By Bill McCarthy, Managing Director UK and Ireland Insurance, LexisNexis Risk Solutions
However, there’s nothing like an existential threat such as the potential obsolescence of conventional motor insurance through driverless cars to elicit interest, and this at its heart is what makes disruption so appealing.
The industry is currently occupied with threats from the outside. In motor, for example, driverless cars are in test across the world.
Whilst the technology is still some years off commercialisation, the pace at which precursor technologies, such as autonomous emergency braking or lane assistance, have made their way into new cars shows the future that possibly lies ahead. With the majority of current motor insurance claims attributable to driver error, the industry will need to adapt with a shifting of liability away from individuals and onto the technology itself. In the future, motor insurance may potentially begin to resemble home insurance – characterised by low incidence, high cost claims.
The acquisition of Insure the Box by Aioi Nissay Dowa Insurance Europe (ANDIE), itself linked strongly with Toyota, has raised the prospect of motor manufacturers muscling in on the insurance market. Given the popularity, at least in the UK, of personal contract plans which effectively shift car ownership to a subscription model, more moves by manufacturers to offer insurance appear likely. Peugeot, for example, is well known for its “Just add fuel” pitch, and the ability of a car manufacturer to “bundle” insurance is a relatively attractive proposition. Nonetheless, vehicle manufacturers may be hard pressed to take on what is a difficult industry to turn a profit in, when margins in vehicle manufacturing are already in decline.
Moves by major internet businesses such as Google and Facebook also attract attention. Google Compare recently launched in the U.S – a market that to date has not seen the rise of aggregators to anywhere near the same extent as the UK. The fear, as anyone familiar with the Google Now product will tell you, is that major internet businesses not only have access to a lot of consumer data, but have an uncanny ability to put it to use in a way that expertly fills a specific consumer need. Of course, there still remains a major difference between predicting travel plans and offering competitive insurance. The UK has weathered the impact of aggregators well: there’s little room for a major new player to make an impact on price. The same cannot be said for other markets, like France and Germany, perhaps.
What the experience of the major internet businesses show is the importance and value of access to a broad range of consumer data, but also the difficulties in convincing consumers that this data use is a good thing. This is something that the insurance industry should take on board. In my view, two of the biggest challenges are coming from within; a need to get access to more and higher quality sources of information, and the need to maintain and develop consumer trust and buy-in for its use.
The industry needs to make advances quickly. For example, Solvency II, to be implemented on the 1st of January 2016, will require insurers to demonstrate that they understand the risks on their book to a greater extent than ever before. This requires us to gather better, more detailed information and to put processes in place to make use of it.
The insurance industry also faces greater intensity around competition on price, continuing commoditisation through the impact of aggregators and the ever-present threat of fraud. Responding effectively to all three threats requires better use of data and information.
In a price constrained market, one way to improve margin is through better underwriting decisions. At the heart of this is quality, useful, reliable data, and it is this requirement that has ultimately led to the growth of data sharing through contributory databases in the US, which have been successful for nearly 30 years. No insurer is big enough to go it alone, and data sharing helps to reduce the unknown. The industry is making good use of shared data to tackle fraud. What we need to see now is shifting data further up the customer lifecycle, to include screening customers’ insurance histories, identity information and claims records at point of quote rather than later on in the cycle when the insurer will already be at risk.
However, the ability to collect and use the right data in part relies on consumer buy-in. Trust in the insurance industry on the part of consumers is low. A recent survey by PwC found that just 27% of UK consumers claimed that they trusted insurers , below even retail banking. Similarly, Huw Evans of the ABI remarked at last December’s ABI Motor conference that the industry’s reputation was in its own hands, and that how underwriting decisions are made, and the rating factors used to make them, is a key reputational issue for the industry. To put it simply, consumers do not understand how insurers make decisions and many believe as a result, that our decisions – especially those that affect price - are unfair.
This sentiment is one of the key factors behind fraud. Our own research found that one in four consumers was prepared to mislead an insurer to get a better price. Even more worrying was that some consumers felt this was an acceptable response to the cost of insurance . To respond, insurers need to do two things. Reactively, it’s essential that insurers do not take self-declared information to be true and accurate necessarily, there’s a clear need for data verification and analytics to make best use of this information. More proactively, insurers need to do more to explain to consumers why accurate data is essential and how data is used to create an accurate price.
Ultimately, the disruptive threats faced by the insurance industry are best addressed through a renewed focus on value. Insurers need to demonstrate that insurance is a valuable product, rather than a necessary evil or an arbitrary cost. Key to this is a renewed focus on demonstrating to consumers not only the value of insurance, but how pricing decisions are made and how data is used. We need to shift the focus from the risks facing insurers, to explaining to consumers the risks facing them, and we need to offer a fair price to have those risks and burdens removed.
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