Insurance innovation is misguided, opening the door for disruptive businesses

David Woodfield By David Woodfield

Looking back on 2014, The Future of General Insurance (FoGI) conference is one place you'd hope to have heard about substantial strides forward in the insurance industry, transforming it from a "chore" for many to a valued part of all consumers’ lives.

Far from a showcase of creative energy and boundless innovation, last year’s conference demonstrated for me that there is a blinkered approach within parts of the industry that restricts the benefit that any innovation is bringing.

For me, the industry needs a new year’s resolution on innovation. The direction and application of limited innovation resources highlight why there is more of an opportunity in insurance than any other industry for improvement and disruption from new entrants.

Bad customers are everywhere.

Initially at least, the FoGI conference agenda brought excitement as it included the idea of using "Big Data" in insurance. Given that these concepts led to some of the more exciting new business and that managing and analyzing large data sets are an insurer’s bread and butter, you’d hope for an imaginative application of those skills to reinvent the industry or transform the experience of having insurance for a customer.

However the choices made regarding the use of that data and those skills was striking and disappointing.

The largest insurers in the UK took the stage and showed how they now use detailed tracking data from telematics black boxes to combat application fraud (like those who lie about where they keep their car overnight) and catch those who falsify claims or try to dodge responsibility for incidents. They demonstrated how they use online behavioral data to improve the rates at which they convince visitors to purchase through their website.

They should be rightly proud of this work – it’s a truly fantastic achievement, it required bringing together a range of new skills in working with data and is a big step forward for the industry. In fact weeding out ‘bad customers’ who are committing fraud should lead to a drop in premiums for all.

The same conference went on to cover the fact that 1 in 10 customers commits fraud…

…and that insurance fraud is a £2 BN industry…

…which sounds significant and lends justification to chasing those "bad customers".

But insurance is a £200BN industry – those premiums being paid every year (Source: ABI 2013) by the 9 out of 10 honest customers. If focusing on serving them well led to just a 1% improvement in profitability within that market, the insurers would achieve as much financially as they would with a much-harder-to-achieve 100% success rate in tackling the £2BN of fraud.

It’s not just the insurers that appear to have such an emphasis. The popular media also focus on fraudsters – from industry press to BBC shows (see Claimed and Shamed), the "bad customer" issue is given a great deal of attention.

Drifting apart

The Centre of Retail Research states that forms of theft, shoplifting and fraud cost the retail industry approximately £4.7BN in 2012-3 but this has not stopped Amazon’s focus on delivering an unmatched service for good customers. This all begs the question – why is it that bad customers appear to be grabbing all the attention and efforts from insurers, rather than the good customers and efforts to delight or innovate for them? And does this focus really matter?

There could be many reasons why but I believe a significant one is one of legacy and insurers trying to shake off the after-effects of years of a broken industry model.

The insurance industry has, throughout the last decade in particular, relied on a series of intermediaries to help reach the end customer. Originally traditional brokers and more recently price comparison sites, there can be a number of entities between the insurer and the customer buying.

These intermediaries have fulfilled the role of being close to the customer and serving their needs, the result being that they are often the first port of call for a buying customer, rather than going direct to the insurance company.

Over time, this has sustained a separation; insurance companies and their processes have drifted apart from customers and the effects are far-reaching. From the detailed and technical legalese of policy wordings that consumers are expected to read through, to the incredibly low NPS scores of the insurance industry, it has a real effect on how the insurance industry presents itself and serves the customer. It is perhaps no surprise then that insurers have chosen to focus their innovation, their exciting initiatives and their application of "big data" on their core businesses of managing risks, claims, fraud and capital.

The influence of a new era of business models

This decision – conscious or not – really does matter. In particular more than ever now as we are already within an era in corporate history where a new type of business model has emerged and is dominating new technology companies.

That business model creates a valuable service for a consumer for free (c.f. Facebook, Google, Airbnb to name a few) and then generates revenue as a result or by-product of the free service (Facebook and Google’s advertising revenues, Airbnb’s commission take). You could even stretch that to the model of the aggregator businesses within the insurance industry itself.

This may not be the right avenue for insurers to pursue but it raises the general expectation that consumers have about the level of service they should experience from a company. It’s only a matter of time before this rubs off on traditional businesses and they too have to live by this higher standard of service or face erosion as a result.

For insurers, already distanced from their customers, this might prove to be a shift in customer sentiment too far. Positive NPS scores are already rare and consumers don’t see the insurer as the natural first port of call when they are buying. If insurers’ service leaves consumers wanting too then there may be nothing left.

Make up or break up?

Hence my surprise at the lack of discussion at the Future of General Insurance conference about new and exciting ways to engage with a customer and provide them with an innovative and valuable service – ideally a way that would see consumers come back to them time and again rather than returning to the intermediaries who have become their trusted source of insurance products.

Whether or not insurers can make this leap is itself a question mark. They have a distant customer relationship today that could be mended but would take a significant move to gain the trust of the customer, or offer them a valued and innovative service. I had expected to see insurers delighted with their data, and able to contact their customers using telematics data to notify them that it was likely their tyres were wearing thin, advise them that their engine was misfiring or just nudge them that it had been a while since they last drove their car so here is the list of checks they should run through before they drive away.

The fact that there is a big leap for insurers to make in order to regain this type of relationship with a customer makes me feel that a simple New Year’s resolution and reallocation of resources and effort may not be enough. It points instead to room for disruption in the value chain and to space for someone to deliver a far more satisfying service or experience to the end consumer. Those that do may find the insurance industry is caught out, being late to the party, distracted by its focus on capital, risk, underwriting and of course those bad, fraudulent customers.

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