Emerging connected technologies breaking thresholds of insurance business models: report

The continued evolution of the Internet of Things (IoT) is among the multiple threats pushing the insurance industry toward massive disruption, notes a report released Tuesday by Capgemini and Efma.

IoT, combined with changing behaviours and preferences from Gen Y customers, “is driving the urgent need for insurers to undergo significant transformation or risk falling behind emerging competitors such as FinTechs,” reports Capgemini, which provides consulting, technology and outsourcing services, and Efma, a global not-for-profit organization that brings together retail financial services companies from more than 130 countries.

The World Insurance Report 2016 – which provides research covering 30 markets across North America, Europe and Asia-Pacific – features data from 15,000-plus insurance customers globally through Capgemini’s Voice of the Customer survey of personal lines customers and exclusive Customer Experience Index, as well as findings from 183 face-to-face or online interviews with insurance executives.

“The insurance industry needs to brace itself for the massive, inevitable disruption brought on by Gen Y and the Internet of Things,” Vincent Bastid, secretary general of Efma, notes in the joint statement. “Those insurers who make it a top priority to improve their ability to manage and leverage data and risk will be the most prepared,” Bastid suggests.

Connected technologies – in the form of such innovations as smart home ecosystems, wearable devices and machine-enabled drones, robots and cars – are a “fundamental threat, or enabler, to the future of insurers,” states a joint press release from Capgemini and Efma. “These IoT technologies are expected to transform traditional insurance business models, including everything from the way insurers connect with their customers to their fundamental assessment and management of risk,” the statement notes.

Capgemini’s customer survey nonetheless found that insurers are underestimating the degree to which connected technologies will be broadly adopted. For example, only 16% of polled insurers say they think customers will embrace driverless cars while 23% of surveyed customers express interest.

Findings further show more than 45% of affluent Gen X customers are likely to adopt connected devices, smart ecosystems and wearables compared to only 30% to 35% of younger, non-affluent Gen Y customers.

Customers who are both Gen Y and affluent are the most likely to adopt connected technologies, at 50%.

Just where these customers will buy insurance is also of interest. Globally, about three in 10 polled affluent customers report they are likely to purchase insurance from technology firms, which rises to 47% for affluent Gen Y customers.

Customer experience levels among Gen Y customers is particularly concerning for the insurance industry, Capgemini and Efma suggest, adding that insurers who respond to them on their terms will have a clear competitive advantage.

Survey results indicate Gen Y customers are much less likely to have positive experiences compared to other age groups, despite communicating with them more frequently. In all, 32.1% of Gen Y customers use social media for insurance needs at least once a month. They also “interact with insurers up to 2.5 times more on social media than other customers and over two times more via mobile.”

Despite the interactions, though, positive customer experience levels are almost “20 percentage points lower than those of customers in other age brackets, suggesting that Gen Y customers have higher expectations for the standard of digital channels than their older peers,” the statement notes.

When it comes to digital channels, positive customer experience ratings are particularly low among the Gen Y population with only 30.5% reporting positive experiences with digital channels compared to 48.2% of others globally.

Gen Y customers also say “they would be likely to buy insurance from non-traditional technology-led providers, highlighting the threat from emerging competitors to the customer base of traditional insurers,” the release adds.

“By not providing adequate engagement for digitally advanced customers, carriers run the risk of pushing them toward a growing population of market entrants and non-traditional, technology-driven competitors,” cautions John Mullen, corporate vice president and global insurance leader for Capgemini.

But even bigger than the impact on customer connections, the report suggests, will be the impact on the core tenets of the insurance business. “In a connected world, data provided by connected devices, smart ecosystems and wearables will increase risk transparency, a dynamic that will likely lead to new business models, especially in pricing and risk control,” it argues.

Most important, “IoT looms large in managing the level of risk exposure due to safer environments. This will shift premiums significantly, threatening some carriers, but providing opportunities for those who can understand the emerging risks that are inherent as the rate of technology change becomes more pervasive in the lives of people and commerce.”

Building strong, but agile, foundations in the short term will help insurers prepare for the transformation of the insurance business. Medium term, insurer value propositions must be sharpened through strategic alliances and data-driven insights, and long term, “strategies must focus on transforming the business to stay ahead of emerging risk profiles, new interaction models, changing customer behaviours and IoT’s expected disruption of risk selection, pricing, and loss prevention,” the report adds.