New Delhi: The next 15 years will see dramatic changes in the insurance industry, according to a new study by the IBM Institute for Business Value.
The report, "Insurance 2020: Innovating Beyond Old Models" was based on discussions with more than three dozens global insurance industry executives at top firms.
It found that current standards will survive, but will not provide the kind of growth the industry seeks. Responding to changes in demographics, technology, information and other areas, insurers will create dramatically different products, services and business processes.
The IBM report predicts that technology will give birth to entirely new policies such as "just-in-time-insurance," where each step of a journey would represent a different risk, such car-to-train-station, train-to-city, station-to-office, etc. A "pay-as-you-live" scenario would trade some location and time of day privacy data for lower insurance bills.
The insurance industry, fuelled by changes in customer demographics, technology, regulatory structure, and globalisation, is growing at an annual rate of approx 20 per cent. The challenge is to meet the compounding demands of evolving market, fiercer competition and new distribution channels; hence a revamp in the existing insurance structure.
Pay-as-You-Live Insurance, which deals with life 'as it happens' and Active Risk Management, which emphasises on preventive actions, will replace the long held Insurance industry models, as the existing models are fast approaching the point of diminishing returns – suggests the IBM research study.
"Like the dinosaur, the business models of many insurers in the Asia-Pacific region must evolve rapidly keeping pace with dramatic market changes to avoid extinction. The imperative for a new model is driven by the opening of a new era, or at the very least, it is an evolving reality as the market dynamics set a new course for the industry. The task ahead is as much a battle for a change in direction, as it is a battle for a change in mind-set among the industry's existing players", said Sandip Patel, Partner, IBM Global Business Services, Financial Services Sector Leader - Asia Pacific.
Over the past 20 years, industry analysts and the press have reproached the insurance business for being so slow to adopt what are clearly important innovations. In the 1990s, it was the Internet and its potential to revolutionise sales, service, and consumer education. More recently, it's been wireless data communications devices for field professionals.
Why is the insurance industry slower to adopt new technology? For a partial explanation, one can point to the low volume and low frequency of insurance transactions: old practices appear adequate, but not for much longer.
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There are a number of drivers causing change - important developments in IT, global competition, new demands from consumers transparency threatening to commoditise insurance products, and industry consolidation and convergence. This is a time of change for insurance companies - a time that offers both promise and peril.
The study respondents and data analysts' revealed four mega-trends that underscore the need for innovation and will pave the way to consistent value creation for stakeholders by the year 2020:
- The rising tide of technology will enable an increasing number of niche service providers from inside and outside of the traditional value chain.
- The proliferation of modern information networks and the ongoing transfer of financial responsibility to end customers will drive applicants and policyholders to shift loyalties to carriers that consistently meet their expectations.
- The globalisation of all industries and the need for efficiency will drive the coordination of consumer and business protection across geographies, increasing automation and underscoring the demand for industry standardisation.
- Personalisation will drive carriers to develop products that are flexible and adaptable. Technology will empower insurance companies to bring their products closer to real time interaction via sensor networks and enlightened privacy regulations.
The technical advances will enable the calculation of the cost of a specific risk with the use of inexpensive sensors tied into the next generation Internet. Data provided by these sensors will support real-time calculation of risk, and keep a running tally of premium costs based on the actual risk presented – serving both life and property policies.
Similar technology will also support a broad range of policy duration products such as "just-in-time-insurance," where each step of a journey would represent a different risk, such car-to-train-station, train-to-city, station-to-office.
A "pay-as-you-live" scenario would trade some location and time of day privacy data for lower insurance bills overall and in the spirit of active risk management, the same network of sensors could also provide convenient information, that is, avoiding an overloaded expressway relayed on the appropriate device such as the car audio system, a phone, and then in email or as a phone call in the office.
Another imperative identified in the research is a switch to customer versus product centricity. In the highly connected world of 2020, policyholders will have much greater access to products and the ability to make decisions on their own.
The concept of agency will eventually succumb to the power of advocacy, so individuals will look to financial services advocates to provide advice as they navigate insurance and financial services markets.
The traditional agency channel will not be gone by 2020, but it will look different in the face of smart software and the salaried advocate model.
"Technology is creating a new playing field for this industry. Customers have access to virtually unlimited information. They're tech savvy and informed, and know they have choices. These same information sources are enabling niche players to enter the game from a variety of sources and they are creating an interesting competitive landscape," said Sandip Patel.
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