Korean Re Q&A: Impacts of technology on insurance industry

How far-reaching is the impact of new technology on insurance?

The development of information and communications technologies is changing the world in ways that humans could never have imagined a few decades ago. It is increasingly clear that they are not only changing people’s lifestyle but also innovating the way business is conducted.

Many traditional industries are faced with technology-driven disruption, and the insurance business is no exception.

Fundamental transformation is indeed taking place in almost every aspect of the insurance business, from risk analysis, pricing and distribution to claims management. This changing environment presents both opportunities and challenges to insurance companies.

One of the biggest opportunities involves data analytics. With the spread of Internet of Things (IoT) devices including smart cars and wearable electronics, it is becoming easier to capture and analyse data on an individual and real-time basis.

Artificial intelligence technologies are also enabling insurers to make a more precise and swift analysis of big data.

What specific changes might we see?

Traditionally, insurance pricing has been uniformly applied to individual policyholders depending on their rating classes as risk analysis relied mostly on probability and statistics. This is now changing due to the availability of more sophisticated analytic techniques.

As a result, usage-based insurance (UBI) is gaining traction. As opposed to the traditional form of insurance where premiums are set against the coverage limit and period, UBI allows insurers to tailor insurance terms and conditions to specific needs, behaviors and usage patterns of individual policyholders.

In motor insurance, UBI is already being widely used in a simple mileage-based form, but technological advancement, together with the growing demand for personalised insurance, will take UBI to higher and more refined levels in the near future.

Insurers will use telematics devices to collect real-time information about drivers such as mileage, average and maximum speed, driving hours per week or month, night-time driving hours, roads typically used and driving behaviors (ie sudden acceleration or braking).

The data collected will enable insurers to rate and invoice insurance policies periodically.

The life and health insurance markets will also be affected significantly by technological evolution. Wearable bio-tech devices will help insurers better capture the health information of policyholders, including heart rates and sleep quality.

For those who show healthy lifestyle characteristics such as regular exercise, premiums can be adjusted to reflect their reduced risk.

How else might new technology outside the insurance industry affect insurance?

The Internet of Things has the potential to materially impact commercial and general liability lines as well.

IoT-enabled devices and sensors such as safety and security systems can reduce the risk of fire or theft for homes, offices, factories and warehouses and allow insurance providers to better assess and manage risk levels.

Meanwhile, technology-driven changes in insurance distribution channels and customer management are becoming disruptive forces to traditional insurers.

In particular, the rise of internet-based insurers and online aggregators is revolutionising the distribution of insurance products and services, which gives rise to fierce price-based competition, decreasing rates of customer retention and reduced profitability for insurers.

This, in turn, leads to market consolidation and requires insurers to reconsider what core competencies they need to focus on to remain competitive.

Moreover, it is becoming more important than ever for insurers to seek third-party collaboration in order to create new business opportunities.

New product development increasingly calls for integration with third-party data providers, given the enormous value and insight coming from Big Data in terms of pricing and risk management.

Where are the opportunities?

With technology players expanding into the insurance distribution market, insurers stand to benefit a great deal from co-operation with technology providers equipped with extensive data, brand value and distribution capabilities.

As with many other industries, success in the insurance business in the future will largely depend on how effectively insurers adopt and utilise technology. Building ICT capabilities is no longer a choice but a must, and those who invest and actively engage in this area will be on the right track to compete and thrive in today’s dynamic and disruptive marketplace.