Three Trends That Are Driving Digital Innovation in Insurance

The insurance industry isn’t known for its early embrace of technology. But that may be about to change. In this article — the first of a two-part series on how technology is driving change in the insurance industry — we highlight three market trends that are prompting insurance companies to change the way they think about the business. All these trends involve digital innovation in one form or another. Let’s unpack them one by one.

Trend No. 1: The shift to direct-to-consumer sales

Consumers increasingly favor digital platforms as a faster, more expansive way to access insurance options. For example, the share of consumers who prefer to buy life insurance in person fell from 64% to 41% between 2011 and 2020, according to a survey by research firm LIMRA. Per Gartner®, “[I]n the 2021 Gartner CIO Survey, 87% of insurance respondents noted an increase in the use of digital channels to reach customers, and 75% reported an increase in use of self-service among their customers.”

This change in consumer preferences will motivate insurance carriers to shift their business model toward direct sales via digital platforms. Such platforms can give consumers a way to access insurance products and services themselves while capturing data that carriers can use to better manage their own risk.

Trend No. 2: The broadening of risk categories

The industry’s risk categories — particularly digital risk — continue to broaden. Consider this trend in just two areas: cybersecurity and cryptocurrency.

Cybersecurity. Demand for cyber and crypto coverage will undoubtedly go up, especially as cloud computing and remote work create more entry points for hackers. Publicly reported data breaches exceeded the 2020 total in just the first nine months of 2021, according to the Identity Theft Resource Center. Nearly all (86%) insurance professionals think cyberattacks will become more frequent, and more than half (54%) think they’ll become more severe. This has carriers reevaluating how much cyber coverage they’re willing to extend going forward.

Cyber policies are a relatively recent addition to the centuries-old insurance industry. The U.S. Government Accountability Office found that 47% of insurance clients opted for cyber coverage in 2020, compared with 26% just four years earlier. Meanwhile, according to the National Association of Insurance Commissioners, premiums for these policies more than doubled over five years to reach $3.15 billion in 2020.

Cryptocurrency. Undeterred by the lack of professional and cyber liability policies for cryptocurrency, public companies are making significant investments in bitcoin. By December 2021, for example, automaker Tesla held $1.7 billion in bitcoin while software company MicroStrategy’s reserves reached $5.3 billion.

Cryptocurrencies are subject to large price swings. Bitcoin, which makes up more than 80% of the cryptocurrency market, more than quadrupled its value in 2020. That volatility, combined with cryptocurrency’s murky governance and fast-evolving regulatory landscape, has made insurers hesitant to expand their business lines to incorporate this type of asset.

And that was even before decentralized finance, or DeFi, entered the scene. DeFi uses smart contracts to allow anyone to lend money in the form of cryptocurrency. In 2021, 3 out of 4 crypto threats — think scams, smart contract hacks and exchange failures — targeted DeFi protocols and applications.

For insurers, cybersecurity threats and the rise of cryptocurrencies are something of a mixed bag. They offer the opportunity to create innovative solutions. But they also complicate customers’ risk profiles, which translates into more complicated policies.

Trend No. 3: The demand for personalized solutions

Although insurance companies traditionally offer products based on demographic segments, customers increasingly expect a more personalized approach. Carriers are responding by enabling customers to choose the specific coverages they want or eliminate the ones they don’t need.

InsurTech companies are taking the customer-centric experience to another level with innovations like usage-based insurance, or UBI. With UBI, insurers can provide dynamic, individualized pricing based on customer behaviors. Metromile and Allstate’s Milewise product, for instance, offer customers a pay-per-mile rate customized to their driving habits using data collected by a telematic device plugged into their vehicle.

Another way to offer personalized insurance products is through parametric policies that pay a prespecified amount when a triggering event occurs. Under this type of policy, payment can be issued in a matter of weeks, versus months or even years with ordinary indemnity contracts. Parametric policies are picking up in popularity as natural disasters become more frequent and severe.

Seizing the opportunities for growth

All three of these trends — the shift to direct sales, the broadening of risk and the demand for personalized products — have created ample opportunities for InsurTech solution providers. How can incumbent carriers, brokerages and agents position themselves to seize those opportunities? That will be the subject of our next article.

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