The Coming Revolution in Insurance

In the stormy and ever-changing world of global finance, insurance has remained a relatively placid backwater. With the notable exception of AIG, an American insurer bailed out by the taxpayer in 2008, the industry rode out the financial crisis largely unscathed.

British insurance giant Aviva’s headquarters in London in 2009.

Now, however, insurers face unprecedented competitive pressure owing to technological change. This pressure is demanding not only adaptation, but also transformation.

The essential product of insurance—protection, usually in the form of money, when things go wrong—has few obvious substitutes. Insurers have built huge customer bases as a result. Investment revenue has provided a reliable boost to profits.

This easy life led to a complacent refusal to modernize. The industry is still astonishingly reliant on human labor. The march of automation and technology is an opportunity for new entrants.

Two Sigma, a large American “quant” hedge fund, for example, is betting that its number-crunching algorithms can gauge risks and set prices for insurance better and faster than any human could.

Other upstarts have developed alternative sales channels. Simplesurance, a German firm, has integrated product-warranty insurance into e-commerce sites.

Insurers are responding to technological disruption in a variety of ways. Two Sigma contributes its analytical prowess to a joint venture with Hamilton, a Bermudian insurer, and AIG, which actually issues the policies—currently only for small-business insurance in America. Allianz, a German insurer, simply bought into Simplesurance, and many insurers have internal venture-capital arms for this purpose.

A third approach is to try to foster internal innovation, as Aviva, a British insurer, has done by building a “digital garage” in Hoxton, a trendy part of London.

Life insurers, reliant on investment returns to meet guaranteed payouts, have been stung by a prolonged period of low interest rates. The tough environment has accelerated a shift in life insurance toward products that pass more of the risk to investors.

Meanwhile providers of property-and-casualty (P&C) insurance, such as policies to protect cars or homes, have seen their pricing power come under relentless pressure, notably from price-comparison websites.

The American P&C industry, for instance, has seen its “combined ratio,” which expresses claims and costs as a percentage of premium revenue, steadily creep up from 96.2 percent in 2013 to 97.8 percent in 2015, and to an estimated 100.3 percent for 2016—i.e., a net underwriting loss. Henrik Naujoks of Bain & Company, a consultancy, said that this has left such insurers facing a stark choice: become low-cost providers or differentiate themselves through the services they provide.

One fairly simple way to offer distinctive services is to use existing data in new ways. Insurers have long drawn up worst-case scenarios to estimate the losses they would incur from, say, a natural catastrophe. AXA, a French insurer, recently has started using its models on the flooding of the Seine to prepare contingency plans. Gaëlle Olivier of AXA’s P&C unit said that the plans proved helpful in responding to floods in June 2016, reducing the damage.

Data from sensors also open the door to offering new kinds of risk-prevention services. As part of Aviva’s partnership with Home Serve, a British home-services company, the insurer pays to have a sensor, a so-called “Leakbot,” installed on its customers’ incoming water pipes, one sensitive enough to detect even minuscule leaks. Home Serve then can repair these before a pipe floods a home, causing serious damage.

The shift toward providing more services fosters competition on factors beyond price. Porto Seguros, a Brazilian insurer, offers services ranging from roadside assistance to scheduling doctor’s appointments. In France AXA provides coverage for users of Blablacar, a long-distance ride-sharing app.

Insurers face many hurdles, however, to becoming service providers and risk consultants. Maurice Tulloch, head of the general-insurance arm of Aviva, admitted that such services have yet to catch on with most customers.

One example of what the future may hold comes from the car industry. Mercedes and Volvo are so confident of their self-driving cars that last year they said that they will not buy insurance at all. They will “self-insure”—i.e., directly bear any losses from crashes.


© 2017 Economist Newspaper Ltd., London (March 11). All rights reserved. Reprinted with permission.


Image Credits: Stevanovicigor |, Ben Stansall/Agence France-Presse/Getty Images