The digital future of insurance post-COVID-19

Pandemics profoundly impact communities and change our way of life.

‘The War on Tuberculosis’ public health campaign in the 1890s led to Americans refraining from sharing cups and spitting outdoors. The Spanish Flu of 1918 greatly increased the number of women that chose nursing as a career.

With the global economy crippled and many well-established businesses on the brinks of collapse, COVID-19 will reshape human behaviour and buying patterns forever. But what impact will this have on the global insurance industry? 

From several insurers returning premiums to the tune of hundreds of millions of dollars to consumers, to reduced investment income and downgraded ratings, the insurance industry has lost US$760bn in market capitalization globally. 

The worst for insurers is yet to come, with lawsuits filed over denied business interruption claims due to the pandemic, and POTUS insisting insurers cover these claims, even though these policies explicitly exclude coverage against pandemics.

But what does this mean for the insurance industry’s digital transformation? 

The problems have just begun

Insurers’ excessive reliance on third-party service providers will be severely tested as operational and technical issues combined with general business interruptions hinder their ability to serve policyholders. The inevitable communication delays around outstanding claims will lead to reputational and litigation risks. 

Down the road, this will create difficulties in pricing of various products. For instance, the workers’ compensation pricing model would have to be reimagined due to long term effects of COVID-19 infections, and the emergence of gig workers.

COVID will change needs and demands from customers

Insurers have continuously evolved their offerings to meet changing customer needs but the post-COVID-19 world will accelerate new product offerings at an unprecedented pace.

For products like personal auto, consumers will now demand a truly digital, contactless experience. The ability to make digital claim payments, for example, will be a huge differentiator.

Several firms like Twitter plan to have their non-essential staff permanently work from home. This would imply pricing for cyber insurance moving away from a guesstimate model to accurately assessing and pricing risk – a task hitherto avoided due to the sensitivity around the sharing of risk data.

Businesses have been hit hard by COVID-related closures and have been unable to file for business interruption claims. This will start a major shift in how businesses buy insurance with several business owners, going forward, including pandemics as a covered cause for BI coverage.

This trend by itself will give rise to others like dual-trigger parametric insurance policies, leveraging insurance as a derivative contract and episodic insurance.

On the consumer side, usage-based insurance will be a de facto expectation for segments like personal auto. 

The role of technology

Insurers have always been very innovative in their product offerings but on the technology front, a legitimate criticism of the industry is that it has been slow to react. This will change going forward with the emergence of a new normal.

These changes are needed as that’s what a safe and pleasant customer experience demands. Imagine being involved in an auto accident, and having to physically interact with several parties, just to exchange some paper documents!

The changing demands across both ends of the spectrum call for inter-firm coordination and seamless B2B communication. Inter-firm coordination is challenging, with a lack of transparency and visibility into the process. A simple claims adjudication process for auto claims involves multi-party coordination, making it impossible for a customer or a customer service rep to get an updated status on the claim until the other party finishes their work.

A straightforward product like parametric insurance should ideally guarantee instant payout once the triggering condition is met but today it takes weeks, even months at times. 

Enter blockchain

Blockchain is a medium for firms to communicate with each other in a secure manner so as to seamlessly exchange data. Purpose-built enterprise blockchain platforms take this concept a step further and ensure that only the parties involved in a transaction view the transaction. 

What that means in a multi-party scenario like claims adjudication is that there is a consistent view of the claim across the customer, customer service rep and auto service shop. They can exchange data securely across organizational boundaries by deploying an application that is “consistent yet unique” in how each one of them views it. 

In the parametric claims example, a smart contract can evaluate all the policies placed on a ledger, determine which ones meet the underlying condition, initiate and complete payout on the ledger – all in a matter of minutes without any human intervention!

But, not all smart contracts are created equal – some blockchain protocols refer to a piece of code as a smart contract; while others implement smart contracts to refer to a piece of code executing against a legally enforceable contract – which in insurance is nothing but the policy document!

So, will everyone move to blockchain?

Given that the network of participants involved in placing a contract or adjudicating a claim cuts across organizational boundaries, an insurer cannot be truly digital unless its network is digital.

This would imply an end-to-end digital application framework that allows all parties to securely communicate with each other to exchange data. This is a textbook case of blockchain, so yes, we will see an acceleration in blockchain technology adoption – across consortiums as well as non-consortia initiatives like parametric insurance, cyber insurance and beyond.

To go back to how we started this piece – pandemics reshape society. With COVID-19 and insurance, the effects will be seen through the industry being more open, accessible and flexible in terms of preparing us for future disasters – yet another example of insurance protecting society at its most vulnerable. 

This article was contributed by Ronnie Kher, Director of Insurance Business Development, R3