Insurance Transforms its Approach to Risk

Digital Business Strategy & Innovation

A 21st Century Approach to Selling Insurance

In the burgeoning digital insurance market, new technology is enabling insurance firms to prevent loss for consumers rather than just managing it when it happens. While a focus on risk prevention is not entirely new, the proliferation of data from connected cars, phones, homes, wearables, and the cloud has markedly changed the game. New engagement models can now coach policyholders to actively mitigate risk for themselves, often in real time, drawing on advances in predictive analytics. This shift alters the nature of insurance in a way that can deliver significant value to consumers.

In this piece from Razorfish, we highlight emerging trends that are benefiting consumers and insurers alike as the industry transitions to various risk prevention models. Our analysis includes insight into: 

  • The trend toward prevention
  • Consumers: curious, confused, and cautious
  • What prevention scenarios look like
  • Charting the transformative path to risk prevention 
  • Recommendations

 

The Trend Toward Prevention

“There’ve been three major events in the history of insurance: when the first policy was written in 1347, the 1666 Fire of London that made people realize the need for home insurance, and now the digital revolution,” says Robert Cummings, head of SAP Insurance.  Unprecedented supply of customer data is leading the insurance industry to rethink how it handles risk. Harnessing data acquired through everything from a wearable device to a telematics dongle for predictive analytics, insurers can anticipate risky events and help consumers avoid them. As Cummings reminds us, “It’s all part of the future shift in insurance towards preventing accidents and damages as opposed to writing checks after they occur.”

Traffic.

Consumers: Curious, Confused, and Cautious

Just give me a reason

The first thing that marketers of risk prevention must understand is that most people hold an irrationally positive outlook on life1, expecting things to go well for them. People are also generally confident in their abilities, with numerous studies showing that the vast majority of drivers rate themselves as “above average” behind the wheel2. Simply put, people are not wired to expect disasters or accidents to happen to them. Thus, marketers face a challenge in encouraging people to change their behavior today for preventing problems tomorrow.

Yet evidence shows that insurance customers who have experienced loss (and have been fairly compensated) would have rather avoided the loss altogether, especially when property is irreplaceable or damage is irreversible. 

So how do marketers encourage risk prevention in a way that consumers care about? The short answer: incentives.

Tying risk prevention methods to savings on rates, fuel, electricity, repairs, or healthcare can make the value of such efforts instantly appealing. Ultimately, both the insurer and the consumer save. But savings don’t have to be the only incentive. Contributing to consumers’ sense of achievement in their personal health, driving acumen, or home improvement efforts can also be motivating for them to participate.

It pays to share data

Some insurance firms believe consumers won’t be receptive to a model that asks them to opt in to providing usage data. Indeed, consumers do care about protecting themselves from Big Brother and hackers alike, but more and more often, consumers are willing to entrust companies with their data when they see a clear value exchange.

In a study of insurance consumers’ attitudes and behaviors, 31 percent of respondents would exchange personal information if it could inform strategies that would prevent needing to make claims3.

More and more consumers are willing to entrust companies with their data when they see a clear value exchange.

Person Driving a Car.

Source: Allstate

In auto insurance, more consumers are opting in to be monitored by telematics for the sake of potential savings and value-added benefits. Allstate’s Drivewise® program, for example, lets customers earn loyalty points that can be redeemed for retail purchases, while State Farm’s Drive Safe & Save™ program offers savings for driving less or driving safer. Parents also welcome telematics that provide visibility into their teenagers’ driving habits. For example, Progressive’s Snapshot® device transmits data about when and how often someone drives, how fast they go, and how hard they brake. Leading the adoption of telematics are millennials, who are 44 percent more likely to use such devices than the average consumer, according to Nielsen4.

Loss prevention is making inroads with life insurance customers, too, as evidenced by John Hancock’s successful connected life insurance product, which it launched in 2015. Gartner research also shows that more homeowners are sharing their connected home data for benefit. 

Data can also enable more personalization. In a survey5 of 8,000 consumers across five countries, 80 percent of participants said they would be willing to share key pieces of personal information with brands in exchange for a more relevant, personal experience. Sixty-eight percent said they would share personal information in exchange for more relevant offers and rewards.

Creating a win-win scenario

While most people don’t get excited about insurance (and indeed often have negative attitudes toward insurance), a partnership in prevention has the power to change that relationship. According to Gartner insurance analysts, “Active loss prevention has the potential of putting insurance in a more heroic role, helping policyholders to prevent losses, including of life and limb.”

People often have negative attitudes toward insurance; a partnership in prevention has the power to change that.

 

Drive-Wise.

What Do Scenarios in the Age of Prevention Look Like?

Storm alerts are delivered in real time to home and auto customers, giving them adequate time to take preventative measures. For example, one hour before a thunderstorm, sensors note a vehicle is parked outside and send an alert to its owner to move it into the garage. 

Life insurance customers are given subsidized smartwatch fitness trackers that make suggestions like, “You might consider going for a walk; you haven’t had much movement today.” 

Drivers get real-time feedback on high-risk driving, including speeding or hard braking, from telematics sensors and are incentivized to try for smoother acceleration and deceleration. 

Home appliances, such as ovens, stoves, and refrigerators, alert their owners that they have been left on or left open. Systems like sprinklers or water heaters signal that they need maintenance.

A patient and his or her physician are notified of a pending heart attack well in advance through biotechnologies that draw information from devices and sensors unobtrusively embedded within his or her body.

An athlete wearing smart clothes is alerted to movement that could lead to injury and is given advice on how to correct such habits.

Fitbit.
Source: Fitbit

In a survey of home and auto insurance, 31% of insurers said they have an outbound notification system to notify policyholders of pending catastrophe or weather conditions. Another 8% said they were planning to implement such a system.

Charting the Transformative Path to Risk Prevention

Prevention as the paradigm

Rates calculated by safety are just the start of a full-scale industry transformation in which insurers must play a more forward-looking role in consumers’ lives. Niche brands will likely pop up to base their pricing models on factors beyond safety or usage. And claims processing, one of the costliest activities insurance firms provide, can be vastly reduced, directly contributing to bottom-line profitability.  

Clarifying the consumer value

Because risk prevention efforts rely on customers being willing to makes changes in their behavior, insurers must position themselves as helpful in the advice they give. It’s not enough to provide static information; insurers must make meaning out of data in order to be useful. For example, early alerts on an auto transmission problem or a water line break in the home would be welcome by anyone interested in minimizing the cost of repairs. 

Overcoming internal adoption issues

Despite the benefits of risk prevention, some insurers see it as a threat to their core business. They have long relied on a positive claim experience to be what motivates a policyholder to renew with them; as such, they worry that prevention will result in fewer of the claims that lead to renewal. Without claims, some insurers say, “We’re not able to demonstrate the value of insurance when customers need us the most.” However, as the industry’s landscape changes and consumers’ expectations evolve, insurers must see risk prevention as a new opportunity to provide a brand experience that warrants renewal.  

Shaking up distribution

Intermediaries (acting as matchmakers and sales agents between the insured and the insurers) have dominated the insurance industry for decades. But more customers are showing a preference to buy direct from insurance firms, relying on online reviews, friends, and family to choose a policy and provider. Prevention fuels this trend further as customers opt in to IoT technologies that help them manage their own behavior, to their advantage as manifest in discounts or other types of rewards. This does not necessarily signal the end of distributors, but to stay relevant, they must find new ways to add value from a connected economy.

In a recent survey of U.S. consumers, 50 percent of those aged 18 to 25 said they prefer to work directly with insurance carriers.

In a PwC survey of insurance executives, 45 percent expect customers to shift to buying direct, even forming groups to negotiate bulk purchases.6

Conclusions and Recommendations

Take this opportunity to innovate the customer experience

An emphasis on risk prevention gives insurers more ways to interact with their customers, but it also demands that brands strike the right tone in delivering that advice, long before or after a claim. As we’ve learned again and again, an experience that isn’t extremely intuitive, and that doesn’t inherently communicate value, will fail every time. Make sure your experience design team is educated in the latest design thinking, but furthermore, take extra measure to enlighten your team on the voice, tone, and persona of the brand whose experience they are designing.

Use connectivity to improve life quality 

As the Internet of Things grows more robust with untold data and myriad connected devices, insurers should aim to uncover more ways they can add value to consumers’ lives. A new relationship can then emerge between insurers and policyholders: one of continual dialogue (on the consumers’ terms) that interacts not just in negative moments (e.g., claims) but in a new kind of moment – one of enrichment, such as offering insight about how their behavior can improve their life quality along with more favorable rates.

Review your capabilities and skill sets

Evolving an insurance offering means evolving the skill set of your staff, too. As technologies like telematics, wearables, and mobile capabilities become fundamental to your product, it becomes necessary to identify the gaps in knowledge that you can fill through additional training. 

It also demands staffing up with data scientists or even incorporating academics, much like how insurance startup Lemonade hired Dan Ariely, the behavioral economist who authored Predictably Irrational. This is also a chance to audit your external partnerships and ensure that they can help push you forward. 

Support a nimble IT operation

Developing new skills isn’t just for individual employees; it should happen at an organizational level, too. As we stated in our piece Dueling the Digital Dragon, a bimodal IT operation is extremely useful in pushing an organization toward new ways of operating. Dedicating a group within the IT department to developing new processes and making use of new technologies could, for example, enable support for real-time, interactive customer communication. Insurance CTOs will also need to craft a technology roadmap to support complex-event processing through analytics, BPM, SOA, and innovation in real-time customer experiences. 

Insurers stand to benefit greatly from shifting their focus toward prevention. But ultimately, the success of prevention hinges on consumers shifting their behavior. To succeed, insurers must check themselves by never ceasing to consider the consumer perspective.

Research sources

  1. Sharot, Tali. The Optimism Bias: A Tour of the Irrationally Positive Brain. New York: Pantheon, 2011. Print.
  2. Roy, M. M., Liersch, M. J. (2014). I am a better driver than you think: examining self-enhancement for driving ability. Journal of Applied Social Psychology, 43(8), 1648–1659. DOI: 10.1111/jasp.12117
  3. “Active Loss Prevention Promises a New Value Proposition for Property and Casualty Insurers,” Gartner, 2016
  4. http://www.nielsen.com/us/en/insights/reports/2015/millennials-in-2015-insurance-deep-dive.html
  5. What Is the Future of Data Sharing?,  Columbia Business School Center on Global Brand Leadership, 2012.
  6. Insurance 2020: Turning Change into Opportunity, PwC study: January 2012.

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