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The insurance industry isn't known for its early embrace of technology. However, that is changing. We're going to take a look at three market trends that are prompting the industry to make a change today. Today we welcome Gigi Wong, Alex Evans, and Noor Abdel-Samed from LEK Consulting to discuss three of the areas, seeing a large impact.
Noor Abdel-Samed:
Hi everyone. I'm Noor Abdel-Samed. I'm a partner and managing director in the Boston office here at LEK, and I help lead the financial services and insurance practices here in the U.S. And excited to talk to you all today.
Gigi Wong:
Hi everyone. I'm Gigi Wong. I'm a managing director and partner in LEK San Francisco office. I sit within our global financial services as well as our technology media and telecom practice. So naturally the crisscross between in the two FinTech, including the likes of Insurtech is something that I spend a lot of time thinking about.
Alex Evans:
Hi, my name is Alex Evans. I'm a managing director head of LEK Los Angeles office, and one of the leaders of our Insurtech practice. Interesting fact, I'm also a licensed property and casualty broker-agent in the state of California.
Noor Abdel-Samed:
Alex, Gigi. Thanks for joining me today to discuss what we've been seeing in Insurtech. One of our recent surveys discussed in our latest article noted that 75% of companies increased their self-service options to consumers. Obviously, that's a huge impact for communication. And sometimes that cuts out the insurance brokers. How do you think the shift the D2C has changed the industry till now? And how do you think it's going to change going forward?
Gigi Wong:
Well, I think like many other transactions in our daily lives, right? The option to easily take care of things ourselves, whether it's to purchase something or even to just quickly check something or make easy changes. The ability to do that whenever we want that's what's made self-service really appealing, and that's no difference to the insurance industry. Within the insurance industry itself, which historically has been a relationship, face-to-face driven industry. Even then, the percentage of consumers that look to buy insurance in person has fallen by over a quarter in the last nine years or so. As a consequence of this change in consumer behavior, about 90% of insurance respondents indicate that they increase their digital options to the consumers. Now it's not just all about making it easier for the consumer as well. With the increased access from consumers on digital platforms, insurance carriers actually have the opportunity to gather a larger array of data that can help them better manage risk over time.
Noor Abdel-Samed:
Great. Thanks, Gigi. So do we think everyone else or other insurance verticals end up looking like auto insurance, which is mostly online now or where do we think this stops?
Alex Evans:
It's a great question, Noor. I think auto is one of the, if you look at the data, it's one of the first ones that really went direct-to-consumer because of the homogeneity of the policy. It's very straightforward, very easy to create selectable policies; straightforward risk underwriting. So, and a lot of comparison sites and direct-to-consumer offers sprung up. And then you also see in other sort of simpler products, some of the basic life policies and things like that, you also see more penetration of online and direct-to-consumer. It's a little more complex when you get into things like looking at homeowners insurance or whole life, or basically where the consumer might not understand all the dimensions of coverage, may not be familiar with the terms, the trade-offs, and it's a more complex consultative process.
And it's just been slower for those to ramp up to direct-to-consumer. But interestingly, if you look at the research where consumers are researching these policies, almost every purchase is researched online. They're just not transacted online. So I think that will grow over time as tools become better, as consumers become more comfortable purchasing these products online. And so will we get to the same levels in auto, as in other categories? I don't know. I don't know if we'll get to the same levels, but we'll certainly close the gap. And you're already starting to see that in terms of whether you're talking homeowners or more complex life products. You've seen D2C penetration go up every year.
Gigi Wong:
To add to that. Even on the commercial side, we see more emphasis on a better end-user experience. Enterprises want to have more easy access to data and dashboards. And in some cases make some changes on their own. This side of the insurance world will likely always require some in-person interaction or white-glove service, because it's just more complex and requires more changes than your typical auto insurance policy. But even then it is most certainly moving more direct with the help of various technology.
Noor Abdel-Samed:
So with more access to client information gathered online versus having papers and faxes sent in, like we did historically, what does risk management look like going forward for insurance companies? They have access to more information than ever before. They also have more risk than ever before, I imagine.
Alex Evans:
Yes, that's a really good question. One of the things we're seeing is that as more information is going online and more activities are possible online, it's actually creating new categories of risk for consumers and businesses that they need to manage. And specifically, we expect to see continued growing demand for insurance solutions in areas like cybersecurity and cryptocurrency, just to take two well-known examples. Looking first at cyber security, cyber attacks have been growing month over month. If we just look back to 2021, the total number of attacks in nine months was greater than the total in 2020. So we see this increasing trend and we expect attacks, cyber attacks, to become more prevalent as we share more and more data online. And recent survey work around insurance professionals. They believe that over half of these attacks coming in the future will be even more severe than the ones we see today.
So not just the frequency of cyber attacks are going up, but also the severity. And again, creating this growing risk profile for, again, both businesses and consumers. Looking at cryptocurrency as that proliferates and decentralized finance makes it easier for parties to transact via the public blockchain. These areas have become an inviting target for scams and hacks. And so, in response, insurance carriers have been increasing their cyber policy coverage from about 26% offering in 2016 to about 47% in 2020. And it's only continuing to increase. And so these are just two examples, but I think they're pretty indicative is that as we migrate more of our lives online, there's a growing risk profile that we need to manage through insurance.
Noor Abdel-Samed:
Do we believe insurance companies are doing a good job of covering these new risks, like cybersecurity, or covering digital assets like NFTs or cryptocurrency, or are they a little bit behind the time still?
Alex Evans:
That's a great question, Noor. I think it's interesting because the insurance companies don't stop these attacks. Let's take a cyber attack, right? The fact that you have coverage, doesn't prevent the attack. And the fact that you may get a payment, you may have a claim in the event of attack, you'll benefit financially, but does that actually repair the damage similar to you have an auto accident, and you can take your car to the shop and the insurance company pays for it. Well, what happens if your information is exposed online, will a payment necessarily make you whole?
So I think that's one of the challenges is that the loss in the case of a cyber attack is very different than the loss in sort of typical property and casualty insurance. And so I think insurance carriers are still learning and evolving in how to respond and how to match coverage with the risk. And it's a dynamic territory. So I wouldn't say that we're perfect yet, but I think they're getting better, but there's still a lot of learning to do.
Noor Abdel-Samed:
So in an age where insurance companies are covering cybersecurity and cyber attacks, it strikes me that they actually have to be more digitally savvy than their clients in some ways to properly gauge the risk and the premium they charge, and frankly, the client's security measures and infrastructure.
Gigi Wong:
Yes. I think that's exactly right, right? Because for these companies, there is most certainly a component that is reactive when things happen to them; when these attacks occur, and they need to compensate for it. But there's also a proactive function that's going to become more and more important as we go forward. How do we actively calculate these risks into the policies themselves? What are ways to compensate for them? This does continue to evolve, and they do need to capture the thought process around that. Now some of it, they may have internally, but a lot of it will require them to hire external folks and leverage external technology. Things that are focused on looking at cryptocurrency; things that are focused on looking at cyber security to really help them build up their technological capabilities.
Alex Evans:
I might add to Gigi's response. And you just emphasize that it's hard to price the risk for these evolving areas, right. Take cyber attacks. We don't have many years of history of what a loss means in terms of cost. So how do we price that as a carrier? Or cryptocurrency and theft of crypto, well, how do we value that given that it can go up or down 10, 20% a given day. So how do you actually value the loss? So I think with these new types of assets and exposures, it just presents challenges for the insurance industry on how to appropriately price and underwrite these risks.
Noor Abdel-Samed:
It's clear that consumers are looking for more coverage and more personalized coverage than ever before. What are insurance companies doing to respond to the demand for more personalized options? Insurance for me versus insurance for everyone.
Alex Evans:
Good question. Insurance companies are doing a couple of things. So if you think about insurance companies, historically, they've priced coverage based on broad population, class ratings. This causes some consumers to pay for items they may never use. Think about those funny Liberty Mutual ads, right? But a more revolutionary area in the market is pricing coverage through consumer centric experience. So often call usage-based insurance. So the consumer actually determines the coverage based on their actual usage. An example might be a telematics product to track actual driving patterns and then pricing an auto policy on a pay-per mile basis. So it's really tailored specifically to a particular consumer's actually usage. And it's not just the usage, but there's other dimensions where insurance coverage can be personalized. There's a concept of perimetric insurance policies.
And these are ones where the consumer can tailor how, and when a claim will be paid. And these are typically used in the event of a natural disaster. And these payments actually come much sooner than traditional policies because they're paid on the basis of a triggering event, a hurricane above a certain level, as opposed to an actual loss. And so that payment can be triggered. And so consumers of that type of insurance are opting for faster payments and can customize on that dimension. So there's different ways that carriers can personalize coverage, but it is definitely the direction of travel we think the industry is going.
Noor Abdel-Samed:
So these insurance trends are shifting, I would say, to a more direct sales model on average, what opportunities for growth in the industry does that leave? Is it all going to be direct-to-consumer, or how do we think about that going forward?
Gigi Wong:
So there's plenty of opportunities as a result of the shift towards a direct sales model and towards more personalized products. And there's actually several categories of opportunities, if you will. If you think about the one that's probably most applicable to say you and I, right? It's going to be about creating a more and better customer centric experience and products that's really geared towards us, and by us, I mean, each of us as an individual and our own needs. And in order to do that, right, that's going to require data. That's going to require technology, both in terms of backend technology, to facilitate creating those products, to facilitate those sort of pricing. But also, so in terms of the experience on our end, when it comes to buying a policy, changing a policy, or filing a claim. All that requires Insurtech to help facilitate that.
And the way that it's getting facilitated is going to get better and better. Things that we see as seamless now will probably seem chunky sometime in the future. On top of that, as we talk about moving into the actual insurance brokers and carriers themselves, as they shift a model to work more directly with the consumers themselves, they will require solutions that help them process and facilitate procedures that they never had to do before, because previously it was managed by a third party agent or a broker of sorts. So there most certainly is a lot of opportunities for Insurtech to not only step in, but to make the overall process better, to help facilitate a more direct channel.
Noor Abdel-Samed:
Thank you both. It was great to talk about the Insurtech space today and what we've all been seeing with our clients.
Alex Evans:
Thank you for having us today.
Gigi Wong:
Thanks, Noor.
Noor Abdel-Samed:
Do either of you have any closing remarks?
Gigi Wong:
In summary, these trends we've talked about today, whether it's direct-to-consumer, expansion of risk categories, or more personalized offerings, are most certainly expected to accelerate going forward. We at LEK have helped dozens of companies navigate this dynamic and, quite frankly, often confusing landscape. Thanks again, Noor, for having Alex and I on today's podcast.
Host:
Thank you, our listeners, for joining us today at the Inside Exchange presented by LEK Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
