Article Synopsis :
For a long time, insurance proved resistant to digital technology’s disruptive power. Complex regulation, high capital reserves required to underwrite insurance, and underwriting skills and proprietary data built on years of experience kept the industry protected. But these barriers are rapidly eroding.

Digital means short-term gain, long-term pain for auto and other non-life carriers 

This report from McKinsey frankly discusses some of the key challenges, as well as opportunities, facing insurers.  Highlights include:

For the most part, the main threat is not from Insurtechs. Though VCs have poured $4.4b into P&C InsurTechs over the last two years, 91% are trying to help incumbents provide better distribution and services, with only 9% aiming to oust them.

The good news in auto: Incumbent car insurers could improve profits over the next eight years by harnessing digital technology. Better data will make pricing more accurate and help detect fraud, while automation could cut the cost of a claim by as much as 30 percent.

The bad news: With forward-collision avoidance, blind-spot assist, and adaptive cruise control already common features in new cars, safer vehicles will reduce risk and lower premium income. In the case of entirely self-driving cars, manufacturers may assume the risk for what was previously a personal liability.

The result of these changes could be that over the course of a decade, insurers’ profits fall precipitously.

More bad news: The same shift toward risk prevention is apparent in other insurance segments. In the home, for example, sensors can shut off the water system if they detect a risk of flooding. In factories, connected devices on manufacturing equipment can alert operators to a maintenance issue.

It’s now possible to imagine a business model built not so much on the premiums consumers pay to protect themselves against damages they might or might not incur, but on gadgets or services that predict and help prevent loss in the first place.

Thanks to economies of scale and network effects in a digital economy, companies that move fast tend to take a greater share of a shrinking economic pie.

Also, in a digital economy, companies owning and analyzing data are increasingly powerful. Insurers might have valuable historical data, but will they be able to compete with players that are able to gather real-time data from sensors in cars and homes, or from social media, credit card histories, and other digital records?

What is a carrier to do? The answer no doubt lies in the speed with which they digitize existing businesses, using the enormous cost savings and newfound skills in areas such as analytics to drive new sources of growth.

In addition, incumbent insurers should consider partnerships to offer new value-added services, be they, for example, part of a cybersecurity package offered by software providers, or part of a package for car owners offered by an ecosystem of companies that might include telematics providers and car manufacturers, as well as those offering roadside assistance, car repairs, or car rental.

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Digital Insurer's Comments
This article brings two related quotes to mind. The first is by Dan Schulman, CEO of Paypal, “The biggest impediment to a company’s future success is its past success.” And the second comes from MIT’s George Westerman, “When digital transformation is done right, it’s like a caterpillar turning into a butterfly, but when done wrong, all you have is a really fast caterpillar.”

It’s really hard to think outside of the existing paradigm of what you are. As you try to envision a new and more nimble digital you, if it feels familiar, if it feels safe, if it feels comfortable, you should probably scrap the idea and try again.  Remember the goal is butterfly, not fast caterpillar.


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