Modern technologies, and digitisation in particular, have the potential to make insurance more appealing, more affordable and better understood. As a result, wide insurance gaps across the globe may narrow, boosting the industry’s contribution to economic and societal development, says Dr Kai-Uwe Schanz of Dr. Schanz, Alms & Company.
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Highlights
- The biggest sources of value creation through digitised insurance will be in reducing costs and developing new products and solutions;
- New technologies offer the potential to radically lower transaction costs and remove traditional obstacles to insurance.
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Globally, the lion’s share of the financial consequences arising from calamity remains uninsured, from property losses to healthcare expenses. This state of affairs partially reflects today’s insurance products’ perceived lack of appeal, affordability and awareness.
From the perspective of economic theory, long-standing issues such as moral hazard, information asymmetries and transaction costs are key determinants of these shortcomings. This begs the question whether modern technologies can make a difference by narrowing existing insurance gaps and enhancing the overall societal relevance of the industry.
The broad consensus is that the biggest sources of value creation through digitised insurance will be in reducing costs and developing new and more customer-centric products and solutions. The key for insurers to unlocking this potential and tap into the vast protection gap is to integrate technology, data and analytics. As far as technology is concerned, insurers increasingly embrace their customers’ preference for mobile communications and transactions, respond to a much increased level of desired interaction, such as through digital advisors, and harness the “explosion” of available sources and pools of data, through the Internet of Things.
They also explore longer-term opportunities from technology applications such as artificial intelligence – conferring the ability to recognise patterns in large and unstructured sets of data – and blockchain, which offers a secure use of common distributed data.
Key links of value chain
Against this backdrop, let us examine the key links of the insurance value chain as they undergo a process of digital transformation. New (digital) technologies are expected to profoundly impact all links of the chain in a way which offers the potential to radically lower transaction costs and remove traditional obstacles such as moral hazard and adverse selection. One of the key forces at work is disintermediation which connects carriers with their customers directly, enabling tremendous gains not just in terms of cost-efficiency, but also in anticipating and understanding customer needs. These effects are set to boost insurance penetration.
Digital enhancement
The impact of digitisation across the value chain is pervasive and permeates across the areas of pre-purchase, sales and operations. It reshapes the way customers discover and perceive insurance propositions pre-purchase. Sales are enhanced by reduced costs as a result of disintermediation and increased conversion of leads on the back of tailored solutions and “digitally enhanced” physical distribution channels, which continue to play a major role as long as the majority of customers prefer “hybrid” models of distribution. The adoption of straight-through processing can lead to a massive reduction in backoffice costs. Coupled with Big Data and predictive analytics, it can also translate into significant improvement of the claims ratio.
The radical changes to the insurance value chain brought about by digitisation are set to boost insurance demand via three major levers, which we may dub the “Triple A” of insurance demand: awareness, affordability and appeal.
Dr Kai-Uwe Schanz is Chairman of Dr. Schanz, Alms & Company AG, Zurich. He can be contacted at kai-uwe.schanz@schanz-alms.com. This article draws on a major recent Geneva Association report co-authored by Dr Schanz.