Three Avenues for Insurance Industry Transformation: Part I, From Indemnification to Mitigation

(Depiction of collision avoidance technology in Volvo’s self-driving cars. Source: Volvo.)

One of the key words in the insurance industry in 2015 was “disruption,” and though different people hold different views on what kind of disruption (if any) actually occurred, most people inside and outside the industry recognized that it’s happening soon. This three-part series will discuss three key ways the insurance needs to transform itself over the coming years or else risk that transformation being imposed from outside the industry. The future of the industry can be found in:

1. Mitigation vs Indemnification
2. Broadening the Experience
3. Narrowing the Focus

Part 1: Mitigation vs Indemnification

Risk mitigation is when an insurer works with an insured to prevent risk before it happens rather than simply repaying an insured after a loss. The concept of risk mitigation is perhaps the most discussed area of current insurance industry transformation going on, if not in those precise words. This is because central to any mitigation approach is the Internet of Things (IoT), which provides the data necessary to understand what is going on in a vehicle, a home, a business, or on a person in real-time.

This new access to cheap, connected sensors and smart devices means companies can do things like monitor environmental conditions in a house or office building to detect leaks before  they become floods, or can use wearables to call paramedics before a minor health issue becomes a major one. No area has received more focus and media attention than the self-driving car, which will potentially reduce auto accidents by orders of magnitude. But even before autonomous vehicles take over the road, smart cars with accident avoidance features will become the norm, along with services analyzing telematics data to recommend safer driving routes and encourage better driving behavior.

(Related: Just How Much Could the Internet of Things Change Insurance?)

How does this impact insurers? First, there will be changes to how and what insurance products are sold. Some insurers will provide (or already are providing) IoT devices and technologies along with the insurance they sell. These companies will monitor the data streams from those devices and use them to engage with insureds, both to better analyze their risk profile but also to educate and correct, making all insureds safer. Consumers will buy insurance from these insurers not just for the indemnification or risk but for these additional risk mitigation services.

Not every insurer will have the technological capability or budget for such programs. There will be plenty of third party companies, however, who will be developing this technology. Insurers will have the opportunity to partner with these companies, either by giving discounts to people and businesses who use the new tech or by skipping that step and paying for it themselves for all policyholders. Whether insurers like it or not, insureds will begin to expect this kind of risk mitigation service to be part and parcel with indemnification they are used to.

(Related: Transportation-as-a-Service Growth Equals Auto Insurance Premium Shrinkage)

The second impact, even for insurers who choose not to build or partner with IoT companies, will be the way that risk profiles start shifting as more and more people and business use these kinds of technologies. No matter what any disruptive startups say, risk is never going completely away. But in different areas it will be greatly reduced (with automotive being the most obvious example). This means that claims and corresponding losses will go down, but it means rates will need to follow. And, eventually, as reserve requirements lessen for certain lines, the threat of external entities with greater technological expertise but less insurance experience moving into the space becomes much more real.

The shift from indemnification to mitigation is in the best interest of the insured and a great opportunity to provide more and better service, but it’s also a move away from how insurers have done business for hundreds of years.