(Image credit: Dollar Photo Club.) 

The insurance industry, considered slow to innovate, has traditionally operated on legacy systems and aging business models. But with the emergence of connected technologies and the Internet of Things (IoT), this is about to change. The IoT is poised to transform the nature of insurance underwriting and business design, making it possible for new players with different business models to gain a stronger foothold in the industry. Thus, for insurers, innovation may no longer be a luxury, but rather a necessary part of staying ahead in a gradually transforming insurance landscape.

Three themes IoT Technology Themes

The IoT is driving three key themes in the technological advances that are shaping customer lives:

1. Connected Ecosystems, wherein devices form a self-managed, independent ecosystem by communicating with each other and with minimal human involvement.
2. Embedded Technology, wherein devices are shrinking to fit into human lives through devices such as wearables and digestibles.
3. Machine Intelligence, wherein machines are increasingly programmed to perform tasks and take decisions for humans.

Under these themes, three technologies of particular importance to insurers are smart ecosystems, wearables, and driverless cars, which are expected to find very high uptake among certain customer segments such as affluent Gen Y and affluent Gen X populations. While 53 percent of affluent Gen Y customers are likely to adopt smart ecosystems, 55 percent are likely to adopt wearables and 46 percent are likely to adopt driverless cars. Among affluent Gen X customers, 50 percent, 48 percent, and 35percent of customers are likely to adopt smart ecosystems, wearables, and driverless cars, respectively.

The rise and fall of risk

These emerging technology themes have very important implications for the insurance industry. On the one hand, they are redefining how insurers connect with their customers by providing substantially more touch points and opportunities for interaction. On the other hand, they are also gradually transforming the industry at a deeper level by causing a significant realignment in the fundamental risk variables that drive the insurance business model.

With connected technologies providing direct access to customer data, such as a heart rate from a wearable device or driving pattern data from an in-vehicle device, risk transparency is also increasing. On the other hand, insurers will be able to conduct more accurate risk assessments based on more than just proxy variables.

Intelligent devices and the rise of sharing economies are also shifting the nature of risk ownership to include new stakeholders. For example, with driverless cars, the liability for accidents may shift from the car owner to the car manufacturer. If such cars are shared by multiple owners, as is speculated, then insurers may have to transact with an even greater number of stakeholders for a single insurable property.

Through smart-programming and real-time connectivity, connected technologies are also creating an increasingly safer environment. As customer exposure to risk slowly reduces over time, it may lead to a decrease in the need for insurance itself.

Finally, with real-time customer connectivity enabled by IoT, the underlying principle of insurance may shift from only risk transfer to risk mitigation coupled with risk transfer—driving insurance underwriting transformation long term.

Sweeping Changes in Customer and Product Portfolio

The insurance operating model may also shift towards mass personalization, driven by customer demands and enabled by advanced technology and data capabilities. Insurers could see a sweeping change in their customer and product portfolios as automated devices such as driverless cars convert personal insurance to commercial insurance by making manufacturers of such devices liable for accidents.

If the nature of underwriting changes, it will become increasingly possible for new players such as Google, Amazon, fintech firms, etc. to become more formidable competition to insurers. Such players may introduce new business models based on innovative underwriting and pricing techniques that are better equipped to cater to increasingly mobile and dynamic customer lifestyles. These firms may also possess advantages over insurers in other areas including stronger big data analytics capabilities and more robust brand value with customers, as well as a deeper customer understanding as a result of theirmore frequent customer interactions across of a number of platforms, unrelated to insurance.

In a potentially safer environment brought on by connected and intelligent technologies, it may also become more feasible for product manufacturers, such as those of autonomous fleets, to insure themselves. In fact, insurers have rated self-insurance by product manufacturers as the strongest threat at 37 percent, next to Google at 41 percent.

The Urgency of Strategic Adaptation

With these looming possibilities, it is critical for insurers to design their short-term and medium-term strategies now. In the short-term, insurers should strengthen their business to make it more robust and adaptable to changes. This can be done by streamlining operations, building capabilities in data and insights, and exploring opportunities for strategic growth through acquisitions, alliances, or expansion. In the medium-term, insurers can enhance their business to provide superior customer experience and build a stronger brand with customers. This can be done by exploring new value propositions, establishing strategic alliances with innovative players, and developing more insight-driven strategies through data analytics. Thus, to succeed in the new insurance landscape, it will be crucial for insurers to master three key areas: data, technology, and customer experience.