This article looks at how insurers are getting fit for digital by examining the potential of digital through three levels of innovation – basic, transformative, and disruptive. Disruptive innovation is both the most meaningful and challenging to achieve, and the article outlines four key business components that insurers should address to move forward and stay competitive in today’s market: shift from a product mindset, seek technology partnerships, address backend processes, and create a culture of innovation.
The past two years have seen the rise of a new trend in insurance: on-demand coverage. Challenger insurers like Trov, Cuvva and Slice allow customers to use a mobile app to purchase as-needed insurance for personal belongings, home and travel insurance, and by-the-mile car insurance. This way customers only pay for insurance when the asset is actually in use and `at risk'.
While some form of usage-based insurance has been around for years, on-demand insurance still represents below 1% of the global insurance market. This market has started taking shape, however, with several challengers attracting hefty investments. Sure raised $8 million in a series A round1 just last month, and Trov raised $45 million in series D funding2 to support its entrance to the U.S. market. With 93% of millennials in the U.S. claiming their willingness to buy usage-based insurance as long as prices don't go up3, it is only a matter of time before on-demand insurance becomes the mainstream way of selling insurance products.
Or is it? The global non-life insurance premium exceeds $2000 billion4. Whilst a range of new entrants are slowly building their customer appeal, their revenue figures have so far been low. Something special is required to move on-demand from a “niche” offering to the “mainstream” form of insurance, representing more than 50% of the market.
In fact, there are three core beliefs that will need to hold true for the mainstream market to switch to on-demand.
For many customers, on-demand insurance is an appealing proposition, providing convenience through an attractive customer interface, and offering flexibility of cover. Customers can feel confident that they have the protection they need, while only paying when that coverage is actually required. Sensors and other telematics devices, combined with powerful machine learning algorithms, are already making the process more compelling than ever before.
What needs to be understood, however, is the number of customers likely to gravitate to this model and whether they could form the majority. While `as-needed' coverage is convenient and available at a better price, the per-item or per-use rates would be significantly higher than an annual policy for those with wider needs or for those whose usage behaviours indicate higher risk profiles.
As a result, regular travellers, high-mileage drivers, and others could end up not only paying more but needing to deal with the burden of “insurance management”. On-demand insurance will offer better value for many customers but will mean higher costs for others. Although, it would arguably lead to fairer risk distribution, it could also lead to some existing customers avoiding the switch to `on-demand' or `usage-based' in fear of revealing their poor risk profiles and becoming `uninsurable'.
On-demand insurers and InsurTech companies in general have not lacked press coverage over the last couple of years. Fuelled by the expectations of the upcoming insurance market disruption, they have attracted positive attention from investors and potential customers alike.
The on-demand model will need to convince customers to switch away from using online aggregators to downloading an app from an unproven provider offering a new model. This conversion will not be easy, although as demonstrated by iTunes, Netflix and many other players across industries, not impossible.
Lack of widespread customer awareness therefore presents a key barrier to on-demand's adoption and mainstream success. On-demand insurance will not succeed in the wider market if customers aren't aware of its existence or don't understand how it works. While word of mouth, social media, and other marketing techniques can help increase awareness, conventional advertising is likely to be a key part of any insurer's marketing strategy --and the experience of price comparison websites suggests that this wouldn't be cheap. Investment in marketing, particularly in costly advertising is, therefore, critical to breaking into the mainstream.
For on-demand insurance to go mainstream, the economics of the model has to work for the insurer. The typical model of an on-demand offering is quite simple - the per-use rate is higher than it would be in case of an annual policy, giving the insurer a higher profit margin. On the other hand, if not frequently used, the overall price would be substantially lower than for an annual policy.
From the insurer's perspective, there are a few challenges. Firstly, there is the increased risk exposure. With the ability to turn insurance coverage on and off as required, some customers may be incentivised to exploit the on demand-model, only switching on their insurance when they want to make a claim, creating fraud risks. Insurers can, however, increasingly use technology and novel business models, such as Lemonade's no-underwriting-profit approach, to mitigate this.
Secondly, premiums for coverage used only occasionally mean that the customer is paying less overall. Per unit of premium, the insurer may need to reserve more capital than they would require for an incumbent product to cover the additional risk factors, which could exacerbate the lower profit. There is then the question of scale: how many insurers can design and run a full insurance business based on a model with lower premium size, higher risks and lower overall profit?
So how will this play out? First, if we define `going mainstream' as `taking close to 50% of the market', we do not expect that to happen over the next 5 years. It is possible that some of the new on-demand providers will become successful in specific product lines or geographies, but it will likely take more time to shake the status quo of the aggregator and broker dominated personal lines market and the more sophisticated and conservative commercial insurance market.
Incumbents will no doubt react to these trends, albeit sometimes half-heartedly due to skepticism about the economics of the model and the expected challenges of transitioning from legacy systems, processes and people. These conversions will require both time and financial investments, suggesting that mainstream insurers may struggle to adapt, handing an advantage to their digital challenger counterparts. Challenger insurers are likely to more quickly iterate their product offerings and test market readiness, allowing them to create more superior, robust on-demand options. It's possible that incumbents will seek to replicate this model by setting up their on-demand offerings in spin-offs outside the core business.
This year, the CEO of Progressive Insurance wrote to investors that usage-based insurance will become the primary means of automotive underwriting in the future, and indicated that the company is taking steps to adapt. MetLife also launched a mobile app to support a new usage-based insurance program. At the same time, digital insurers are continuing to grow and expand their customer base, with multiple companies announcing plans for U.S. and even global expansion.
While on-demand insurance may not become the default offering for all insurance types in the next few years, it will become an increasingly important insurance model. We can expect challengers to grow notable market shares of up to 5-10% in their chosen lines of business, and, therefore, not only provide a healthy return on investment for their investors, but also create a springboard for even more significant impact in later years.
1Paul Sawers, Venture Beat: Insurance startup Sure raises $8 million and launches smartphone protection based on virtual diagnostics
2Paul Sawers, Venture Beat: On-demand insurance platform Trov raises $45 million ahead of U.S. and global expansion
3Volume Sixteen Number Four Q4 2016, Industry Trends Report (PDF 4.20 MB), Mitchell International
4Primary non-life, Swiss Re
Article original published in The Digital Insurer: Will on-demand insurance become mainstream?