Traditional insurance companies are currently facing threats on several different fronts, from Coronavirus-related payouts to cyber security challenges and InsurTech disruption.

The most immediate concern is that the pandemic is hitting every industry in many different ways.

Following a short consultation last month, the Financial Conduct Authority (FCA) confirmed some targeted temporary measures for insurers.

They were asked to waive cancellation and other fees associated with adjusting customers’ policies; reassess the risk profile of customers which may have changed due to COVID-19 with the scope to offer materially lower premiums; and consider whether alternative products can be offered which would better meet the customer’s needs.

Tim Hardcastle, chief executive and founder of insurance software firm INSTANDA, said that the primary challenge for insurers will be how they can quickly adapt their systems and processes in order to meet the demands of these new measures in the most seamless and cost-effective way possible.

“The positive news is that there are a number of flexible digital solutions out there for insurers to enable them to bypass their outdated legacy systems and adapt at speed, whilst keeping operational costs to a minimum,” he explained.

“The pandemic has brought to light the desperate need for digital transformation of the insurance sector and the FCA’s ruling is yet another example of this.”

Increased cyber threat

Another consequence of the Coronavirus crisis is that cyber criminals have exploited the increased number of remote workers and the early lack of co-ordination amongst teams to launch attacks on businesses of all sizes.

In response, insurance bosses have called for a government-backed programme to help the sector deal with the impact of cyber security threats.

The committee, led by Lloyd’s of London chairman Bruce Carnegie-Brown, raised particular concerns around the impact of any future catastrophic events such as a large-scale, state-sponsored hack.

“The cyber insurance market is relatively new,” said Carnegie-Brown. “It’s fast-growing, but it’s quite small – most businesses, and indeed individuals, are not protected for cyber risk in the UK.

“You could easily see that having a similar impact [to COVID-19] on the UK economy if very significant parts of the economy were taken down by some kind of a cyber intervention.”

Manan Sagar, chief technology officer for insurance at Fujitsu, said that the ‘new normal’ post-Coronavirus will mean most businesses not only have to increase their reliance on online channels, they will also be providing their employees with a transformed workplace where working from home will become regular practice.

“Most insurance policies are designed to cover traditional property and casualty losses where customers and employees transact from physical sites. Such policies offer minimal or no coverage to cyber attacks – this gap doesn’t just leave businesses exposed, it risks de-railing society as we attempt to emerge from this global pandemic.

“The insurance sector needs to work with technology sector and the government to reduce the likelihood and severity of cyber attacks, because no amount of social distancing will be able to help if a large-scale attack was to happen.”

J Gdanski, chief executive and founder of crypto asset insurance company Evertas, added: “The insurance industry has already found itself unable to deal adequately with claims linked to ransomware, and losses concerning cryptoassets and blockchain are significantly more complex.

“If a loss were to occur at an exchange with sophisticated security, it is likely that the insured will have greater depth of skills in investigating this than the insurance company itself.” 

InsurTech disruption

These new threats come at a time when the traditional insurance business model is under attack from a variety of cheaper, more agile and user-friendly digital challengers.

Paul Donnelly, executive vice president for EMEA at Munich Re Automation Solutions, said from his point of view, the most important difference between incumbent and startup comes with regard to user experience.

“While traditional insurers have a well-established reputation for dependability, financial security and understanding the consumers’ product requirements, there is far more to it – and the truth is, many still have lessons to learn when it comes to being sensitive with their customers’ time.

“Nothing irks a consumer today as much as being asked for the same information repeatedly, starting on a journey that cannot be completed, or finding a surprise change to the indicative premium,” he continued. “We have even seen cases of dramatic exclusions to the level of cover towards the latter stages of the process where the supposed expert party to the conversation (the insurer) could have, and should have, known and surfaced this much earlier.”

Vijayamohan Keshav, senior principal business consultant at technology consultancy Expleo, explained that InsurTechs have the benefit of being tech-native and having a digital first approach in all operations, which makes them more agile than traditional insurance companies, many of whom have struggled to adapt digitally and are still relying on manual processes and legacy systems.

“As a result, InsurTechs can create and introduce products to consumers, or adapt to market pressures much more quickly, and potentially more seamlessly – their lean digital operations let them tackle aspects like remote working seamlessly, unlike traditional insurance firms, as shown by this pandemic.”

He suggested that incumbent insurers use some of their capital reserves to upgrade technology, both in the back end and consumer-facing side of the business, while also putting state-of-the-art security measures in place.

“However, the trend in recent years for traditional insurers has been to take a very cautious approach to digital transformation – as a result, when the coronavirus pandemic occurred, up to 70 per cent of them were still relying on manual processes and legacy systems,” said Keshav.

New lines of business

Innovations in technology have resulted in various product related changes in the insurance industry. Assessment of risks for instance has changed due to Internet of Things, connected devices and wearable technology, while certain products have been simplified or customised for sale through digital channels.

“Autonomous vehicles can be potentially a major disruption given that traditionally vehicle insurance has been a major contributor to the top line of personal insurance lines,” commented Keshav, adding: “Insurers which take proactive steps on this front will have a first mover advantage.”

Tom Helm, head of claim consulting within the insurance consulting and technology team at Willis Towers Watson, picked up the self-driving vehicle point, arguing that whether they be five or 25 years away, their arrival appears an inevitability.

“Not to be outdone in this digital age, insurance claims is forging its own digital transformation path, leveraging advancements in technology and analytics to inject automation into the claim process,” he explained.

Claim-focused InsurTechs have recognised this challenge and have typically responded by disrupting distinct elements of the claim process, with a significant number targeting digitisation of the first notification of loss process - for example, using AI to assess images to determine the extent of vehicle damage or developing a solution that enables the customer, or their broker, to self-serve this part of the process through a digital channel.

A common thread across these activities is decision making, and Helm suggested that this where the technology opportunity kicks in.

“Computer science can play a key role in this decision-making process, and progressive insurers are already leveraging its predictive power - supported by advancements in Natural Language Processing, the accuracy and speed of decision-making can expedite proactivity in claim handling and improve efficiency, bringing significant financial savings and better outcomes for customers.”

Helm did point out that the caveat to achieving full automation in claims is that certain aspects of the process or scenarios will require complex judgment, investigation, or the human touch, such as the need to reassure and empathise with a customer who needs support during a significant event.

Partnership solutions

As FStech previously investigated in 2018, partnerships between incumbent insurers and InsurTech disruptors seem to be one of the most effective ways to move the industry forward.

Paul Stanley, head of insurance at Accenture UK and Ireland, suggested that by establishing an ecosystem of technology partners, insurers are more likely to achieve their technological goals and facilitate easier, more secure information through areas such as Application Programming Interfaces (APIs).

“Collaborating with a select group of technology partners allows insurers to combine unique capabilities to push the technological boundaries necessary to unlock growth and get closer to customers – this could include sections of the insurers’ value chain being carved out on their behalf by a third party,” he explained.

“Indeed, BigTech could accelerate implementation to drive new sources of value at speed whilst simplifying parts of insurers’ operations,” Stanley continued, adding: “Traditional insurers should embrace the different working styles and culture of InsurTechs as inspiration to transform their own and drive more innovation at the core of their business”

There have been several recent examples demonstrating this trend, with traditional groups able to innovate without significant internal investment, while startups can gain access to scaled-up customer bases.

IBM recently entered into an agreement with Aegon in the Netherlands for the servicing and administration of its individual life policies - a move designed to digitally enhance the service for around 800,000 customers.

The policies will be migrated to IBM’s Open Insurance Platform to digitise the insurance policy administration from customer contact to financial settlements in an IT platform hosted on the IBM public cloud.

Outsourcing the administration to IBM is aimed at helping Aegon reduce its management costs per policy for the full remaining contract time, with the platform helping to secure continuity of the management of closed book life insurance policies against low fixed costs per insurance policy.

Another move saw digital asset custody startup GK8 making its product insurable by Aon UK and a panel of insurers led by Arch Underwriting at the Lloyd’s insurance market.

As with any growing asset class, digital securities bring with them new insurance needs. The premium insurers earn from blockchain-powered businesses have been modest to date, but the market appears to be accepting the risk/reward equation.

The Aon policy is designed to cover internal theft, as well as external theft, loss, damage, or destruction of the assets stored in their cold wallet.

“We have worked hard to demonstrate the validity of GK8’s solution to insurers so that the company’s clients can benefit from pre-negotiated insurance coverage to protect the digital assets in their care, custody, or control,” says Tom Davis, client director of Aon UK. “As such, we’re excited to facilitate this offering to clients of GK8 who comply with the company’s security recommendations.”

Finally, InsurTech firm Zego partnered with global telematics firm ABAX to drive down the cost of insurance for fleet owners.

While some vehicle fleets already use on-board telematics devices to improve efficiency, many still operate without them. Zego will now offer businesses an ABAX telematics solution and usage-based insurance policy wrapped up in one.

Morten Strand, chief executive at ABAX, commented: "The world of business and commerce has been changing rapidly for some time, although no-one could have foreseen the impact of COVID-19 – which has both accelerated the change, and pushed businesses into some interesting new directions.”

Facing the future

COVID-19 has hit the insurance industry hard, with UK insurers losing on average 30 per cent of their market capitalisation, as the operational costs of crisis management have risen while there is potential for lower levels of new business.

“When you examine these challenges alongside the recent requirement for insurers to expand their online access and roll out collaboration tools to stay connected with employees, customers and partners, this is no easy feat,” noted Stanley. “It’s now more crucial than ever that insurers tackle these business challenges whilst navigating the new world we’re living in by ramping up their digital capabilities.”

Willis Towers Watson’s latest InsurTech briefing for the first quarter of 2020 showed a 54 per cent drop in total funding, when compared with the record highs of last quarter.

The slowdown in March coincided with several major event cancellations and sporting season suspensions amid climbing rates of COVID-19 infection, the report read. “Entire cities and nation states have now been shut down or put into isolation, which has led, and in some instances forced, the (re)insurance industry into a brave new world – what was a clearly defined sold insurance risk (e.g. auto) in January was not necessarily the case in March.”

That said, the recent Initial Public Offering (IPO) filing by US home insurance disruptor Lemonade - aimed at raising at least $100 million - has showed that there is still life in the sector.

Its app-based business model keeps a flat fee of 25 per cent of customers’ premiums, using the remainder to pay claims and donate to charity, while processing claims in record time using advanced algorithms. It has so far been successful, with the IPO documentation showing revenue of $26 million in the three months to 31 March, compared to $11 million for the same period in 2019.

INSTANDA's Hardcastle commented that the underlying message for the industry is clear – the markets believe there are better ways to deliver insurance products and services.

“Lemonade embraces technology to bring more flexibility to the industry, delivering diversified products tailored to individual needs – incumbents, meanwhile, have traditionally been held back by clunky legacy IT systems that often cause delay in responding to customer needs.”

Stanley added that the Coronavirus crisis has only added to the shift in consumer demand for more real-time, personalised interactions with insurance providers.

“When it comes to customer facing technology, even pre-pandemic insurers were struggling to seize new technological opportunities to keep up with shifting consumer demands, but now the pandemic is shining a light on how they respond to customers during this time.”

In a recent blog, Aon's chief operating officer John G. Bruno commented that the pandemic hit at a time when overall insurance spend as a proportion of global GDP was stagnating, but there is an opportunity for insurers to satisfy clients’ increasingly complex insurance needs with new and relevant products.

"The crisis is going to trigger another digital pivot – one that will see the InsurTech space attracting renewed venture capital investment flows," he concluded. "The resulting solutions will help resolve the many dislocations created by the COVID-19 outbreak and will ultimately re-imagine how consumers and businesses interact with risk transfer solutions."

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