AS THE financial sector is racing to embrace digital technology to boost sales and drive profits, the traditionally staid insurance industry is in danger of falling behind.
Some insurers are using developments such as telematics, or social media sources, to increase the amount of information they have about customers to reduce claims and theoretically make insurance cheaper for all.
Telematics uses aircraft-style "black boxes" extracted from Formula One racing cars for years to collect data about how policyholders drive, so they can be rewarded with lower insurance premiums if they adopt a cautious style. But an industry that has long relied on personal contacts, the Lloyd’s of London insurance market that was started in a coffee house in the 17th century, has not been quick to embrace new technology or mine vast new data sets, known as "big data".
The reluctance to roll out technology with the same enthusiasm as banks and some investment managers is partly cultural, partly financial.
"Compared to many other industries, (insurers) are still playing catch-up. The sector has a very traditional culture," says Catherine Barton, a partner at EY.
Staff at Lloyd’s, home to more than 90 trading syndicates in London’s financial district, still trundle suitcases of claim forms for complex insurance transactions. Function rooms in its flagship building are furnished with antiques, while besuited underwriters swap ideas in local pubs and restaurants when the market is out on lunch.
Lloyd’s CE Inga Beale says the industry needs to take technology on board to maintain its role in global business. The firm recently appointed a chief data officer and Ms Beale says the sector needs to attract new, tech-savvy talent.
Insurers already carry plenty of data about policyholders, and have started mining sources such as Facebook, to cut fraud or better estimate customers’ claims. But a mass of different systems, often the legacy of firms being swallowed up by bigger insurers, makes it hard to streamline technology. Some firms have chosen the status quo.
"I have a very jaundiced view of the generation behind me, they are too reliant on technology," a broker says. "I don’t believe this (face-to-face approach) will disappear."
Even if firms want to harness technology, they may be unwilling to commit cash. Insurers are struggling to balance their books, with bond yields at record lows and slashing the returns they make on investing premiums.
A report from Morgan Stanley and Boston Consulting Group says the first movers will reap bigger spoils.
They say a full transformation to becoming a digital company could cut an insurer’s combined ratio by 21 percentage points, in other words making the firm more profitable. Expenses could fall by 10% of premiums and claims by 8%.
Germany’s Allianz is highlighted in the report as a good example of a traditional insurer working to enhance its digital capabilities and transform its business model.
It is investing €400m-€500m a year in digital initiatives such as setting up an innovation lab to work with young companies on Big Data, mobile, social media and sponsorship, the report says. Others are focusing on telematics, one of the industry’s brightest innovations. Britain’s RSA has a telematics product and underwrites business for specialist telematics insurer Ingenie. Direct Line also does telematics.
Belgian insurer Ageas, which has a British division and writes insurance for firms such as Tesco Bank, also underwrites Ingenie’s telematics car insurance, while Progressive is a frontrunner in the US.
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