How COVID-19 has affected the digital future of the insurance industry
It is no surprise that a global pandemic has completely reshaped the future of the insurance industry and the way we live our lives. We have seen it before with “The War on Tuberculosis” public health campaign in the 1890s, and the Spanish Flu in 1918, both of which caused profound changes in human behaviour.
With the global economy still recovering and many well-established businesses struggling for survival, it is fair to assume that people’s economic behaviour will be reshaped forever. The insurance industry is no exception, but just how will this take effect?
From several insurers returning premiums to the tune of hundreds of millions of dollars to consumers, to reduced investment income and downgraded ratings, the insurance industry has lost USD 760 billion in market capitalization globally.
Insurers are not quite out the other side yet, with lawsuits filed over denied business interruption claims due to the pandemic, and the President of the United States insisting insurers cover these claims, even though these policies explicitly exclude coverage against pandemics.
But how will this affect the insurance industry’s digital transformation?
Problems to address
Insurers’ excessive reliance on third party service providers is being severely tested as operational and technology issues combined with general business interruptions hinder their ability to serve policyholders. The inevitable communication delays around outstanding claims are leading to reputational and litigation risks.
Down the road, this will create difficulties in pricing of various products. For instance, the workers’ compensations pricing model would have to be reimagined due to long term effects of COVID-19 infections, and the emergence of gig workers.
COVID will reshape customers’ needs and wants
Insurers have continuously evolved their offerings to meet changing customer needs, but the post COVID-19 world will accelerate new product offerings at an unprecedented pace.
For products like personal auto, consumers will now demand a truly digital, contactless experience. The ability to make digital claim payments, for example, will be a huge differentiator.
Several firms like Twitter plan to have their non-essential staff permanently work from home. This would imply pricing for cyber insurance moving away from a guesstimate model to accurately assessing and pricing risk – a task hitherto avoided due to the sensitivity around the sharing of risk data.
Businesses have been hit hard by COVID-related closures and have been unable to file for business interruption claims. This will start a major shift in how businesses buy insurance with several business owners, going forward, including pandemics as a covered cause for BI coverage.
This trend by itself will give rise to others like dual-trigger parametric insurance policies, leveraging insurance as a derivative contract and episodic insurance.
On the consumer side, usage-based insurance will be a de facto expectation for segments like personal auto.
The role of technology
Insurers have always been very innovative in their product offerings but on the technology front, a legitimate criticism of the industry is that it has been slow to react. This will change going forward with the emergence of a new normal.
These changes are needed as that’s what a safe and pleasant customer experience demands. Imagine being involved in an auto accident, and having to physically interact with several parties, just to exchange some paper documents!
The changing demands across both ends of the spectrum call for inter-firm coordination and seamless B2B communication. Inter-firm coordination is challenging, with a lack of transparency and visibility into the process. A simple claims adjudication process for auto claims involves multi-party coordination, making it impossible for a customer or a customer service rep to get an updated status on the claim until the other party finishes their work.
A straightforward product like parametric insurance should ideally guarantee instant payout once the triggering condition is met but today it takes weeks, even months at times.
Blockchain holds the key
Blockchain is a medium for firms to communicate with each other in a secure manner so as to seamlessly exchange data. Purpose-built enterprise blockchain platforms take this concept a step further and ensure that only the parties involved in a transaction view the transaction.
What that means in a multi-party scenario like claims adjudication is that there is a consistent view of the claim across the customer, customer service rep and auto service shop. They can exchange data securely across organizational boundaries by deploying an application that is “consistent yet unique” in how each one of them views it.
In the parametric claims example, a smart contract can evaluate all the policies placed on a ledger, determine which ones meet the underlying condition, initiate and complete payout on the ledger – all in a matter of minutes without any human intervention!
But, not all smart contracts are created equal – some blockchain protocols refer to a piece of code as a smart contract; while others implement smart contracts to refer to a piece of code executing against a legally enforceable contract – which in insurance is nothing but the policy document!
So, where does blockchain fit in?
Given that the network of participants involved in placing a contract or adjudicating a claim cuts across organizational boundaries, an insurer cannot be truly digital unless its network is digital.
This would imply an end-to-end digital application framework that allows all parties to securely communicate with each other to exchange data. This is a classic use case of blockchain, so we are indeed likely to see an increase in this technology’s adoption. Consortiums and non-consortia initiatives, such as parametric insurance and cyber insurance, will be where blockchain is harnessed initially.
To reiterate, pandemics drastically change the world around us. The way in which COVID-19 will reshape the insurance industry is by making it more open, accessible and flexible regarding our preparation for future hardships. Insurance will always be there to protect society when it needs it most.
Source: Ronnie Kher, R3