforcement costs, fraud losses and malicious and accidental exceptions. Smart contracts are particularly relevant in the insurance industry, either when policies are procured, or potentially to assist with the delivery of services (particularly healthcare services) in the case of claims, or to provide proof of insurance.

For instance, A.P. Moller-Maersk, an integrated container logistics company, alongside insurance companies MS Amlin, Willis Towers Watson and XL Catlin joined the Insurwave blockchain platform for marine insurance. The platform enables Maersk to manage marine hull insurance for its fleet of 800 vessels.

Overall impact of the nine ‘Domains of Change’ in Insurance

The Insurance sector is amongst the most susceptible to digital transformation-enabled change of all industries. At the core of insurance is the concept of risk-transfer (from an insured party to an insurance carrier), and the availability of more high-quality information about a risk, and enhanced analysis of that information, can result in more accurate pricing and a more efficient market overall. Concepts such as IoT allow insurance offerings to be extended to support new propositions (such as insurance for servitised assets) and enhance services in already-established markets (with, for instance, usage-based insurance and new types of parametric insurance). Artificial Intelligence can play a significant role both in automating processes (for instance claims processing), and also in terms of assessing risks at a level of granularity that might not have been feasible before.

Collectively, the concepts listed above will bring significant changes to the insurance industry. Importantly, many of the concepts listed act to increase the efficiency of risk-transfer (from the insured party to the insurance industry) and so result in insurance premiums that are more closely aligned with actual risks for an insured partyf a decrease in overall risk for the insurance sector. Other areas from the list above (e.g., claims automation) are focussed more on enhancing the overall efficiency of operations in the insurance industry, and still others relate to new emerging opportunities for insurance services related to changes that are underway in different (non-insurance) industries.

About the report

This report ‘Digital Transformation in the Insurance Sector’ focusses on digital transformation in the Insurance sector as enabled by the key technology groups that are the focus of Transforma Insights’ research. These technology groups include: Artificial Intelligence, Distributed Ledger, Internet of Things (IoT) and Robotic Process Automation.

The purpose of the document is two-fold. Firstly, from the perspective of a practitioner in the insurance industry, the document highlights new and emerging aspects of change that can be expected to impact the industry in the next few years. Secondly, from the perspective of potential vendors to the insurance industry, it highlights key emerging areas of opportunity to sell new products, services and solutions to the insurance industry. Our analysis of the key technologies that enable each of the identified areas of digital transformation will help vendors of horizontal (technology-specific) capabilities to identify the contexts in which they may be able to secure new business from the Insurance sector.

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