McKinsey: How top tech trends will transform insurance – Part 2
Why tech trends matter—and why now
These technology trends have the potential to materially change some of the underlying inputs of insurance products and core functions. In underwriting, for example, automated warehouses (enabled via applied AI and distributed infrastructure) may fundamentally alter the nature and focus of workers’ compensation coverage by removing the majority of human workers from most warehouse operations. The higher-order impact of these trends on insurance will likely be experienced when technological forces interact and build upon one another. As an example of this multiplicative effect, we see distributed infrastructure (such as wearables), trust architecture (enabling privacy-protected sharing of real-time health data), and applied AI (enabling real-time feedback on the impact of physical activity on personal wellness) combining to transform how insurers use data to develop predictive insights and inform a variety of interactions with policyholders. Similar innovations could take place across the insurance value chain.
According to Amara’s Law, we often overestimate the short-term impact of new technology and underestimate its long-term effect. With respect to the tech trends affecting insurance, it is unclear where the industry is in the impact continuum. Given the pace at which these trends have emerged and become disruptive (consider the rapid, in some cases exponential, increase in AI capabilities such as deep learning in the past three to five years), we may have passed the inflection point and begun to underestimate their long-term impact. These specific trends have significant momentum (as measured by the tech trends index), and innovative insurance incumbents and new entrants have started using them to offer new products and services. However, many insurers are still modernizing their technology stacks and are at an early stage of the digitalization journey, leaving them susceptible to being overtaken by more nimble players. All of these factors should be a wake-up call for insurance executives to develop an understanding of where and how these trends may affect their core products and the competitive landscape.
Scenarios enabled by the combination and interaction of tech trends
Several scenarios could play out, depending on technology adoption, government legislation, consumer preferences, and tech-enabled product innovation.
Property and casualty
While these trends could affect property and casualty (P&C) in a range of ways, two scenarios illustrate the extent to which they could transform the landscape.
Seamless, automated underwriting of commercial insurance
Key trends: applied AI, distributed data collection, future of connectivity, and next-level automation
Scenario: The combination of applied AI, distributed data collection, future of connectivity, and next-level automation will allow insurers to underwrite a much wider range of risks more or less automatically using real-world, real-time data from a variety of sources. Insurers can increasingly use drones, satellite-generated radar imagery, computer vision, applied AI, and smarter edge devices to collect a variety of data on facilities and assets. In just a few days, a carrier could compile a data set of radar-based and drone-generated images and image attributes of an oil rig to inform underwriting in a fraction of the time currently required. Trust architectures embedded via IoT and high-speed mobile networks allow a wide range of participants in the insurance value chain to share data in a secure and public manner.
Potential P&L impact: There could be significant improvement in combined ratio as a result of more accurate underwriting and more efficient processes for initial quote and bind as well as renewal.
- Predictive intelligence company Windward provides watch-list monitoring for maritime assets, enabling risks to be assessed based on near-real-time conditions and recent activity.
- The integrated logistics company Maersk has built a maritime blockchain with a vision for using IoT and smart contracts to update policies in an automated fashion.
Drastic shift in risk profile and how insurers partner with their customers to manage it
Key trends: next-level automation, applied AI, trust architecture, and distributed infrastructure
Scenarios: As the degree of automation increases in traditionally labor-intensive industries, the nature of insured risk will change. Consider a fully automated dark warehouse run by robotic pickers using applied AI and next-level automation. Risks from cyberthreats and malfunctioning AI become more acute compared with accidents caused by human error. The nature of risk will change, while some new risks may emerge and require new types of coverage and underwriting.
Managing risks from autonomous and semiautonomous vehicles will force carriers to reassess how auto insurance products function. The role of insurers may shift from claims to prevention, whereby they are best placed to identify and reduce risk by partnering with clients and using technology. In many cases, insurers will need to form ecosystems and integrate a multitude of data sources.
Potential P&L impact: Industry revenue and profit pools could shift significantly.
- Munich Re’s aiSure is an insurance product for AI providers that wish to offer insurance-backed performance guarantees. For example, Deep Instinct (a cybersecurity firm using AI and deep learning in its products) offers customers a ransomware warranty backed by an insurance policy purchased from Munich Re.
- AXA’s Construction Ecosystem integrates data from a range of technologies, including imagery, wearables, and sensors, to provide contractors with unique insights and benchmarks to help manage risks on their jobsites.
Life and annuities
Through technology, insurance underwriting becomes continual rather than at a point in time, with innovative products emerging to reflect shifting customer behaviors. Models such as ecosystem-enabled data sharing will give insurers greater access to granular information to support more specific pricing and risk tiering. The combination of tech trends will enable insurers to cover individuals in more dynamic and responsive ways.
Insure the individual: ‘Pay as you live’
Key trends: future of connectivity, distributed infrastructure, applied AI, bio revolution, and trust architecture
Scenario: The ability to engage individuals continually will lead to products that dynamically adjust premiums, benefits, or both on a regular basis. Mortality and morbidity insurance will be a more fluid product, essentially enabling individuals to pay as they live. For example, many individuals today need to buy life insurance, critical-illness protection, disability coverage, and long-term-care coverage to fully protect their families from the financial disruption of high-cost medical events. In the future, the lines between these product categories will blur substantially, as carriers are able to offer “umbrella” coverage across risk categories tailored to each individual. In addition, with the bio revolution and the advent of precision medicine, carriers will be expected to have a significantly more nuanced perspective on a customer’s risk. The ability to “unbundle” traditional protection products to create custom packages will be guided by broader regulation and actuarial standards, which will need to adapt.
Potential P&L impact: Industry revenues and profit pools for personal life and health insurance could change substantially.
Emerging example: Vitality, a South African wellness solution, provides incentives for better health behavior, collects data using fitness devices, and dynamically prices risk over time based on customers’ engagement with their health.
Reimagining strategy in an evolving landscape
As these trends unfold and begin to steadily alter the nature of insurance operations and products, incumbent carriers will need to carefully consider a number of critical questions to inform decisions and actions in the near future:
- How will these trends affect the nature and structure of our organization? In what ways will we need to adapt our functions and core processes?
- Do we have the right talent and mix of skills that will be required to both understand and harness these new technologies? Where are our gaps—and how wide are they?
- If we were to incorporate these new technologies, should we pursue a build, buy, or partner strategy?
- What is the role of data and technology ecosystems as we consider our future technology, product, and operating strategies? If we participate, what should our role be—for example, ecosystem owner, facilitator, or participant?
- How are consumer attitudes toward privacy and data sharing evolving? Which technology ecosystems are well positioned to capture data that could be transformative for insurers?
- Where are traditional insurers being disintermediated by new entrants, and where do new entrants have an unfair advantage in how they deliver products and services built on tech trends?
The tech trends highlighted in these articles will dramatically reshape the industry from top to bottom, creating significant opportunities and, in some cases, existential threats to traditional players. These shifts are already happening, meaning insurers should act now to develop a more ambitious vision for how technology can elevate their organizations. To embrace the potential of tech trends, winning insurers will build their tech talent, put tech trends and their business implications on the leadership agenda, and be willing to disrupt their own products and services.