An insurance cost reduction wave is on its way, as well as disruptions in the insurance industry.
As a function of big numbers, statistics, and probabilities, insurance premiums are traditionally determined by actuaries.
When you don’t know what’s really happening, you do that.
In your predictive model, you hope the pool of insured individuals is large enough to account for variation.
This will be changed by exponential technologies, such as computation/digitization, artificial intelligence, machine learning, sensors, and networks (especially social networks).
A post about insurance’s future can be found here.
It’s time to get started.
The disruption of the insurance industry
The world’s first peer-to-peer (P2P) insurance company, Lemonade, is my client and a proud board member. Lemonade is rebuilding the insurance model from the bottom up.
A 90-second process to get insured, a three-minute process to get paid. There is no paperwork involved.
In contrast to traditional insurance, P2P reverses the model. Despite paying premiums, they treat the money as if it were their own. P2P makes everything simple and transparent. The Lemonade cause gives back what’s left after paying claims quickly.
New York State has licensed Lemonade as a full-stack insurance carrier for homeowner’s and renter’s insurance.
They’ve done fantastic work, so I’m going to use them as examples of some of what I’m going to speak about.
There are five exponential drivers of this upcoming revolution in insurance.
1. The digitization process
It is estimated that fraud consumes 38% of all the money in the traditional insurance system, inflating premiums by $1,300 and making the claims process tedious and frustrating.
When there are many humans involved in an analog (rather than digital) system, there is not enough transparency.
In addition to automating and incorporating machine learning, if you could digitize the entire process, from signing up to submitting a claim, you would dramatically reduce processing times and costs.
Essentially, Lemonade is about this. Founder and president Shai Wininger says that technology drives everything at Lemonade. The entire process is mobile, simple and remarkably fast, from signing up to submitting a claim. In place of weeks or months, it now takes minutes or seconds. Machine learning and bots replace brokers and paperwork. “No paperwork and instant results.”
2. The implications of social networks
It will be possible to create peer-to-peer insurance models through social networks.
If you could find a group of peers you trusted and who could vouch for each other then you could self-insure together.
The insurance company is replaced by a decentralized network of people who pay premiums and file claims that are approved by a technology stack (app, database, AI-bot).
There is an enormous reduction in the cost structure of conventional insurance as a result of this. Peers can decide what to do with any extra cash they don’t have to pay for insurance fees and salaries.
It is possible to donate underwriting profits at Lemonade to nonprofit organizations of your choice. Insurers hope to transform insurance into a social good, rather than a necessary evil.
3. The implications of genomics
The use of genomic data in life insurance is going to be difficult to ignore. The future of your medical care is determined by your DNA. Predicts what will afflict and kill you.
Genetic information nondiscrimination act (GINA) passed in 2008 protects people from discrimination on the basis of their genetic information in health insurance and the workplace. According to the law, genetic discrimination refers to the misuse of genetic information.
Life insurance companies, however, are exempt from GINA.
It is likely that in the near future, groups with great genes will coalesce and self-insure.
In their best interest, this is the best course of action. Upload your genomic data to find others in your peer group who have similar or better risk profiles than you…
Life insurance companies will soon have a beautiful alignment of incentives. To make sure their clients live longer, these life insurance companies will make use of genomic information.
What’s the reason? They are able to pay more premiums the longer they live…
4. Sensors and their implications
Instead of general heuristics and rules, insurance policies will be based on actual data (e.g. usage, health).
Check out Progressive Insurance’s Snapshot automotive sensor package – it’s a sensor that tracks how well you drive. Are you prone to braking hard? Speeding? Making high-speed turns?
It is safer to drive if your insurance policy is based on how you drive, rather than just your age, gender, and car kind.
There will be hundreds of new health sensors on the market in the next five to ten years, which will have a major impact on health insurance.
Health sensors will reduce insurance costs by tracking healthy behaviors, such as exercise and diet.
There are already a number of health insurance companies using health sensors.
An innovative health insurance company called Oscar uses technology to simplify the entire process.
Their app lets you talk to a doctor and get prescriptions from the comfort of your home.
With a free Misfit step tracker, you can earn rewards for staying active and track your health history.
Peer-to-peer insurance will soon allow you to upload everything from what you eat to how many steps you take per day and find a group with similar health profiles.
5. The implications of artificial intelligence and sensors
Insurers are about to be disrupted in a big way.
Autonomous cars are being developed by every major automaker, and since they are expected to reduce accidents by more than 90%, they could spell the end of car insurance as we know it.
Additionally, why would I need a car insurance policy if I never drive? If I don’t own a car, what should I do?
Advisory firm KPMG predicts a 60% decline in motor insurance by 2040. Underestimating that number would be a serious mistake.
A legislative battle looms for auto industry stakeholders and auto insurance providers.
Who is responsible for car manufacturers’ negligence? Are they “drivers”? Engineers working on software? Artificial intelligence? We will have to wait and see.
There is no doubt that insurance across the board is ripe for disruption.