Suresh Dhanushkoti heads up CoreLogic insurance solutions and is uniquely placed to analyse what the history of data can teach us in the face of rapidly advancing and radical challenges facing the entire insurance industry today.

Insurance business models have for centuries being undergoing alterations to suit market conditions but the latest trends are more focused on major changes in the actual underpinning platforms: the way we think about them and how the currency of data will fuel their supporting eco-systems.

Application Programming Interfaces (APIs) offer exciting transformational opportunities for insurers and customers alike. Competitive advantage is up for grabs - all it takes is an adoption of new platform thinking, within an industry under stress from technology disruption, regulatory pressures and increasing customer expectations.

In this three part series, Dhanushkoti examines some of these opportunities and emerging trends. Part 1 explores the role of digital platforms and ecosystems in insurance.

Learning from the past

The transferring of insurance risk has ancient world origins. Chinese merchants and traders taking treacherous sea or river journeys would distribute their merchandise amongst many vessels to hedge against the loss of any single one. This practical sensibility later evolved into business relationships: Mediterranean sailing merchants would pay a premium and receive a loan, in exchange for the lender agreeing to cancel the loan if the merchandise was stolen or lost at sea.

By the 17th century, insurance was more sophisticated. In addition to being a local merchant, Edward Lloyd was a true innovator. His action of opening a coffee shop in 1688 was actually a game-changer for the distribution of reliable shipping news. It’s one of the insurance industry’s early examples of a platform (Lloyd’s café) connecting participants (ship merchants, owners, captains and underwriters), supported by data (shipping news) to enable interactions (connecting traders wanting to insure ships/cargo with those willing to underwrite such ventures) that then generated value. This then evolved into the establishment of Lloyd’s List (1696), Lloyd’s News (1697), Lloyd's of London, Lloyd's Register and several other shipping and insurance businesses.

Fast forward to today and insurers are facing increased competition from aggregators and non-traditional competitors: new entrants who are driving product commoditisation and acceleration of both price and margin pressures.

To identify meaningful competitive strategies in this environment requires reaching beyond the traditional business models or technologies. Just as Lloyd did back in 1686.

Tesla: changing car insurance forevermore

Its vehicles may not be sea based but Lloyd would still be well impressed by Tesla, who claims that its first generation ‘AutoPilot’ has reduced crash rates by 40%. Impressive, but nothing compared to the staggering 90% reduction that the second generation is predicted to achieve.

‘InsureMyTesla’ is an insurance offering (via a Tesla/insurer partnership) currently being rolled out to 20 countries. The concept is that a lifetime insurance and maintenance package at the time of purchase avoids unexpected repair costs and monthly insurance bills.

With a 90% reduced crash rate, you can see why Telsa has stated that unless premiums reduce proportionately to the reduced risk in owning a Tesla car, the provision of insurance will be in-housed. The risk would still be underwritten, but the advanced data, analytics and insights from the car, plus its ability to influence driver behaviour and provide more accurate risk assessment can very clearly deliver consumer value with a decreased overall cost of ownership.

Tesla is also quietly creating its own ecosystem to control the software and major components in its cars (including batteries), plus the charging infrastructure required: offering solar tiles or solar panels for the home, with an ability to store any surplus energy in home Powerwall batteries. Granted, this is still early days, but Tesla’s vision, industry impacts and trends for car insurance are clear.

In America, car ownership/maintenance/insurance is the second largest household expense after housing. This indicates (rather frighteningly) that Americans borrowed more to buy a car than to attend college, according to the 2017 US Federal Reserve figures. In Australia and New Zealand, over 92% of the population own at least one car. As of 2014, both Australia and New Zealand fared in the top 10 countries on a per capita basis. The 2016 Australian Census indicated over 50% of Australians had access to two or more vehicles, with transportation being the third largest expense after housing and food.

With a future of Self-driving cars, insurers will not only face the risk of markets shrinking, but threats to their fundamental business models too. In fact, analysts [1] estimate that the car insurance industry could shrink as much as 40% over the next 25 years, with a substantial part of this saving being diverted to the end consumer.

MyTesla for my home?

Following the Tesla model, a package deal combining home ownership (or rental), maintenance and insurance of that home isn’t too hard to imagine.

This end-to-end view of the consumer’s total home requirements involves a re-thinking of insurance as a standalone product. But for those brave enough; it would open up a wider market to all participants in the eco-system. Consumers would enjoy a seamless experience - whether taking out a mortgage, creating an insurance policy, mitigating a risk (repairs/renovation) or making a claim. Wouldn’t that be nice!

Yes; the ‘traditional’ boundaries may blur, but sharing data and analytics across platform participants will result in a happy consumer, delighted with value and convenience.

The time is right

Insurers are perfectly placed to make the most out of these platform plays, with the current trend already moving away from traditional claims remediation towards claims mitigation, thanks to advanced IoT technologies such as monitoring risks from fire and weather events. Alerting occupants and appropriate authorities to enable prompt action against impending disaster isn’t something all our insurers currently offer commercially in Australasia, but perhaps we should be asking: why not?”

Already we’ve seen some insurance company’s partner with providers of home automation, smoke, fire and water leak detection systems, benefitting the policyholder via reduced premiums and a better customer experience.

Google sends Nest’s smoke detector free of charge and offers discounts to the policy holder when Nest’s smoke detector is linked to the insurance company. Utility providers are eyeing up their slice of the pie too. In NZ, Meridian Energy already partners with Nest: “With more than 90% of Meridian customers using smart-meters, the time was right for Meridian as the 100% renewable energy generator to look at new ways for customers to look after their home and what’s important to them”. In Australia, Nest has partnered with iSelect which promises to find consumers the right utilities, financial, and…you guessed it…insurance products for them.

Introduction of voice assistant devices from Amazon, Google and Apple into homes will definitely accelerate the adoption of IoT. The commercial potential to monetise data about the residents from these devices is real too, especially now that today’s consumers understand the value of data and are prepared to give it to suppliers…provided they receive a benefit in return such as better pricing, service or personalised products.

A recent survey [2] showed that 36% of Gen Y would consider buying insurance from an online provider such as Google or Amazon. Unsurprisingly, Amazon has positioned itself to disrupt the insurance market in some regions, leveraging its core principles of transparency, customer focus and innovation. The company has already established that users of Alexa (its home voice assistant device) spend 10% more with Amazon than non-users, and with the potential to merge home automation and IoT capabilities with insurance offerings, a move into insurance makes sense.

As these eco-system boundaries become thinner, new entrants will enter the market, potentially bringing with them a higher level of consumer trust than insurance providers. Insurers, wanting to improve their NPS ratings should be planning a response, very carefully.

Remember Google Compare, the comparison tool for insurance and financial products? Google bowed out after 12 months to anti-trust and anti-competitive pressures, saying the company would be instead focusing on AdWords and future product innovations. Amazon’s Alexa and other voice assistants watching (listening) intently from home may now offer another untapped sales funnel to insurers in addition to the traditional search engines on the web.

Packaging up the major life purchases such as homes or cars with insurance makes sense, as does a sensible mitigation of risk to protect those very assets through new processes and infrastructure, leveraging the best in emerging tech. As our homes become smarter and even the fridge talks to your credit card (let alone the smart meter controlling your power and the any voice assisted home devices), future insurance boundaries will very definitely move and blur. The question is: are you ready?

Stay tuned for our second part in this series: “The new standards of customer experience and transparency” looking at disruptive technologies, parametric products and the potential of block chain. The third part of this series focuses on the bravery required in partnerships and the true transformative power of APIs for insurers.

[1] KPMG report - https://assets.kpmg.com/content/dam/kpmg/pdf/2016/06/id-market-place-of-change-automobile-insurance-in-the-era-of-autonomous-vehicles.pdf

[2] Accenture, ‘Transforming Distribution Models For The Evolving Consumer’ - https://www.accenture.com/t20170111T041601__w__/us-en/_acnmedia/Accenture/next-gen-3/DandM-Global-Research-Study/Accenture-Financial-Services-Global-Distribution-Marketing-Consumer-Study.pdf