Life Insurance 2020+ – Prepare to be disrupted
While life insurance companies are busy dealing with business as usual imperatives, game changing social and digital trends are unfolding that stand to turn the industry on its head.
A number of key trends impacting the life insurance industry are here already, while others are just around the corner. Then there are the future trends we can only dare to predict. While some anticipated innovations might seem far-fetched or the stuff of science fiction – be assured they are very real. To remain relevant in the new social and digital age, life insurers must prepare their businesses to cater for these trends – not next year or in five years’ time – but right now.
The problem with business as usual
Over the past decade, the life insurance industry has been understandably focussed upon business as usual pressures. Against a backdrop of global economic volatility, insurers have turned their attention to financial management and associated regulatory compliance issues. Continuous regulatory change in the form of Trowbridge in Australia and the RDR review in the UK have forced a significant redesign of products and distribution, while Solvency II and LAGIC have increased pressure around capital management and profitability. As the proportion of people over 60 years old continues to grow and longevity increases, providers have accelerated their efforts to manage the impacts of an ageing population on life insurance. Changes to retirement income policies is just one area that has kept insurers up at night. During the same period, we have seen the life insurance industry face losses as a result of poor claims experiences, particularly in the Australian market, as well as high lapse rates. While these business as usual concerns are clearly pressing and require attention, they have served to distract the industry from equally pressing and salient social and digital trends that signal imminent and seismic shifts in the life insurance business as we know it.
Trends happening right now
Many social and digital trends impacting the life insurance industry are no longer abstract future concepts. Is your business ready for them?
The key demographic trend for insurers today is not the increasing ageing population, but the rise of the Millennials. Traditionally known as Gen Ys, this group has emerged as the target market for life insurance. Recent research by Gen Re found that the Millennials will represent 75 per cent of the global workforce by 2025 and their spending power will surpass the Baby Boomers by 2018. Aged 14-34 years, this cohort represents a largely underpenetrated, potentially lucrative market.
Yet successfully tapping into this market requires a vastly different approach to that taken with the Gen Xs and Baby Boomers. As digital natives, the Millennials are tech savvy, educated and have a unique set of needs and expectations. The Gen Re study found that 90 per cent routinely research products online and 50 per cent use their smartphones to research purchases. Seventy per cent agree that having their friends’ approval on a decision is important, while 73 per cent believe other consumers care about their opinions. Interestingly, they still rate face–to-face (F2F) as the number one way to communicate. This will require blended distribution models that combine online education, information and quoting with an appropriate level of F2F contact when the customer desires it. Insurers must be socially aware and digitally ready to service this dynamic new market.
There is little doubt that social capital is the new currency. The high value placed on social networks is enabling social media – such as Facebook, Twitter and consumer review sites – to drive many aspects of life insurance from product design, uptake and distribution, through to customer service, loyalty and retention.
In the digital age, reputation and service excellence at every point in the user journey are critical. Just as Trip Advisor currently fulfils a key role in the travel industry through its user generated content and reviews, similar online services are emerging for the insurance industry. Products that are truly relevant to customers and prompt resolution of customer complaints are essential. Failure on these fronts can result in a dissatisfied customer venting their grievances on social media, bringing about untold reputational damage. Insurers must cultivate a deep understanding of social capital as well as a dedicated social media presence and strategy in order to thrive in this new landscape.
The breadth, quality and immediacy of data is allowing savvy industry players to venture into predictive analytics and modelling as never before. By combining and analysing data from a range of sources, insurers can gain a detailed understanding of personality profiles, buying trends and behaviours that can be used to inform almost every aspect of their operations.
Data is being collected and analysed in real-time, enabling it to directly influence the user journey as it unfolds. Should a potential customer begin, yet fail to complete an application form, there exists an opportunity for the provider to follow up with a personalised communication designed to assist them through to completion. Should analytics reveal that a customer belongs to a cohort with a propensity to lapse or change provider, it is now possible to attempt to circumvent this behaviour via personalised customer service. To genuinely capitalise on these advanced technological capabilities, insurers must move beyond the rhetoric and make big data and analytics a priority within their business.
Insurers are opening themselves up to the fact that they don’t hold all the answers. Astute providers seeking to tap into the prevailing zeitgeist are exploring the benefits of crowd sourcing. This approach invites the general community to have input into how insurers should operate, in return for prizes and/or remuneration for the best suggestions. The technique is useful for identifying innovative approaches to improving customer service, retention and distribution. Already, several key players in the Australian marketplace such as HCF and AMP have initiated crowd sourcing projects and we are likely to see more insurers employ this approach in the future.
Insurance bought not sold
In another key development, life insurance today is bought, not sold. This shift in power from the provider to the consumer is having a significant impact on business structures, products and distribution. This is evidenced by the growth in the D2C channels.
Already, there are providers who are breaking their products into building blocks, enabling customers to construct tailored and personalised insurance policies that cover people for what they need, rather than the traditional standardised, one-size fits all approach. Other providers are turning the traditional distribution model on its head by requiring insurance brokers and advisors to competitively bid for a policyholder’s business. The relatively new concept of peer-to-peer insurance is gaining ground due to its ability to make insurance cheaper. This approach allows policyholders to form an online peer group with a reduced risk profile. The industry is also witnessing the emergence of special risks insurers, who are taking on customers traditionally deemed uninsurable.
Insurers can no longer afford to rely on traditional operating models and business processes. They must look at ways of restructuring their business to meet their customers’ needs on their terms.
Trends close at hand
Within the next two to five years, the life insurance industry can expect to see further exciting developments that will radically alter the nature of the life insurance industry as we know it.
In the very near future, wearable technologies such as smartphones, Fitbit and Apple Watch will provide an ability to collect all manner of personal information, such as how we drive, what kinds of food we eat and how much we exercise. The data being collected by providers such as Google across devices is truly mind boggling. In the years ahead, such data will be used by insurers to more accurately determine our individual risk profile. Sharing personal information in this way is becoming part of everyday life, particularly for the Millennials, who are digital natives. The desire for lower insurance premiums and improved service levels are likely to outweigh privacy and security concerns.
The Internet of Things
In addition to wearable technology, our society will be connected through the Internet of Things (IoT). In the years ahead, we will employ ‘smart’ devices within our cars, our homes, our workplaces and recreational spaces that will all be connected to the internet. Many of these devices will assist us to prevent or minimise the incidence of accidents and hazards, improve the safety of our physical environment and improve our overall health and well-being – all of which have implications for insurance. By delivering the ability to constantly monitor a whole range of variables – including personal behaviours and conditions – the IoT represents a valuable tool for the insurance industry. Insurers capable of harnessing predictive analytics will be able to more accurately determine the risk profile of customers, predictively rate their insurance cover and effectively customise and personalise products and services to better meet their needs. Tech savvy providers will seize this opportunity to secure a competitive edge in the marketplace.
The days of maintaining in-house IT infrastructure are all but over. Within a few years, insurance data will be almost exclusively collected, stored, managed, maintained and shared via the cloud in real-time. One of the great advantages of the cloud is that it frees businesses up from legacy infrastructure that is not suited to digital and mobile service delivery. Life insurance providers must act swiftly to become cloud aware and ensure their business processes are cloud friendly.
The debate about genetics and its use in insurance has been raging for a number of years. Given that genetic testing provides insurers with the ability to more accurately determine an individual’s risk profile, genetics will continue to emerge as a key factor shaping future life insurance. However, genetic testing has already raised moral and ethical questions about the potential for genetic discrimination.
Australian insurers are currently permitted to use an applicant’s genetic information to assess applications for life insurance, provided the insurers take into account the benefits of special medical surveillance, early medical intervention and the likelihood of successful treatment. The extent to which this is happening is being questioned and some European countries have taken a more interventionist approach, legislating to prohibit the use of genetic tests by life insurers.
In a concerning trend, some people are rejecting genetic testing due to the potential impact on their or their family’s insurability. In a recent Australian study of families with a history of bowel cancer, 50 per cent of participants declined individual genetic testing when informed of the insurance implications. Yet such testing is crucial because it allows for early intervention through lifestyle changes and treatments that can bring their individual risk profile back within a normal range. Such testing is also critical to medical advances in prevention, diagnosis and treatments.
Inevitably, genetic testing will force insurers to rethink the traditional concept of risk, as well as the conventional underwriting process.
Trends on the horizon
Thinking further out, it’s possible to make an educated guess about what some of the key trends might be. Collectively these developments will further challenge and transform the insurance industry’s traditional notion of risk.
In the longer term, medical advances are likely to eliminate or greatly reduce many of the common health risks that currently form the basis for life insurance and income protection. We are likely to see cures for conditions such as certain cancers, coronary disease, Alzheimer’s and diabetes. Current research and advances will allow medical professionals to grow skin and organs in 3D printers, employ nanobots to directly target medication to diseased cells and doctors will be able to perform flexible spine implants to enable paraplegics and quadriplegics to regain mobility. These advances will have a profound impact on issues such as underwriting, insurability, risk profiles, product design, pricing and claims.
In the next 20 years, many of the risks we currently associate with modern lifestyles will be minimised. For example, driverless cars such as the Google Car and fully automated trains, planes and ferries will eliminate human error and greatly improve the safety of all modes of transportation. Our home, work and leisure environments will be much safer thanks to advanced engineering and constructions methods and constant monitoring that will keep us safe from fire, burglaries, natural disasters and environmental hazards. As a result, some of the key pillars of insurance today, will be rendered virtually obsolete.
As traditional risks wain, the new digital age will bring rise to a whole new range of risks surrounding data privacy and security. This was demonstrated by the 2014 Sony cyber-attack, where a hacker group leaked confidential data including personal information about Sony employees, staff emails, company executive salaries, copies of unreleased Sony films, and other information. There are new areas of vulnerability for both individuals and businesses. For life insurers, the issue of cyber security has major implications for the enormous amounts of personal data they will collect.
The way forward
While it is appreciably hard for life insurers to respond to the magnitude and pace of these trends when they are so busy handling business as usual concerns, providers must find a way forward if they are to survive in the new social and digital age.
Make legacy history
One of the key barriers to effectively addressing social and digital innovation is the mindset that insurers can continue on with their traditional business operating models, getting by with a website here and a mobile app there.
Yet, what is needed to simultaneously cope with business as usual pressures and social and digital innovation – is simplification. Insurers need to get rid of the legacy and complexity associated with old technology and outmoded business processes. They must look to ways to greatly simplify their business environments through modern, scalable technology that will allow them to cater for the rapid onset of these changes. They must switch now to technology and business processes that genuinely and effortlessly support real-time multi-channel interactions, predictive analytics and the digital and mobile service delivery experiences their customers – in particular the Millennials – have come to expect.
Thwarting non-traditional disruption
Life insurers cannot afford to put off the simplification process. We will almost certainly see non-traditional players like Google (already entering the general insurance market in the US), and Facebook enter and disrupt the life insurance market on a global scale. Already, we are seeing the rise of consumer brands (such as big supermarket chains) offering insurance products through white-label distribution models. These businesses already have the edge on social capital. They already have access to unprecedented amounts of big data, as well as well-honed data analytics capabilities. These businesses are free from legacy and, in many cases, have access to substantial capital to support their operations. More importantly, they possess an intimate knowledge of the Millennials’ market. And so it begs the question: How will these non-traditional players choose to engage with the market? The spectre of these non-traditional players entering the global life insurance space provides an urgent incentive for life insurers to make the leap into the social and digital age. Compliance and implementation issues remain a hindrance for these non-traditional players at present but it is only a matter of time before this is smoothed out. If traditional providers are to successfully defend their market, they must become socially aware and tech savvy without delay. Significant growth opportunities still exist and the most successful life insurers will be those that have established multiple digital channels to engage with customers.