Take a look around you. Whole industries are being remade by technology, which is giving businesses the tools to be smarter, more efficient and more transparent than ever before. But each sector is reacting at different speeds. For example, the insurance industry has maintained a fairly strong immunity to this revolution. Until now, that is.
The insurance industry is an interesting case study, both because of its size – net life, property and car insurance premiums in the US alone were worth around £1tn last year – and its relative proximity to the banking world, which itself is in the throes of major technological transformation. In many ways, the insurance world of 2015 is quite similar to the banking world of 2005.
Transparency
Online insurance comparison platforms are forcing ever greater levels of transparency in pricing. In the UK, 56% of consumers said they’d used a price comparison site to shop for insurance in the last two years. Even Google is interested in this area – in the UK, the search giant has launched a car insurance comparison tool that claims to draw from more than 120 providers.
Transparency in pricing is really just the beginning though. We’re also starting to see technology give customers unparalleled levels of insight into their risk coverage at a very granular level. For instance, companies like Trov are allowing customers to cover key items in their home, rather than selling them a generic home content policy. And Metromile is doing something similar for car insurance.
Data
Insurance is the original big-data business but it is companies like Google, Amazon and Facebook that are attracting top data-science talent. A good example is the success of Climate Corporation, which was founded by an ex-Googler and acquired by Monsanto in 2013 for just shy of £1bn. Climate Corp leverages weather data and combines it with a modern, big-data infrastructure built from the ground up. As a result, the company is able to provide instant weather insurance quotes and adverse-event compensation.
While insurance companies might share the same challenges and opportunities as banks, the investor or entrepreneur’s opportunity in insurance might be even bigger than in banking. A quick Google search will tell you that insurance is ‘a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss’. If we start from that definition, the points where technology can play a role expand.
Risk
The increasing numbers of sensors and computational abilities could have a big impact on existing pools of risk. The automobile industry is a useful example. Statistics show that the ‘human factor’ – essentially the driver – is the most frequent cause of car accidents. Fully automated cars might still be far off but machine-assisted driving will soon be available in the mass market and self-braking mechanisms are being installed by car manufacturers en masse.
To put this in perspective, motor insurance is estimated to represent about 30% of overall premiums for property and casualty (P&C) insurance in Europe. With lower collision risks, premiums will be expected to lower as well. One of the underlying questions here is whether, with lowered premiums and less variability among drivers, insurance could be embedded in the cost of the vehicle itself. At what point do insurance and guarantee start to be the same thing?
As software’s role in our lives grows, the question of risk remains attached to it. Will risk shift away from individuals and hardware companies to the software provider? Who should be insured for driving a Google Car – Google or the driver?
Contingency
A greater number of sensors accompany us daily, measuring the way we move, eat and feel. Should the level of contingency on an individual’s health shift as well? Several insurance companies are experimenting with leveraging wearables as preventative tools in health plans. Oscar, for example, is running a program with Misfit and Vitality‘s insurance program has a strong focus on prevention. If you assume the wearable-wearing population is more health conscious and less prone to disease than the norm, it makes sense for insurers to run this type of program.
Uncertainty
The insurance industry is under no illusions about the reality of climate change. Up until now, it has relied on historical data to derive models of risk but if climate conditions are changing rapidly, these models might become less relevant. This is forcing the insurance industry to reevaluate the way it collaborates, fostering the creation of open source models and platforms.
Some earlier models of insurance were based around the sharing of risks and rewards by a community of people. For instance, in the mutual insurance model, launched by Benjamin Franklin in the US, policy holders co-own their insurance company. In the internet age, online communities can grow larger and faster than ever before and can be constructed around more than geography. The possibility of combining the community-building power of the internet with the mutual insurance model is one of the most tantalising ideas in digital insurance. Early players in this field have emerged such as Friendsurance and Guevara but I am sure we will see more innovation in this approach.
Technology has already started to change the way insurance companies do business but changing the way customers search for rates or talk to the carriers is only the beginning. The tools that are now available deliver the promise of a complete reimagining of insurance as a product, service and business. As an investor and customer, nothing excites me more. 
