Emerging tech
Emerging tech: a salve for insurers during COVID-19
Big Tech is an increasingly popular term that describes massive technology organizations that are dominant market players and extremely innovative. By the very nature of their business and reach, Big Techs have access to incredible amounts of data.
Within the insurance sector, there’s been an expectation of how Big Techs could significantly disrupt the industry simply because of their unprecedented access to data.
But, it was only the fintech firms who held such expectations, at least only the firms who were exploring partnerships with incumbent insurance companies. A widely held opinion was that Big Tech will want to avoid the highly regulated insurance sector space.
What followed, to the industry’s surprise, was Big Techs gradually taking measured steps into the insurance arena. Here are a few examples of such moves -
Interestingly, Thomas Buberl, CEO of AXA France, the French multinational insurance firm said, “Facebook, Google, or Apple….I believe those are our competitors of tomorrow, and not Lemonade or other small insurance companies.” And, it's in line with his prediction that the recent move by Tesla into insurance has changed the narrative for good.
To understand why Tesla’s entry is a disruptive moment in insurance history, let’s first delve a little into the nature of actuaries. These are professionals who analyze financial risk and determine premiums bands. If premiums are too low, insurance pay-outs can bankrupt the company. If they’re too high, customers opt for competitors’ cheaper options.
As one might imagine, better data ensures better clarity of the potential risk, and helps actuaries accurately price insurance products. However, competing actuaries have historically had access to the same data. Now, in the case of automobile insurance, the automobile’s price is a primary factor of premium computation - conventionally, a one-size-fits-all pricing strategy that rarely reflects the actual risk.
Tesla’s approach is noteworthy because of their individualized risk pricing. The company is set to revolutionize the way automobile premiums have been calculated because of the unprecedented regularity of data inflow that Tesla is privy to, refer to Fig1.
While Tesla insurance doesn’t utilize this data yet, it is an easy guess that they will start doing so over time, barring some regulatory constraints. Aided by this data, Tesla Insurance will be able to either reduce prices, increase margins or both.
For instance, lane departures caused about 13,000 deaths in the US in 2015, resulting in significant insurance claims payouts. Tesla will be able to leverage their access to lane departure data, more so than any other insurer, and can correspondingly adjust premiums.
Elon Musk firmly believes that premiums for Tesla cars should be cheaper in spite of the car’s high price because the cars are safer. Tesla currently produces the safest, second safest and third safest vehicle ever tested by NHTSA. Tesla Insurance’s approach is based on ‘risk represented’ not ‘as per sticker price’ of the insured product.
To expand on Tesla’s claim that their cars are safer, the data below shows the miles between accidents of Tesla cars, at varying levels of driver involvement against traditional cars - highlighting Tesla’s supremacy in safety.
Individualized or personalized pricing goes against conventional pricing principles of insurance because the latter is largely based on the dividing of risk exposure (to potential financial losses) among policyholders belonging to ‘homogeneous’ risk segments. Under these traditional guidelines, some clients pay a premium in spite of no accident or repair having occurred, while others might be compensated well beyond their (premium) contribution.
Tesla’s individualized pricing is a tough act to follow or even imitate because other insurers don’t have the kind of access to data that Tesla does. We are talking about the kind of data that can help incumbents transition from risk profiles that are broadly defined and homogeneous to a hyper personalized one.
The customer benefits of personalized pricing include everything from a broader coverage to better premiums, especially for those identified as ‘good’ risks. Such personalization could motivate individuals to adopt healthier lifestyles or be better drivers.
Tesla’s move creates an urgency for insurance companies to up their data game. And, we expect insurers who don’t leverage formidable data strategies to run the risk of re-intermediation, become mere policy issuers apart from taking risks onto their own books.
This will further restrict insurers’ access to data sources because of customers’ growing proximity to Big Tech companies. In the face of such disruption, insurers can either build a data capability or partner with organizations that have access to data value chains.
Our recommended strategy for insurers wanting to build an individualized pricing capability involve -
Becoming a digital first organization - As a primary focus, insurers must move away from ‘anchor’ or ‘selective’ digital initiatives and set themselves on the path of complete digital transformation. It's important to note that while the implementation can be based on MVP's or thin slices, the vision should embody the complete digital transformation of the entire value chain to have a significant impact. The digital initiatives should re-engineer customer journeys to suit personalized pricing and not be a quick-fix wrapper built across existing channels, systems and product legacies.
Redefining the data strategy - Data is central to personalized pricing. The strategy, at a high level, should be uniform across the organization and address data collection, transmission, usage, security and accessibility. The data shouldn’t be restricted to actuaries alone, but made available to marketing to modify campaigns, to underwriters to make riskier than usual decisions, and to the claims function to accurately assess risks and prevent frauds etc.
Strategic partnering - For better access to data, insurers will need to partner with the likes of social media giants, tech-firms, fitness equipment providers, telematics manufacturers and digital native insurtech firms. These partnerships should involve both exchange of data and technological expertise.
Creating customer incentives - Insurers will need to make customers comfortable with the idea of sharing more data. They will have to create incentives to encourage this sharing behaviour. This could be financial, like low premiums or non-financial like customized policy terms. They will also have to consistently collaborate with regulators to define the boundaries of data collection and its necessity.
In conclusion, Tesla won’t be the last example of a Big Tech directly entering the insurance business to compete with incumbents. Also, disruptions caused by Big Techs might not call for immediate concern but will be a differentiating factor in the coming decade. To end with Bill Gates' apt words, “We always overestimate the change that will occur in the next two years but underestimate the change that will occur in the next ten. Don’t let yourself be lulled by inaction.”
Within the insurance sector, there’s been an expectation of how Big Techs could significantly disrupt the industry simply because of their unprecedented access to data.
But, it was only the fintech firms who held such expectations, at least only the firms who were exploring partnerships with incumbent insurance companies. A widely held opinion was that Big Tech will want to avoid the highly regulated insurance sector space.
What followed, to the industry’s surprise, was Big Techs gradually taking measured steps into the insurance arena. Here are a few examples of such moves -
- Google invested in Applied Systems, a cloud based insurance agency technology company.
- Apple partnered with Cisco, Aon and Allianz to develop a cyber risk-management solution.
- Amazon launched Amazon Protect in the UK and Acko in India.
Percentage of respondents replying in the affirmative that they would consider purchasing insurance from Big Tech Firms. Source: Capgemini Financial Services Analysis 2020
Interestingly, Thomas Buberl, CEO of AXA France, the French multinational insurance firm said, “Facebook, Google, or Apple….I believe those are our competitors of tomorrow, and not Lemonade or other small insurance companies.” And, it's in line with his prediction that the recent move by Tesla into insurance has changed the narrative for good.
Curious case of Tesla Insurance
There is very little about this organization that doesn’t make headlines. So, Tesla’s foray into the insurance business was surprisingly low key and lacked the usual Musk showmanship. But, we believe Tesla Insurance has the potential to overshadow a lot of the company’s existing innovations and change the insurance industry as we know it.To understand why Tesla’s entry is a disruptive moment in insurance history, let’s first delve a little into the nature of actuaries. These are professionals who analyze financial risk and determine premiums bands. If premiums are too low, insurance pay-outs can bankrupt the company. If they’re too high, customers opt for competitors’ cheaper options.
As one might imagine, better data ensures better clarity of the potential risk, and helps actuaries accurately price insurance products. However, competing actuaries have historically had access to the same data. Now, in the case of automobile insurance, the automobile’s price is a primary factor of premium computation - conventionally, a one-size-fits-all pricing strategy that rarely reflects the actual risk.
Tesla’s approach is noteworthy because of their individualized risk pricing. The company is set to revolutionize the way automobile premiums have been calculated because of the unprecedented regularity of data inflow that Tesla is privy to, refer to Fig1.
While Tesla insurance doesn’t utilize this data yet, it is an easy guess that they will start doing so over time, barring some regulatory constraints. Aided by this data, Tesla Insurance will be able to either reduce prices, increase margins or both.
For instance, lane departures caused about 13,000 deaths in the US in 2015, resulting in significant insurance claims payouts. Tesla will be able to leverage their access to lane departure data, more so than any other insurer, and can correspondingly adjust premiums.
Elon Musk firmly believes that premiums for Tesla cars should be cheaper in spite of the car’s high price because the cars are safer. Tesla currently produces the safest, second safest and third safest vehicle ever tested by NHTSA. Tesla Insurance’s approach is based on ‘risk represented’ not ‘as per sticker price’ of the insured product.
Fig1. How is Tesla revolutionizing automobile insurance
To expand on Tesla’s claim that their cars are safer, the data below shows the miles between accidents of Tesla cars, at varying levels of driver involvement against traditional cars - highlighting Tesla’s supremacy in safety.
Source: electrek.co
How does individualized risk pricing work?
Individualized or personalized pricing goes against conventional pricing principles of insurance because the latter is largely based on the dividing of risk exposure (to potential financial losses) among policyholders belonging to ‘homogeneous’ risk segments. Under these traditional guidelines, some clients pay a premium in spite of no accident or repair having occurred, while others might be compensated well beyond their (premium) contribution. Tesla’s individualized pricing is a tough act to follow or even imitate because other insurers don’t have the kind of access to data that Tesla does. We are talking about the kind of data that can help incumbents transition from risk profiles that are broadly defined and homogeneous to a hyper personalized one.
The customer benefits of personalized pricing include everything from a broader coverage to better premiums, especially for those identified as ‘good’ risks. Such personalization could motivate individuals to adopt healthier lifestyles or be better drivers.
Building a personalized pricing capability
BCG's report states that insurers must adapt to new technological, market and consumer complexities with more dynamic pricing if they want to maintain competitive advantage in the insurance industry.Tesla’s move creates an urgency for insurance companies to up their data game. And, we expect insurers who don’t leverage formidable data strategies to run the risk of re-intermediation, become mere policy issuers apart from taking risks onto their own books.
This will further restrict insurers’ access to data sources because of customers’ growing proximity to Big Tech companies. In the face of such disruption, insurers can either build a data capability or partner with organizations that have access to data value chains.
Our recommended strategy for insurers wanting to build an individualized pricing capability involve -
Becoming a digital first organization - As a primary focus, insurers must move away from ‘anchor’ or ‘selective’ digital initiatives and set themselves on the path of complete digital transformation. It's important to note that while the implementation can be based on MVP's or thin slices, the vision should embody the complete digital transformation of the entire value chain to have a significant impact. The digital initiatives should re-engineer customer journeys to suit personalized pricing and not be a quick-fix wrapper built across existing channels, systems and product legacies.
Redefining the data strategy - Data is central to personalized pricing. The strategy, at a high level, should be uniform across the organization and address data collection, transmission, usage, security and accessibility. The data shouldn’t be restricted to actuaries alone, but made available to marketing to modify campaigns, to underwriters to make riskier than usual decisions, and to the claims function to accurately assess risks and prevent frauds etc.
Strategic partnering - For better access to data, insurers will need to partner with the likes of social media giants, tech-firms, fitness equipment providers, telematics manufacturers and digital native insurtech firms. These partnerships should involve both exchange of data and technological expertise.
Creating customer incentives - Insurers will need to make customers comfortable with the idea of sharing more data. They will have to create incentives to encourage this sharing behaviour. This could be financial, like low premiums or non-financial like customized policy terms. They will also have to consistently collaborate with regulators to define the boundaries of data collection and its necessity.
In conclusion, Tesla won’t be the last example of a Big Tech directly entering the insurance business to compete with incumbents. Also, disruptions caused by Big Techs might not call for immediate concern but will be a differentiating factor in the coming decade. To end with Bill Gates' apt words, “We always overestimate the change that will occur in the next two years but underestimate the change that will occur in the next ten. Don’t let yourself be lulled by inaction.”
Disclaimer: The statements and opinions expressed in this article are those of the author(s) and do not necessarily reflect the positions of Thoughtworks.
