The Next Big Thing in Insurance: The End of Middlemen
“Middlemen” — the insurance brokers, claims adjusters, reinsurers, pension companies, banks, etc. — were once the domain of executives who oversaw all aspects of an organization’s insurance operations. Their enormous variety of services — many of which had little or nothing to do with what actually drove business value for a business — were often viewed by business leaders as unnecessary, wasteful and detrimental to a company’s bottom line.
In recent years, though, this model has been challenged, making room for the emergence of innovative alternative insurance models. Unlike traditional reinsurance arrangements, which protect a company against a risk by investing its assets in an insurance company’s portfolio, insurance-as-a-service models provide companies with end-to-end insurance coverage.
Rather than paying a single fee to an insurance company every time a customer files a claim, businesses can now pay the same amount to a variety of insurance providers without paying high commission and retain full control of their insurance coverage.
To stay on top of your insurance-related responsibilities, you will need to understand how the “financing” of insurance differs from the traditional reinsurance arrangement. And the following are five trends that explain how this can create the foundation for the next big shift in your business.
1. Distributed Insurance Is the New Reinsurance
While traditional reinsurance deals are structured as an agreement between two companies, insurance-as-a-service offerings are developed for use by a company’s insurance team. The traditional reinsurance arrangement aims to protect an organization against a major loss. If, for example, your company’s computer server were to burn down, a reinsurance company would take the bulk of the loss and invest it in a fund that will gradually pay out on your behalf over the course of many years.
In contrast, when insurers provide companies with insurance-as-a-service, they promise to act as your risk manager — implementing risk controls based on your specific business needs — and cover all your risks with broad coverage. They’ll pay for all your claims, but you’re responsible for all your underwriting and insurance activity. You can opt to use one provider’s coverage or switch to another, and you won’t be penalized or prevented from doing so. Instead, you’ll get services in exchange for your data.
2. Insurance Will Soon Come to You, Not Your CIO
At the moment, many insurance companies still rely heavily on their middleman function to sell their products and collect premiums. Although most insurance company executives understand that technology is becoming an essential part of the insurance value proposition, they often don’t see it as a risk mitigation tool, and many are reluctant to invest in new technologies — including platforms for risk management — which could help them take a more proactive approach to managing risk.
To position itself as a leading player in the insurance industry, a company like Expedia now depends on partnerships with independent insurance agents, brokerages and risk management service providers, which together offer a full range of value-added insurance products and services. Rather than relying on traditional reinsurance, the company offers an insurance-as-a-service platform on which they share data and address the information and risk management needs of Expedia and its insurance partners.
3. Software Is Becoming a Part of the Insurance Value Proposition
According to Gartner, 40 percent of insurance companies currently use big data in their products. In the near future, technology will likely continue to play an important role in all aspects of insurance management, including underwriting, claims processing and analytics. Already, companies like Munich Re are using the Internet of Things and mobile technologies to collect big data from connected devices and deploy an early warning system to address cyber threats.
Technology is already having an important influence on underwriting, claims processing and claims management, among other aspects of insurance. For example, claims processing — currently done using print-based documents — will soon be done more efficiently and effectively through a centralized claims database. In the same way, using data to drive decisions and analytics to improve underwriting, claims and the underwriting process could help insurers capitalize on increased operational efficiency.
To take the reinsurance giant Munich Re’s case as an example, it’s clear that insurers like Munich Re see data analytics as a key part of their insurance value proposition. Munich Re has developed an analytics platform designed to solve problems for customers and insurers — in other words, it’s all about shifting from an underwriting-centric mentality to an analytics-driven one. As the value proposition becomes increasingly focused on insurance-as-a-service, this kind of platform will become even more essential.
4. Insurance Firms Are Exploring New Business Models
As much as the insurance industry wants to hold on to its traditional business model, there’s a lot of evidence that organizations need to go through a transformation if they want to survive in today’s digital world.
At the same time, it’s undeniable that insurers and reinsurers are adopting business models that were simply not feasible in the past. For example, the concept of a virtual insurance carrier (VIC) was introduced a few years ago, and it lets insurance companies rent their underwriting capacity to third parties, which can then use the platform to offer their own insurance products on the same platform. These VICs can also offer catastrophe insurance without having to worry about covering their own risks or handling the underwriting process.
This means that insurers don’t have to build a robust infrastructure to offer their own products, which saves them a lot of money and time. This model also allows insurers to maintain control over the customer experience and can lead to innovative new insurance products. For example, Berkshire Hathaway’s Catastrophe group has developed an innovative product called Warranty Safe, which pays for the cost of products if they are delivered as promised.
It’s clear that insurers are embracing new business models in order to stay competitive in today’s digital landscape, and this is especially true for the more traditional insurance types, which usually offer more comprehensive insurance products to comply with regulators and in order to provide comprehensive coverage for clients.
As the nature of the insurance industry changes, insurers must pay attention to the changing landscape — both digitally and in terms of customer behaviors — in order to create more relevant and personalized products. The whole insurance value proposition will evolve as a result of this transformation, which will be no easy task. However, as already seen, there’s no way for insurers to remain the same in a digital world.
By Catherine Payne, VP, General Manager, Program Management and Business Analytics, Validic.
As the nature of the insurance industry changes, insurers must pay attention to the changing landscape — both digitally and in terms of customer behaviours — in order to create more relevant and personalized products. The whole insurance value proposition will evolve as a result of this transformation, which will be no easy task. However, as already seen, there’s no way for insurers to remain the same in a digital world.