The insurance model of the future: 2035 will see a change in the traditional business model
A race against time
On June 1, there was a high-level conference organized by the Alumni of the three most prestigious business schools in France: HEC, ESSEC and ESCP Europe, whose title was “How to run an insurance company in the context of digital, societal and regulatory transformation?” The most current burning issues were addressed with depth and perspective, including issues relating to the impact of digital revolution, the clash of generations, and new playground imposed by Solvency 2 on insurance.
The three major French insurers, AXA, ALLIANZ, and GENERALI compete to operate as quickly as possible while the digital transformation of their business lines and organizations face an environment of increased uncertainty and threats from the emergence of new competitors—GAFA or startups—which have mastered the art of customer relationship.
This challenge is an essential step, and it is certainly headed in the right direction, but it is justified in a high-risk environment and, consequently, for a business model centered around insurance. In this regard, the combined ratio remains the cornerstone of the financial policy of an insurer, and insurance remains at the services’ hearts and flowers.
Should we fear GOOGLE or an Insurtech?
According to many insurers, GAFA (Google, Apple, Facebook, & Amazon) may be strong competitors for insurance companies. Indeed, they have undeniably strong assets: a market capitalization among the highest, high expertise not only in customer experience, but also in algorithmics and data, and a very high level of agility. However, this opinion should definitely be relativized. What would be similar to Google – the first advertising agency of the Internet – in a rich yet complex industry like insurance, which is highly regulated and whose confidence is only acquired after many years and millions of dollars of investment?
The Insurtech? Besides oscar and lemonade, which are true insurers, the vast majority of InsurTechs are brokers who cannot work without an insurer’s support. And even if some start-ups succeeded, it would take time, and they would not be independent for quite some time.
Where is the real threat? In 2035, we might see a world with little risk
As we know, the heart of the insurer’s business is risk management. However, it is likely anticipated that ongoing technological innovations will significantly reduce risk levels.
According to a KPMG report on autonomous cars, there could be as much as an 80% reduction in car accident frequency by 2040 if auto and safety trends continue. Another example suggests a scenario where the personal auto insurance sector could shrink to 40% of its current size.
According to Ray Kurzweil, Director of Engineering at Google and futurist, we will reach a point around 2029 when medical technologies will add one additional year to people’s life expectancies. Some believe that the adoption of these innovations will be hindered by people’s refusal to allow invasion of privacy. However, another could argue that who would hesitate to provide more personal data, such as DNA, if that person was guaranteed, in exchange, an additional 20 years of life?
Having a similar conclusion, connected homes that are bristling with sensors inside and out and that also populate smart cities of tomorrow, could contribute to a decline in claims by 43% by the year 2025, according to McKinsey.
As it is anticipated, whether for Life of P&C, over the next 20 years, the risk level will significantly decrease, which will result in a drastic reduction in the value of the insurance market.
The twilight of insurers?
Can we therefore announce the end of the insurance industry? Certainly not. However, the share of insurance and the income of insurers could drop significantly. To maintain the same level of business, it will require finding new sources of profit.
From insurers to “preventers”
Indeed, the insurer of tomorrow will be one that will transform its business model around prevention and become a prevention specialist. The decrease in risk will become a major challenge that will require considerable investments in people, infrastructure, and technology. New prevention services charged on a subscription basis will likely be the new source of margin for insurers. One can imagine that the new standard of performance for the new model of “Prevention as a Service” will be the ratio of prevention fees / insurance premiums. Then, we will see the complete reversal of the traditional business model.
The question that then arises is: should a manager of an insurance company not make the leap forward and skip the step of digital processing in an insurance context in order to strive for refocusing its business model around prevention?
Graduate of ESCP Europe and insurance professional, Jean-Claude Sudre(@ohev) is an European InsurTech expert. He is connected to Innovation in the insurance industry and the author of a blog on these topics (www.assurancedufutur.fr). He is also a mentor for Startupbootcamp.