How Technology is Reshaping the Insurance Business?
Today, there are more internet-connected devices than people on the planet.
From smartphones and fitness trackers to cars, factories, and household
appliances, these devices continuously produce vast amounts of real-time data.
This flood of information, made possible by inexpensive sensors, has the
potential to improve our lives. For instance, black boxes in cars can encourage
safer driving habits, while wearables like the Apple Watch promote healthier
lifestyles.
While these advancements are beneficial to consumers and public health
officials, they also present a significant challenge to some insurers. How could
these data-collecting devices disrupt and potentially threaten traditional
insurance models?
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Insurance relies on a dynamic of imperfect information. Individuals are at greater
or lesser risk of all sorts of ills, from car accidents to cancer. But because those
at lowest personal risk of trouble are not always aware of their good fortune,
they seek insurance against trouble alongside those with greater propensities to
fall seriously ill or face other hardships. Unlucky and lucky alike pool premiums
into a collective fund, and the unused payments of the fortunate cover the costs
of the unfortunate, leaving some money left over as insurer profits. But the
uncertainty that underpins the need for insurance is now shrinking thanks to
better insights into individual risks. The growing mountain of personal data
available to individuals and, crucially, to firms is giving those with the necessary
processing power the ability to distinguish between low-risk and high-risk
individuals (and those in between). Thanks to technological innovation, sensors
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that monitor our every move are becoming cheaper, cleverer and more
ubiquitous.
This could upend existing insurance business models, in a few ways. The better
behaviour resulting from smart devices is one threat. Conventional risk pools (for
home or car insurance, for example) are shrinking as preventable accidents
decline, leaving the slow-footed giants of the industry at risk. Business is instead
moving to digital-native insurers, many of which are offering low premiums to
those willing to collect and share their data. Yet the biggest winners could be
tech companies rather than the firms that now dominate the industry. Insurance
is increasingly reliant on the use of technology to change behaviour; firms act as
helicopter parents to policyholders, warning of impending harm—slow down;
reduce your sugar intake; call the plumber—the better to reduce unnecessary
payouts. Yet this sort of "Big Mother" relationship relies on trust.
The rise of smart devices and advanced technology is poised to disrupt
traditional insurance business models in several significant ways.
1. Better Behavior as a Threat
Smart devices, such as fitness trackers, home monitoring systems, and vehicle
sensors, are encouraging safer and healthier behaviors. For example, these tools
can alert individuals to drive more cautiously, maintain healthier lifestyles, or
address minor household issues before they escalate. While beneficial for
consumers, these changes pose a challenge for insurers typically the traditional
and big players if they are not able to adapt the technology changes and still
relaying on the traditional model of risk assessment.
2. Shrinking Risk Pools
As preventable accidents decline due to technology, the size of conventional risk
pools for products like home and car insurance shrinks. Traditional insurers,
especially large, slow-moving companies, rely on these risk pools to distribute
costs and generate profits. With fewer high-risk customers needing coverage,
these "slow-footed giants" face increasing pressure, potentially losing market
share to more agile competitors.
3. Rise of Digital-Native Insurers
The industry is increasingly shifting toward digital-first insurance providers.
These newer players offer lower premiums to customers who are willing to
collect and share their data. By leveraging advanced analytics and technology,
they can offer personalized and cost-effective solutions, making them attractive
alternatives to traditional insurers.
Technology as a Competitive Edge
Technology offers a significant advantage to insurance providers that embrace
advancements for streamlining operations and improving customer experiences.
By leveraging these tools:
Policy Generation Becomes Seamless: Customers can quickly
generate policies without needing to contact an agent or seller, thanks to
user-friendly digital platforms.
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Faster Risk Assessment: Insurers can utilize available data and
advanced systems to assess risk more accurately and efficiently, allowing
for better pricing and tailored coverage.
Enhanced Efficiency: Automation and AI reduce administrative burdens,
enabling insurers to focus on innovation and customer engagement.
However, insurance companies that are slow to adopt these technologies or
resist implementing them risk being left behind. As digital-native and tech-savvy
competitors dominate the market, these traditional players may struggle to keep
pace and eventually face obsolescence.
Adapting to technological advancements is no longer optional—it is essential for
survival and growth in the rapidly evolving insurance landscape.
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