This article was produced by (E) BrandConnect, a commercial division of The Economist Group.

Digitalisation, new forms of risk and new customer demands are radically changing the insurance industry with the promise of lower prices and better products for consumers and more profitable business for insurers. Companies must adapt to this new world and create sustainable business models for the next decade, warns KPMG’s Mark Longworth.

“Ninety per cent of the world’s recorded data was produced in the past two years,” says Ed Klinger, CEO of Flock, a provider of on-demand drone insurance that has raised more than £6m since it was founded in 2015. “In an increasingly autonomous world, the amount of data being recorded is growing exponentially.”

InsurTech startups such as Flock and Wrisk in the UK and Oscar and Hippo in the US are confidently disrupting the insurance industry. Coming from the technology sector rather than from traditional insurance, they use their considerable strengths in data analytics to improve risk management and customise offerings to the market. “We will enter a world of continuous underwriting; insurance will be seamless and digital by default.“ Ed Klinger, CEO of Flock

Mr Klinger says focusing on this data will mean the end of traditional annual policies that are both a gamble for the insurer and a hassle to renew for the customer, and the advent of insurance that is, as he puts it, automated and invisible. Drivers (and, later, users of autonomous vehicles) will see the price of their insurance changing on a minute-by-minute basis, depending on the route they take, road conditions and, in the case of a human behind the wheel, the quality of their driving—incentivising them to take less risk. And customers will pay for insurance instantly or in retrospect. Flock has already sold thousands of hyper-personalised policies that operate in this way, says Mr Klinger. “We will enter a world of continuous underwriting; insurance will be seamless and digital by default,” he predicts.

Upheavals like this in the insurance sector are being pushed by the existence of new technology, especially the huge datasets to which Mr Klinger refers and advances in the computing ability to crunch that data. But they are also being pulled by new customer demand.

Most obvious are younger customers, who expect to be able to browse and buy insurance quickly and online (and who are often driven to despair by the paperwork and time it can take to renew a policy).

“Customers in the 25–34 age group, which is who all insurers should be trying to attract, want to do everything on their smartphone,” says Nimeshh Patel, CEO of Wrisk, which currently offers contents insurance and cover for devices such as phones and laptops, and is expanding into mobility insurance. “And they want flexible insurance, both in terms of what is covered but also in how they pay for it. They are looking for products that they can customise through add-ons, such as Uber vouchers instead of a courtesy car if their vehicle has to go into the garage to be repaired.”

But change is also coming from a very non-millennial cohort—older people who are living longer and expecting more out of their retirement. According to Chetan Singh, chief strategy and M&A officer at Aviva, “There is a new challenge of funding and care in old age as the world’s populations are ageing, driven by better standards of living and improvements in medical science. We need to create fit-for-purpose flexible retirement plans for an evolving later-life environment.”

As well as changing demographics, the insurance sector will also have to come to terms with new types of risk. Mr Singh highlights climate change and the evolving mobility sector as areas that will drive significant shifts in the industry. The greater volatility that the world is already seeing around weather events will, he says, pose particular challenges to insurers. On the other hand, he adds, insurers are often big investors in companies and this presents an opportunity to change company priorities and encourage them to become more sustainable.

And a move away from private ownership of internal-combustion-engined vehicles to the shared ownership of electric vehicles—which will include scooters and bikes—will require very different ways of assessing risk and indeed of working out who the customer even is.

“With the growing number of corporate fleets serving the population’s mobility needs, insurers may see a shift towards a greater number of commercial and corporate clients—and therefore a shift in focus to risks related to commercial liability and business continuity,” says Mr Singh.

Looking further ahead, self-driving vehicles will present significant challenges to the insurance sector. Who, for example, is at fault and therefore liable if a self-driving car hits a pedestrian—the owner, the manufacturer or even the company that wrote the software on which the vehicle runs?

“Right now, many incumbents are tinkering rather than reimagining. They need to bite the bullet and build a picture of what they want their company to look like in this digital future.” – Mark Longworth, partner and head of insurance consulting at KPMG in the UK.

Mr Singh also sees digitalisation itself creating new risks that will have to be covered. “Customer needs will evolve,” he says. “In a world of shared ownership, customers will expect availability 24 hours a day, 365 days a year, which means a rise in products that cover service interruption.”

Across the industry, there is broad agreement that the next ten years will see radical changes in the nature of insurance products and provision, and, says Mark Longworth, partner and head of insurance consulting at KPMG in the UK, both startups and incumbents will need to begin preparing for them today.

“Right now, many incumbents are tinkering rather than reimagining,” he says. “They need to be acting now and creating a fully connected enterprise with data at its heart. They need to bite the bullet and build a picture of what they want their company to look like in this digital future.”

One challenge incumbents will have to overcome is the inevitable inertia that comes from established systems and procedures. Many are held back by legacy technology systems, but “companies will also need to make a cultural shift,” says Mr Longworth. “There needs to be a change in legacy thinking, retraining of staff and more openness to new ways of doing business.”

He adds, “Speed to market for new propositions needs to improve significantly as consumer demands change more quickly and more radically.”

Startups, by contrast, currently have the lead in terms of product innovation and lower technology debt, but, says Mr Longworth, that is not going to last long. “They will need to scale, otherwise funding stops. And they will need to get to scale quickly—in the next three or four years while they have the advantage.”

That growth will most obviously come from alliances with existing insurers that already have mature marketing and front-end operations as well as customer numbers that are the envy of many a startup. Mr Klinger likes the idea of what he calls “collaborative partnerships” between startups and incumbents and points out that they are already well established in fintech. But Mr Longworth is not so sure.

“I think we will see partnerships forged through acquisitions of smaller companies by the bigger players rather than straightforward joint ventures,” he says. “It’s hard to see incumbents giving up hundreds of years of scale so easily.”

The changes that digitalisation will bring to insurance will be challenging for many existing players and some incumbents will certainly fail to grasp the change required, says Mr Longworth. In addition to legacy problems, “the pressure for short-term results may mean that they don't really put the investment in to move to the new world,” he says.

On a brighter note, the survivors will be stronger, leaner and more efficient, says Mr Longworth. “They will be forced by some of the new entrants to say, ‘Well, you know, why are we making insurance so complicated? Let's make it simpler and easier’.”

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