Technology is increasingly integrating aspects of our everyday lives with a connected world, and the insurance industry stands to reap the benefits.
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From health apps and personal fitness bands that monitor people’s day-to-day vital signs to always-on smart devices in cars and homes, technology is increasingly integrating aspects of our everyday lives with a connected world, and the insurance industry stands to reap the benefits.
Insurance is about pricing risks, and that means data, some of which until now didn’t exist. Insurers and technology companies are trying to figure out how to tap this growing trove of more useful, relevant, even real-time data, which will allow them to build better risk models, price policies more efficiently, create better products and enter niche markets that today are simply too hard to price.
All of this will also benefit consumers, from targeted incentives for less-risky behavior and tailored insurance products, to better and more timely access to the insurers who seem to control their fates during some of life’s most challenging moments.
The Cost of Change
While technology has revolutionized most other industries—think online travel, retail, trading and mobile banking—insurance has been the laggard. Actuarial spreadsheets, brokers, agents and physical paperwork predominate. Old firms struggle with legacy systems and complex regulatory requirements. The cost of change has been high, and the cost of entry for newer players into this industry can be even higher.
Technology has begun to break down some of these barriers, in part, because it has provided the incentives to innovate. The Internet of Things (IoT) is a burgeoning world where most of the participants are not people, but rather the appliances we use, the homes we live in, the cars we drive and the smart devices we carry around everywhere. The growth of the IoT has opened vast new information technology fields for Big Data miners seeking that essential competitive edge in the new data.
For traditional insurers, one way to get a leg up may be to partner with innovative technology start-ups. By bringing their respective strengths to the table, both sides benefit and neither needs to reinvent the infrastructure, tools, experience and innovation that the other lacks. In effect, they need to pool their expertise—and their risks.
Improving the Consumer Experience
The biggest beneficiaries may be consumers. Insurers rank near the bottom in customer satisfaction when stacked against most other industries. Many customers still go through insurance brokers to find the right policies, and agents to file paperwork and process claims. Transactions can be painfully slow; most clients struggle with the complex processes and inefficient bureaucracies, and come away believing that insurance is what you buy and hope never to have to use, and then, when you most need help, the experience feels medieval.
Change has been slow, but has started to speed up. More insurers are going digital and interacting directly with consumers, rather than through middlemen at a time when most customers want to handle all of their transactions online, preferably via their smart phones. In time, customers will be able to get instant, competitive quotes online; file a claim at the site of a car accident via smart phones; or be rewarded via lower premiums because the insurer automatically registers their efforts to lower health risks.
This is a key inflection point for investors as well. Identifying the traditional insurance companies that are innovating and the technology companies that are helping them change could mean getting a leg up in a stodgy, often-overlooked industry on the brink of a sea change. The best part is that insurance is often considered a stable, safe bet. In this case, it could also offer outsize returns for those willing to take the right risks.
Morgan Stanley Research, together with the Boston Consulting Group, has written a Blue Paper, “Insurance and Technology: Evolution and Revolution in a Digital World” (Sep 8, 2014). Explore more Ideas and Research, or contact your Morgan Stanley representative for the full report. Find a Financial Advisor to discuss your investment goals and strategy.
