The insurance industry is not insured against death at the hands of innovators

Cars driving. Photo.

Car sharing platforms that purchase multi-vehicle policies are hijacking the insurance market. The rest of the market is going to those insurance companies that are daring to be data-driven. 

By Erik Berg Solheim, Manager (Itera), Tom Kr Foosnæs, Senior Manager (Itera) and Stefan Astroza, Head of Analysis & Insight (Cicero Consulting, a subsidiary of Itera). 

While open banking has boosted the pace of innovation in the banking industry, there are far fewer innovation initiatives underway at insurance companies. One reason for this is that there is no directive equivalent to what PSD2 represents for the banking industry. 

The basic concept of insurance has not changed for over 100 years 

Many people maintain that the insurance industry is several years behind the banking industry in terms of technological progress. According to market reports from Cicero Consulting, there are no signs of this gap shrinking. Despite the fact that the industry’s business models are virtually the same as those of the good old fire insurance mutuals and yet continue to work for now, everything points to the time now being right for more radical changes in the industry. 

The industry’s biggest product is facing major changes 

The upheaval taking place in the automotive industry will lead to major changes for insurance companies. Annual premiums from car insurance policies represent 45% of the total private market in general insurance. 

We think that there are two major trends that will affect how cars are insuredThe first trend is that car sharing platforms will lead to there being fewer cars that are used moreNew figures from Fremtind Forsikring suggest that in Norway the average car is only used 3.2% of the timeAt present the culture of ownership among Norwegians represents a barrier to car sharing becoming more widespread, but we expect the use of car sharing services to increase in the densely populated areas of Norway. 

Over the long term, this will change the market dynamics of the insurance industry. Services such as Hyre and Vy’s Din Bybil insure fleets of cars with a single company. This will result in a proportion of the car insurance market becoming locked. 

The second trend is new forms of car ownership. Volvo has started testing a subscription service that is a new form of ownership. Insurance is part of the package. The challenge for insurance companies in this area will also be that all the policies Volvo has for its cars will be from a single insurance company – possibly a company that is a joint venture between the car manufacturer and the insurer. We can think of this as a more wide-ranging solution that covers both financing and leasing. 

On the basis of the consequences of these two trends, we do not think that car insurance in its current form will completely disappear within the next ten years, but we do think that the market dynamics will change due to a lack of competition. The car insurance market as a whole will decrease in size, and a larger proportion of it will become locked. Insurance companies will find that there is tougher competition for the rest of the market.  

Data can be used to create new products and services 

According to Gartner, one million new IoT devices will be sold every hour in 2022. This should make for exciting reading for insurance companies. We have already started to see products and services that are based on data from customers in the form of smart car insurance from Fremtind, and Tryg has conducted a trial project related to accident prevention that uses data from advanced metering systems (AMS). 

Creating interaction with and therefore data about customers has been a challenge for the insurance industry for as long as its business model has existed. This is why the emergence of the IoT should be exciting for insurance companies. This technology will allow them to gather data directly from customers in a passive fashion. Customers will not need to complete specific actions for their insurance company in order for it to be able to assess their driving style or electricity consumption. 

When an insurance company is in possession of data about its customers and receives data from them regularly, it has the option to offer new services in the same way as Fremtind and Tryg, and it can also start assessing risk in a new way. Instead of relying on historical accident data and demographic information, they can price and assess customers on the basis of real data that comes directly from each customer. Doing this successfully requires some trial and error. We are therefore calling for insurance companies to become more flexible and investigative.  

Customers are becoming more used to sharing their data 

But do customers really want to share their personal data? Yes, or in any case some of us are willing to, if we are to believe a study conducted by Kantar TNS last year on behalf of Finance NorwayInsurance companies are trusted by their customers to a significant extent, and the study suggests that 31% of people would want to share information about their behaviour in exchange for more tailored products and prices.  

The winners will be data-driven! 

It is difficult to say what will replace much of the revenue that car insurance currently generates for a lot of insurance companies. However, it will not be any of the industry’s traditional products - we cannot see the increase in the number of people who need home insurance, contents insurance and travel insurance coming anywhere near to replacing the volume of business that insurance companies will lose in car insurance. 

We are, however, seeing private individuals and companies become more willing to pay for health insurance, an area in which more new products are being developedGoing forward, data will play a critical role in new products and services. We think that the winners will be insurance companies that dare to be data-driven and that are strongly customer-oriented in their development of new products. The key to success for companies is to start to adjust to this new reality now. We recommend that companies build expertise in advanced data manipulation – and cultivate customer orientation into absolutely everything. It is, after all, customers who will decide which companies will triumph!