The 4th Industrial Revolution (4IR) relates to the introduction of cyber-physical systems, blurring the lines between technology and “the real world”.
It’s strange to consider, but most people’s first awareness of the 4IR was probably when the world went briefly crazy for Pokemon Go. Cyber-physical systems is an umbrella term covering the whole gamut of Augmented/Virtual reality, wearable technologies, smart devices (particularly those with voice recognition/command or bio-security), self-driving cars, and cognitive computing.
The Insurance value-chain is and will continue to be significantly impacted by the 4IR, with both positive and negative impacts. 4IR certainly represents an explosion of data, as well as a revolution in the tools for analysing that data and making decisions based on it. This will change the behaviour and expectations of customers and insurers in many areas:
It’s no surprise that InsurTech is already focussed on the distribution space in the personal lines sector. Given the ubiquity of the smartphone, the ability to reach customers and make their buying journey more simple (such as by generating a life insurance quote from a selfie) is an attractive way to reach additional markets. (Half of the world’s mobile money accounts are in sub-Saharan Africa, indicating the potential in the developing world.)
InsurTech will also help digitise risk much earlier in the insurance chain which will provide opportunities for automation and process efficiency for the insurers. With many InsurTechs operating under delegated authority, this may even result in a much more efficient bordereaux process, saving money and providing better data.
One negative consequence (for the customer) is potentially fragmentation. InsurTech can atomise insurance – an example being flight delay coverage being separated from the rest of travel cover – which gives the customer more to manage (and pay for) and risks coverage gaps.
Risk management – by insurers and customers – is one of the biggest areas of change caused by the 4IR, or specifically the explosion of data availability it has enabled.
For customers, the 4IR provides opportunities for risk mitigation – in personal lines this may be a fitness watch helping track steps and heart rate, or a smart home monitoring for leaks, heat system failure or break-in. In commercial spheres this may be digital asset registers that also provide real time data on system performance, depreciation, and geo-location.
For insurers, all this data provides for an opportunity to perform more informed underwriting. The cognitive computing revolution allows for more sophisticated AI and machine learning to perform these tasks.
One result may be changing both customers and insurers appetites for risk. Insurers may feel they will be able to better identify and select risk, but customers may also be selective in their insurance. For example home insurance may see the Excess rise and the price fall, as customers feel they have enough ability to manage the smaller risks and not wish to pay for coverage. Commercial customers may also feel it is more benefit to retain certain risk or set up a captive where again they feel technology gives them the opportunity to monitor and mitigate.
If customer behaviour changes the type of insurance they buy, or the claims experience of the insurer, this will have a knock-on effect in the reinsurance purchasing (something we talked about in our recent white paper).
With the increase in AI processing, and the ability to make claims 24/7 via connected devices, the claims management and settlement process will speed up significantly. Connected devices could potentially initiate a claim during the event, or provide information vital to determining whether a claim is accepted or not.
The ability of sensors to determine certain conditions may see an increase in parametric triggers applying to certain coverages.
With simple claims able to agreed and settled near instantaneously, this will provide a significant boost to customers. It will however potentially put cash flow pressure on insurers, and require speedier reinsurance collections.
Impact on individual classes
With technology playing an ever bigger role in society, not only will new classes of business emerge, but existing ones will change and blur.
The understanding of Cyber risk is still changing, and the continuing expansion of connectivity will increase cyber risk. There has already been discussions of Pool Re covering elements of cyber, and cyber as a war or terrorism risk will continue to develop. Wearables will mean cyber risk is not just around identity or financial information, but even biometrics.
The impact on motor insurance if self-driving cars become mainstream will surely be profound. This in turn may blur the burden of coverage for accidents from one of personal liability (of the driver) to one of products liability for automated driving system.
And on the question of blurring products liability and other classes – who pays if your pipes burst and flood your house while you’re out but the smart monitoring system said it was all fine?
In conclusion, it’s clear that we are indeed living in revolutionary times, and the changes on the insurance industry will be wide ranging and profound. If the exact outcomes are still uncertain, the direction of travel is already clear.