How will the insurance industry change before 2025?

By Adam Goldsmith, Insurance Specialist, SAS UK & Ireland
Adam Goldsmith at SAS provides five indications of the direction insurance could be heading in and how to prepare...

Change is in the wind for the insurance industry. In the midst of this black swan event which is the global pandemic, insurers the world over are finding that current practices are fast becoming out-of-date. Customers have new needs and expectations, and algorithmic models have run out of historical data to base judgements on. Now centre stage in one of the greatest international crises in modern memory, the insurance industry – until now relatively slow to transform – is beginning to feel the force of long-term disruption.

Much is changing as we speak, but the true impact of COVID on the insurance industry will only become apparent in the years to come. Of course, only those prepared for adaptation in the face of the challenges and opportunities ahead will be shaping the future of insurance. For now, reacting to trends like those outlined below will be the key to preparing tech-savvy and flexible insurers for moving with the seismic shift we’ll see in the coming years.

1. Sharing data will be critical for truly understanding customers

A typical Insurer today is set up in a very traditional manner. There remain distinct, separate departments for the key functions: including assessing risk, acquisition, customer engagement, claims handling, customer protection and renewal. This is in addition to maintaining the operational, financial and organisational support structure that’s needed for the firm to survive.

Yet very few insurers have a truly joined-up view of a customer’s full journey with their organisation, let alone what can be done to optimise each interaction. What’s needed is the ability to understand each customer touchpoint as they traverse through their journey, as well as the ability to make decisions as to how best to engage them.

This imperative is more urgent than it might appear. One example of a forced change for insurers is the recent FCA final report on home and motor pricing that was very critical of ‘complex and opaque’ pricing processes. In particular, it criticised the industry’s 'loyalty tax' on customers that renew with the same providers each year. With this regulatory mandate for change, insurers will be forced to take a more holistic approach to the way they price policies for their customers, across both new business and renewal processes.

Insurers often cite legacy policy admin and claims systems as the biggest barrier standing in the way of this approach being adopted. By 2025, however, the most successful insurers will have broken those barriers down, gaining an unprecedented understanding of their customers’ needs and preferences, and the ability to offer pricing plans that are both fair and competitive. 

2. Algorithmic excellence will be at the heart of progress

We've long heard of 'digital transformation' being a key objective for insurance executives. However, by 2025 it’s expected that successful insurers will have completed this transformation. Digitalisation will no longer be the differentiator, it will be the default. As a result, a new way to drive business advantage will have to emerge – and it will be centred on the use of algorithms to drive business decisions.

This is not a new concept. Gartner describes 'algorithmic business’ as the ‘industrialised use of complex mathematical algorithms pivotal to driving improved business decisions or process automation for competitive differentiation'.

We’ve already seen some insurers start this journey in their claims function. Companies, including Aviva, have long automated decisions concerning whether a vehicle is deemed a total loss or not. However, the trend will become much more prevalent, with Gartner research predicting that, by 2023, over 33% of large organisations will have analysts practicing decision intelligence, such as decision modelling.

3. Tech will help deliver the interactions customers want

It’s clear by now that COVID-19 will fundamentally change how insurance is done – both in terms of how customers want to interact with insurers, and also how insurers need to adapt. While we hope this pandemic won’t be with us forever, it has opened the eyes of many executives to what is possible within the customer-facing parts of their organisation.

From my discussions with insurers, many have commented on how well employees and customers have adapted to the new normal. While there were initial logistical hurdles in virtualising contact centres, they’ve been impressed at how well staff have adapted under pressure to deliver what customers and shareholders expect. Many are likely to follow the approach of Lloyds in allowing staff to work remotely for the foreseeable future. 

Indeed, the previous months have exploded the myth that minimal policyholder interaction is a barrier to customer experience innovation. Technology can more than fill the gap. As companies like By Miles have shown, on-demand or telematics-based products can deliver an insightful monthly, weekly or even daily dialogue with customers. 

4. Prevention will become far more important than the cure

Insurance has long been society’s safety-net, protecting us when something goes wrong in our lives. Yet, it would be to everyone’s benefit if risk could be avoided altogether. The use of telematics to assess the risk of younger drivers was the first big industry push here, but by 2025 we will see this becoming ubiquitous across many other products and customer demographics.

The recent example of Munich Re’s acquisition of IoT service provider Relayr will benefit manufacturers with a ‘pay as you use’ model. This will enable them to be more flexible and react faster to market changes. The IoT Observatory is also exploring new ways that data extracted from connected sensors and devices can help to transform risk assessment and empower insurers with data.  

This is no small step for any traditional insurer. But it is one that puts a truly customer-centric lens on the service that insurers deliver. Data-driven risk prevention allows for significant product differentiation, taking insurers out of their comfort zone and enabling them to explore whole new opportunities. 

5. Fraud is increasing and insurers can’t afford to tackle it poorly

Come 2025, we will be living in a very different world with new risks that require novel insurance solutions to resolve.

One of the largest looming threats is insurance fraud. Recent analysis from the Insurance Fraud Bureau shows that fraudulent claims rose by 5% in 2019, and there are concerns the current economic climate could see this rise even further. In the aftermath of the 2008 Financial Crisis insurance fraud rose by 17%, and there’s no guarantee this won’t happen again on the back of growing practices like crash for cash fraud and ghost broking.

Putting in place an effective defence mechanism to intelligently detect, prevent and investigate potentially fraudulent claims will be an essential requirement by 2025. Fraudsters are nothing if not resourceful and they regularly target the weaker insurers. A soft defence is a liability while those that take fraud detection seriously will drive a more profitable outcome. This is especially true when it was announced recently that close to 20% of each policy premium is goes to cover the cost of fraud.

Insurers have plenty to consider as we await a future without the pandemic. Those who can spot these patterns in their interactions with customers right now, and consequently adjust business models, data sharing and decision-making, will be ready to compete to redefine the industry in a post-COVID world. Looking to the future of insurance, based on what we’re seeing now, is the best way to get a strong head start.

This article was contributed by Adam Goldsmith, Insurance Specialist, SAS UK & Ireland


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