Digital technology is disrupting industry after industry—and quickly separating winners from losers. The spoils are going to the boldest innovators. A McKinsey survey of more than 2,000 executives in industries affected by digital disruption shows that the companies with the highest revenue and earnings growth led the disruption or were fast followers, making big bets across their businesses on innovative products, digital processes, and even entirely new business models.1
Most insurers, though, do not have innovation in their DNA. Regulation has curbed incumbents’ ability to experiment, while limited competition has given them no particular need to do so—the size of their in-force books makes it hard for new entrants to build market share, and start-ups seldom want to take risk on to their balance sheets because of the capital required to offset it. But innovate they must. Although there is significant opportunity to capture value in the short term by digitizing their current business, they will get left behind if they fail simultaneously to use digital technology to innovate and build new business.
Exhibit 1 shows where insurtechs are concentrating their innovation efforts. To help companies think through where innovation lies, we look at three broad areas—new kinds of risk, new approaches to underwriting, and new value propositions. And we discuss how companies are organizing themselves to develop ideas and accelerate innovation.
Insurers have an immediate opportunity to write cover for new types of risk that are emerging in a digital age.
Companies today run on data, which makes cyber insecurity a major concern. An intrusion can not only disrupt business but also cause great harm to a company’s reputation, particularly if customer information such as credit card data is compromised. Consumers too are at risk, from identity theft, loss of financial assets, and unauthorized credit card use. Opportunities for carriers include prevention services and insurance integrated into the offerings of software providers (see box, “The cybersecurity opportunity—that few are seizing”).
Global supply chains
Digitization and ubiquitous data communications have enabled companies to build global supply chains. These complex networks make it possible for companies to source supplies, manufacture goods, and sell their wares anywhere in the world. But the rising complexity of supply chains also multiplies risk. There are more points of vulnerability, and disruption in any part of the chain can quickly affect the entire business. There is thus growing demand for equally sophisticated supply chain cover.
Digital technology not only creates the risk, it also provides many of the solutions. Using the connected sensors and monitors that comprise the Internet of Things (IoT), it is possible to track the location of inventory and finished goods as they travel on trucks, ships, and planes. Predictive analytics can then be applied to data on claims, weather, and other factors to enable insurers to underwrite the supply chain risk more precisely.
The cybersecurity opportunity—that few are seizing
Cybercrime presents rapidly multiplying risks for businesses and consumers. Having almost quadrupled between 2012 and 2015, from $112 billion to more than $400 billion,2 the estimated cost of cyber breaches is projected to reach $2 trillion in 2019, or almost as much as India’s GDP for 2015.3
Yet the insurance industry has not leaped at the opportunity to sell protection against this new risk. The global insurance pool in 2015, according to Lloyds, was just $2.5 billion.
Part of the problem is demand; awareness of the risk remains limited. There are also supply-side issues. Insurers are unsure how to model cybersecurity risk and still have not decided what they can cover economically. Few have written “full” cyber cover to compensate customers for all possible losses, including data theft, business disruption, property damage, and personal injury, and a lack of reliable information on historical breaches makes pricing difficult. Moreover, there are few standards for cover and the law differs according to jurisdiction. Perhaps most important, technology and the capabilities of hackers continue to evolve more rapidly than cybercrime protection methods.
Nonetheless, a risk this large should be the basis for a successful line of business for companies that are able to innovate. They would need to invest in understanding the drivers of cyber risk, which would require them to hire experts who understand the technical issues as well as the underwriting process, or enter partnerships with organizations that have those capabilities. They would also need to develop comprehensive histories of cybersecurity breaches and create compliance frameworks to measure enterprise risk. Given the magnitude of the risks involved, though, incumbents with strong balance sheets could have an advantage in cybercrime insurance.
The sharing economy
New kinds of risk are emerging from the sharing economy that has grown from digital technology’s capacity to match supply and demand. Online platforms such as Uber and Airbnb enable consumers to “share” unused capacity (a car ride, the use of a spare room) for a fee. This turns a car owner into a cab driver and a homeowner into a hotelier, and alters the nature of the insurance cover that the driver and homeowner require.
New solutions are emerging. For car rides, Uber supplies drivers with limited liability cover when its app is turned on and a driver is available. Its commercial cover kicks in when a fare enters the car. For drivers of BlaBlaCars (a service that operates in France and the United Kingdom), Axa offers a combined personal and commercial package.
Various forms of cover are emerging for homeowners participating in Airbnb and other short-term home rental platforms such as Alterkeys and 9Flats.com. The platforms offer protection for damage by tenants that cannot be resolved by the owner, but with significant exclusions. Carriers such as US-based Proper, which have long offered insurance to owners of vacation rental properties, are adding cover for short-term rentals. Still, most traditional homeowner policies do not cover commercial uses of properties. As the sharing economy grows, there will surely be more opportunities to innovate and provide relevant insurance products.
New underwriting approaches
Digital technologies enable new ways to provide traditional cover and underwrite traditional risks, often by using individual rather than group data. They are also being used to reach new customers.
“It’s hard for big carriers to innovate as they have so much to contend with already —industry headwinds, legacy issues. But they need to be in the game, right now.”
Traditional, loss-based insurance can be prohibitively expensive to provide for small amounts of cover. New data streams and data analytics address this problem. For example, they are enabling a form of low-cost, micro-crop insurance for farmers in emerging economies that does not require claims adjusters to trek to remote locations to settle claims. Instead, insurers use data analytics to determine if severe weather, low rainfall, or other factors would have damaged crops, and pay claims based on their analysis. This vastly reduces settlement costs, making it possible for insurers to offer affordable policies to farmers in the developing world.
In addition to facilitating the underwriting of small amounts of cover, real-time data can enable the provision of “episodic” or on-demand cover for short periods. Sure,…