Transformative technologies are the subject of a study from Moody’s Investors Service.
Five technology areas in particular are singled out as set to transform the competitive landscape in the property and casualty (P&C) insurance sector on a global scale.
The report, entitled “As Technology Transforms Landscape, Innovative Insurers Have Competitive Edge” studies the ways emerging technological developments could influence the sector’s creditworthiness over time.
The five emerging technology topics are: customer engagement tools; big data and predictive analytics; the sharing economy; the internet of things; and digital ecosystems.
On customer engagement, development of mobile apps will continue, said Moody’s
“Greater customer engagement via apps and connected devices increases the amount of data – and insights – insurers have about their policyholders,” said the rating agency.
Continued updates to legacy IT systems continue to be necessary to improve operational efficiency, said Moody’s.
“Such upgrades can also expedite product development, speed to market, and expand the ways policyholders can reach a company – via mobile apps, for example – enhancing customer service and creating differentiation among insurers in their ability to attract and retain customers,” said the rating agency.
Underwriting margins will be improved by Big Data, defined as the collection and analysis of large volumes of both structured and unstructured data to reveal patterns and trends, particularly relating to human behaviour, Moody’s noted.
“Insurers that have not kept pace with sophisticated predictive modelling are exposed to adverse selection, most notably in retail lines. Companies able to effectively use Big Data to price and select risk will have a competitive advantage. Many insurers have therefore formed data science groups to manage, analyse, and capture the benefits of Big Data,” said the rating agency.
The Sharing Economy was cited as another transformative technology, including various business models such as peer-to-peer and pay-as-you-use.
“One sharing economy sector that has grown quickly has been ride-sharing through companies like Uber and Lyft, as matching up car owners and riders is becoming increasingly cheaper and easier to do on a large scale thanks to increasingly widespread use of connected devices (e.g., phone
GPS lets people locate the nearest rentable car) and online payment systems,” said Moody’s.
The Internet of Things (IoT) was the fourth emerging technology listed, defined as the digitalisation of objects around us, which transforms the physical world into a type of information system.
“It works by embedding advanced hardware (sensors, cameras and meters) into everyday objects from watches, glasses and refrigerators to cars, ships, pacemakers, roadways and even people themselves, linking these objects to on-line networks. A notable example would be driverless cars, which are set to have a significant impact on many sectors globally.
Huge volumes of complex information are generated by such connected devices, Moody’s noted, “such that the IoT is one of the key growth drivers of Big Data”.
The IoT is also set to reduce the frequency and severity of losses as well as force innovation, the rating agency claimed.
“Longer term, however, as technology providers have access to customers and data, the risk of disintermediation grows. Retail P&C insurers appear most vulnerable to such technological disruption, which could result in meaningful declines in revenues and operating income, unless business models shift,” Moody’s said.
Digital ecosystems was the last listed technology area, as “the logical next step in the development of the IoT”.
Moody’s defined this as an online platform where digitally connected objects, companies, institutions and people are linked to via communication networks, able to interact to create mutual value.
“In a digital ecosystem, the platform host creates the technical foundations – the operating system, devices, apps etc. – that enable the components of the ecosystem to collaborate. The ecosystem host may partner with other companies (insurers, retailers etc.), to provide customers with a wide range of products or services spanning various sectors,” said Moody’s.
Innovating insurers responding to the emerging technologies listed in the report will have an edge over new entrants seeking to disrupt the sector by competing from outside, suggested Moody’s.
“Insurers have some time to adapt to technology-driven change and are increasingly partnering with technology companies and investing in digital start-ups,” said the rating agency.
“Existing insurers also have inherent advantages including large customer bases with generally high retention levels, well-developed underwriting capabilities, and a reservoir of premium and claims data. The industry’s regulated, capital-intensive nature could also protect against disintermediation, particularly in the life insurance sector,” Moody’s added.