Traditional insurers face big risks from their growing use of technology but also stand to gain big rewards, according to a senior equity analyst.
"From an investors' point of view, the opportunity and the challenge of technology for the incumbent insurance industry is absolutely massive," said William Hawkins, co-head of European research at KBW, while speaking at an S&P Global Market Intelligence event in London covering the changing landscape of insurance. He noted that although technology of varying forms has been a constant challenge for the insurance industry over the years, it has "stepped up in terms of the order of magnitude, and the opportunity has stepped up as well."
The biggest challenge technology presents to the industry, he added, "is working out how to effect that change without disrupting the existing business too much."
Risks 'dwarfed' by rewards
The benefits to insurers of technology such as fitness trackers and in-car telematics devices include the ability to generate more data about individuals to price products more accurately and to reward safer driving or healthier lifestyles with cheaper premiums. Technology can also help insurers reduce running costs, such as administration and distribution expenses, which Hawkins pointed out can eat up about half of net earned premium.
Yet the flipside of data-driven underwriting is that some segments of the population could be rendered uninsurable or subjected to higher premiums. Those affected could include those with historically poor driving or health data, those without access to the technology or those who are uncomfortable with an insurance company tracking them.
While noting that these problems are relevant, Hawkins said the risks are "dwarfed by the scale of the opportunity." He added: "The opportunity is so huge that to my mind the scale of that opportunity and the scale of the good the industry is doing is so much greater than the downside risks of issues of uninsurability and the rest of it."
Regulators "are fully on top of and mindful of" the potential risks of insurers' greater use of technology and data, he said.
Fellow panelist Andrew Scott, principal of The R&D Lab at technology-enabled health insurer Vitality in the U.K., said insurers had to ensure that consumers were comfortable with the products on offer.
"It is really incumbent on the insurer when they are packaging these propositions to properly address all of the concerns," he said.
Insurers also need to brace themselves for how technology will change their relationship with customers, added Dennis Sugrue, senior director and insurance sector lead at S&P Global Ratings. Companies "are really starting to wake up" to this change, he said, adding that it is "a real way companies can differentiate themselves in this kind of changing landscape."
He also noted that the greater interaction was shifting the balance of power in favor of policyholders, who are "pulling more in terms of the types of products and services that they are looking for, rather than being pushed by insurers."
He added: "A number of insurance companies really need to change the way they think about product development and interaction with customers, moving away from the products they want to write and the risks they want to take to the products that they think insureds would want to buy or would need."
Tim Zawacki, senior research analyst, insurance, at S&P Global Market Intelligence, agreed that the greater interaction that technology is fostering between insurer and consumer is "very positive" and "very compelling." He pointed to the example of U.S. life insurer John Hancock, which offers fitness-tracking life policies in conjunction with Vitality in the U.S.
But he added: "For every John Hancock, there are life insurance companies that are still using policy forms from the 1980s and haven't really changed the way they distribute or underwrite the business." Others are at an in-between stage, he said, perhaps having switched to simplified underwriting for term life business, but not yet making the leap to offering incentives for better customer behavior.
Zawacki noted that it is an "exciting time" for insurers but also that it is "somewhat uncertain as to the level of adoption and the benefits that consumers will see." But he is encouraged that U.S. companies "are finally ... taking a step down this direction because I think it will bear out in their underwriting results to the extent they can adopt [technology] more broadly."