Like the rest of the financial services industry, the insurance business is facing disruption. Persistent low rates and increased longevity test firms’ bottom lines; evolving client expectations combined with clunky legacy systems make traditional products a tough sell. What can insurers and advisors do?
One way forward is to harness tech to better connect with customers who have come to expect seamless experiences from digital services, says Rohit Sood, a senior partner at McKinsey & Company in Toronto. “How does the insurance product stack up?”
Not so well — at least in its traditional form. A model of “assess and service” at point of sale means policies are often offered based on data acquired at the client’s inconvenience, with little ongoing service. “The touch points of life insurers are amongst the lowest in financial services,” Sood says.
That will change this decade, as the industry focuses on client service using predictive analytics, personalization and client engagement, he says.
Client experience: extended version
Health-tracking wearables are one example of this new client service.
Dacadoo, an insurtech firm headquartered in Zurich, offers a digital wellness platform that drives client engagement with health and life insurers (including Dublin-based Irish Life, owned by Canada Life Assurance Company, and London, U.K.–based Aon plc). An app provides a health score to users who opt in, and offers them personal health insights and nudges.
Insurers don’t use wearables to learn more about longevity risk, as some might assume. That risk is well understood, says Blake Hill, vice-president of insurance business development at Dacadoo (North America), in Waterloo, Ont.
Instead, wearables allow insurers to get to know customers better and “remain relevant as a brand” as products become commoditized, says Hill, who was previously an actuary with Manulife and head of its wellness program. Dacadoo’s program is white labelled, so customers can interact with the insurance brand.
Wellness programs align with an insurer’s objective to be relevant to the client when they’re healthy, not just when they have a claim. “You don’t have to be sick or dead to benefit from insurance,” Hill says.
He describes wellness programs as win-win, because clients get healthier and save insurers money. The programs can also benefit hard-to-insure clients with existing conditions or family histories of disease: if those clients share their health data, insurers could potentially include them in their risk pools at better price points, Hill says.
Wellness programs can also help set advisors apart, he says, because they transform a transactional exchange — buying life insurance — into one that fulfils higher-order needs (such as improved health). While it can be difficult to follow up with a client about an insurance product that essentially doesn’t change, advisors can check in with a client using a wellness program to chat about their experiences, setbacks and successes.
Insurers might even feed advisors relevant client data (assuming clients opt in to share it), such as health score increases. Wearables thus create “avenues for more upsell and cross-sell” of insurance products, Hill says.
It also falls to advisors to explain how tech innovations like wearables work and comply with privacy laws, says James Colaço, partner, national insurance sector leader, at Deloitte in Toronto. He expects advisors will play an important role in the distribution and adoption of client-focused innovations.
Hill says there is typically a segment of clients who won’t share their data because of security concerns. That segment might shrink as privacy regulation evolves globally, allowing clients to remain owners of their data. (Right now, insurers own client data.) Dacadoo is ready for this trend: the platform complies with Europe’s General Data Protection Regulation, and client data can be permanently deleted.
Those who share data might also benefit from dynamic pricing of group life and health insurance, based on wellness program participation. Dynamic pricing has been available globally for decades and in North America for about five years, Hill says. Sood says he expects it to be relatively common by mid-decade.
As insurtechs continue to solve client needs, traditional insurers will look to work with them, Sood says. “More and more insurance companies are identifying the right places in the value chain to partner with tech startups and leverage their capabilities.”
Many insurtechs harness artificial intelligence (AI) to analyze massive amounts of data and make accurate predictions. In Prediction Machines: The Simple Economics of Artificial Intelligence (2018), authors Ajay Agrawal, Joshua Gans and Avi Goldfarb explain that AI lowers the cost of prediction, allowing it to be widely applied to problems not traditionally considered prediction problems (such as navigation and translation). The result is widespread disruption.
While AI disruption will ultimately require that some businesses upend their strategies, others can use AI to execute their current ones. The latter is likely true of insurance, which has always used prediction, says Gans, a professor of strategic management at the University of Toronto’s Rotman School of Management.
He says he expects AI to “help the insurance industry but not disrupt it.” For example, as noted in the book, arguably the most important marketing activity for insurers and financial services firms is managing customer churn. “The first step in reducing churn is to identify at-risk customers,” the authors write. “Companies can use prediction technologies to do that.”
Dacadoo, for example, has plans for further client engagement. As the platform partners with more insurers and gains access to more data, its AI will be able to predict how long it takes a client to change their mind after refusing a suggested offer from its chatbot. Clients may also get “a future look at themselves” as AI predicts what their health scores could be if they achieved certain goals over the next three to six months, Hill says.
Leveraging data for advisors to incorporate into customized advice is “the next frontier,” Sood says.
This will allow advisors to have “richer, better conversations with their clients,” Colaço says. As mobile platforms improve, advisors will receive real-time data on the client’s needs and preferences, the client segment and relevant market characteristics. As a result, he says, advice will be personalized and timely, creating trust.
To be effective, however, AI requires sufficient data, which must be cleaned and aggregated to deploy to advisors on appropriate platforms with appropriate apps, Colaço says. So far, most innovations in insurance are occurring beyond our borders. “Canada is typically a laggard relative to other developed markets,” though some Canadian insurers are making investments in the space, he says.
A 2019 report commissioned by the Society of Actuaries and the Canadian Institute of Actuaries found that Canadian insurers’ main priorities with predictive analytics includes simplified underwriting.
Hill expects AI underwriting and claims assessment will result in less bias. As it stands, “we don’t really know the consistency between [human] Underwriter A and B,” Hill says. “AI has a huge opportunity to bring standardization within and across insurance companies with how risk is assessed.”
Karen Cutler, head of underwriting at Manulife, says the firm uses AI underwriting for about 17% of its term life insurance approvals for those age 18 to 45, up to $1 million. With human underwriters freed to hone their skills on challenging cases, Cutler expects more hard-to-insure people to be approved. Plus, approving low-risk cases faster — within 30 minutes — meets clients’ evolving expectations. Manulife’s long-term objective is to employ AI underwriting for 50% to 60% of its life insurance approvals, and across products.
Canada Life uses AI underwriting for life insurance applications up to $1 million for those aged 18 to 45.
Insurtechs will also use data, such as prescription history, to find proxies for medical specimens, says Daniel Shum, insurance technology leader at Deloitte in Toronto. This will free clients from inconvenient medical visits.
Easy does it: direct-to-client channels
As insurtechs remove friction throughout the insurance process, will direct online sales be next?
Colaço says online sales are typically successful where products are simple or guaranteed, with well-understood benefits offered by trusted brands (e.g., creditor protection). Following that formula, some U.K. insurers have been successfully selling term insurance online for more than a decade, he says.
Toronto-based PolicyMe, a direct-to-consumer online insurance channel aimed at millennials, follows a similar formula. While the platform’s users with complicated needs can access its licensed advisors, the typical client requires term insurance to cover an income or mortgage — “a pure projection need,” says Laura McKay, co-founder and president at PolicyMe.
The insurtech sells the traditional insurers’ products, partnering only with those that support digital signatures.
“We try to strip out any of the friction in the [sales] process,” McKay says. Policies are received within days, not weeks.
Canada Life leverages AI for its digital application tool SimpleProtect, which enables term policy issuance of up to $2 million through an advisor-driven process in as little as 20 minutes, says Katrina Lee-Kwen, senior vice-president, non-par insurance solutions and individual customer digital strategy at Canada Life.
David Officer, associate partner at Ernst & Young in Toronto, describes the direct-to-consumer channel in insurance as “exploratory” so far. “Throughout all the demographics, there’s absolutely still a need for the one-to-one relationship,” he says, owing partly to the products’ complexity.
The nature of life insurance as a product — people don’t typically seek to buy it — means it will remain advisor-driven, says Shum.
And traditional insurers maintain other advantages over fintechs, Hill says, such as building and managing partnerships, as they’ve done with advisors.
Further, insurers are highly regulated “for the right reasons,” he says — to protect clients. And they still own “the most important thing,” which is the brand and the customer.
Low rates, new products
Low rates are arguably the biggest challenge to insurers in recent years, says David Officer, associate partner and the Canadian life insurance advisory leader at Ernst & Young in Toronto. In response, insurers have reduced costs and improved operations, including automating back-office processes.
They’ve also collaborated with non-traditional partners, like tech companies, to cross-sell or bundle products, he says, and acquired brokerages and managing general agencies to tap into distribution networks.
Product innovation typically involves new or expanded features that target specific demographics, he says. For example, policies like those provided in conjunction with Toronto-based insurtech Jauntin’ provide flexibility to cover gig-economy workers exposed to risks, such as bike couriers. Combination benefits, such as hybrid life insurance plus long-term care, which is popular in the U.S., extend coverage options to those less inclined to purchase traditional products. (Such a product was offered by Kingston, Ont.–based Empire Life Insurance Company in 2013, but discontinued after two years.) And annuity options supplement incomes for policyholders with longevity risk who might otherwise balk at the product. For example, a U.S. annuity introduced in 2018 unpacks its benefits so that clients can access their accumulated values at a set date while continuing to receive lifetime income payments.
Who says insurance is boring?
Globally, insurers are high-tech leaders, not staid institutions. China’s Ping An Insurance, one of the world’s largest insurers, “offers something for everyone,” says Rohit Sood, a senior partner at McKinsey & Company. In addition to insurance, banking, asset management and healthcare services, the insurer is a tech superstar, with several startups and mobile apps to its name. For mobile loan approval, for example, a credit app assesses applicants’ micro-expressions within milliseconds for signs of lying during the application process.
Such apps require harnessing the power of artificial intelligence. “Some insurers are getting better at using big data,” Sood says. “Others still don’t know how.”
Top-of-mind trends for insurers
Climate change and an increase in natural disasters aren’t yet impacting life and health insurance products relative to property and casualty, but such trends will be “part of the future planning for all the carriers,” says David Officer of Ernst & Young.
Artificial intelligence will predict risky situations, such as where flooding will occur, says Joshua Gans from the University of Toronto’s Rotman School of Management. As a result, insurers will price risk better and serve the market more efficiently, he says.
Another trend hitting the insurance sector is regulatory scrutiny on conduct and fee disclosure. “Insurers and advisors will need to think differently about the economics of the life insurance transaction,” including at the portfolio level, says James Colaço of Deloitte. Any innovation related to disclosure will consider transparency, fairness and value, he says.