Paul Webster, Business Consultant at SSP for Insurers identifies how the death of “one size fits all” will provide insurers with opportunities for improved risk selection and rating whilst offering customer cost savings, enhanced loss prevention and better customer service.
Insurance has never had a reputation for being a dynamic industry, it is historically known as slow paced or as having the turning circle of the HMS Ark Royal. Even with the internet and the ability to reach customers online, insurance has lagged behind banking and perhaps understandably so. For an industry founded on risk, until recently insurance has been bad at underwriting based on an individual person or object. Insurance premium pricing is traditionally based on a set of rating parameters derived from predictive models built from historical loss data.
I remember back to my earlier days at Royal Insurance, the underwriting and rating of a risk was completed using an old paper scorecard! For motor insurance this meant little more than entering the vehicle car group, age of the driver and the postal code combined with trusting the driver’s past history to calculate a premium. Even proof of NCB was received via a paper form that was completed by the insurance company! The prospective policyholder would be grouped with other insureds within a particular demographic and treated generically, hardly underwriting based on specifics of the actual risk.
The same process was used for providing quotes on Royal’s old Homeshield product. Postal code, number of bedrooms, the sum insured and maybe a cheeky 5% discount if you were a member of the local Neighbourhood Watch scheme. Happy days. Those were the days, but even after automated quoting systems were introduced with their green screen glory, little changed in terms of how the risk was priced.
What if the prospect was a bad debtor, had convictions, lots of previous claims, including some fraudulent ones, or was even trying to insure a ringed vehicle? How would the insurer know? Trust the potential policyholder? And what if the insured lived in a post code that wasn’t prone to flooding, do his premiums remain the same as the one half a mile away in the riverside cottage? In those halcyon days, when I still had a full head of hair, insurers were not optimally selecting and pricing risks, nor were they able to manage and control losses based on real knowledge of the policyholder’s history and their likelihood to make a claim.
The large amount of newly available data has enabled insurers and technology providers to leverage data and analytics to create a more detailed and accurate portrayal of individual risks. This allows the insurer to offer more competitive quotes, provide better risk selection, speed up the acquisition process and enable them to better choose customers who only claim for genuine reasons.
Many examples of this are already widely used including ID verification, credit checking, MyLicence and geo-coding and we already know that usage-based insurance provides a number of key benefits:
• More accurate pricing allowing insurers to work with good drivers, opening up previous
unattractive sectors of the market such as young drivers.
• Encourage good behaviour by tracking the performance of the driver and providing graphical metrics to let them know how they are doing and perhaps use gamification techniques to reward the best drivers. Encouraging safe driving for younger drivers is a particular focus in Australia. SSP worked with QBE Insurance Box to provide Australia’s first motor telematics insurance offering.
• The tracking of driver behaviour together with the ability to view driving information via dashboards provides insurers with a greater opportunity to engage with customers regularly. This provides scope for greater up-sell and cross-sell opportunities and allows insurers to promote their service offerings to encourage higher levels of renewal retention in an ever price sensitive industry.
The interesting question is how the insurance industry will use the rapid developments in big data and the Internet of things to cultivate new offerings that not only benefit the insurer but also help make consumers lives easier.
The connected home is one such interest that is moving quickly with large corporates such as British Gas investing heavily and Google and Apple getting in on the act too. The easy availability of broadband and Wi-Fi provides a simple way for consumers to interact with a multitude of connected devices in the home.
• Motion sensors
• CO2 detectors
• Smoke detectors
• Intruder alarms
• Temperature controls
• Water alarms
• Electronic locking systems
The impact of this is interesting and is already being exploited. Prominent players in the North American market such as State Farm and Allstate are already offering discounts to policyholders if they are willing to install home monitoring systems. State Farm promotes two different partner systems with installation prices starting at $179. The policyholder is offered an initial 10% discount for implementing the system and the ongoing data collected by the system provides a tool to offer additional monthly discounts if appropriate. The theory, as with usage-based insurance, is that if the customer is prepared to be closely monitored, they are unlikely to have anything to hide and are less likely to claim.
This gives the customer peace of mind that their most treasured possessions are protected in the best possible way, via remote checking of device statuses, early alerts of potential issues and the ability to “auto” call an engineer in times of trouble. There are already services like Hive enabling us to remotely manage our heating. The challenge for insurers now is how to consolidate these to accurately manage risk whilst providing a “one for all” home management system for the policyholder. While the US is by far the largest user of connected home technology, Europe is beginning to follow suit and that will surely lead to a number of insurance related initiatives. The likes of Allianz are already developing interesting propositions.
With the developments rapidly evolving for private property, it will be interesting to see how
the commercial lines insurance market tailors its propositions to keep up. Smoke and intruder alarms, cameras, sensors and temperature controls are equally if not more relevant to many business enterprises. There is additional scope to look at tracking systems that provide early warnings of potential floods; storm shutters that are applied automatically and humidity systems that help prevent the early build-up of mould and property degradation. The ability to proactively manage loss prevention is essential and will potentially open up opportunities in traditionally less attractive trades or risks, just as telematics has opened up the young motor insurance market for young drivers.
Some of the recent “connected” developments are slightly more advanced. Ralph Lauren, the popular fashion designer are now marketing “wearable tech” polo shirts fitted with technology to monitor all types of bodily functions. The technology transmits the data into the cloud, where it is plugged into a number of algorithms that gauge important biometrics. If this wearable tech can monitor heartbeat, pulse rate, stress levels and energy output then again what is the potential impact on insurance? How will the health, travel and accident and sickness insurers potentially use this data in the future to underwrite more selectively and be more proactive in preventing claims?
The insurance industry is still getting to grips with all of this – historically known to move very slowly! However what is abundantly clear is that insurance policies will evolve as sensor data continues to evolve. Whether it be monitored, transmitted and analysed from your car, your home or even your favourite Ralph Lauren polo shirt!
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