September 8, 2014
BL UE P A P ER
M O R G AN S T AN L E Y R E S E AR C H
G l o bal
Jon Hocking1
Adam Wood1
Nigel Dally2
Kai Pan2
3
Ben Lin
Hideyasu Ban4
Daniel P Toohey5
Xinmei Wang1
Francois Meunier1
Sara Lee 6
Insurance and Technology
Evolution and Revolution in a Digital World
The insurance industry is on the brink of m ajor technology-driven change. This
creates exciting opportunities for insurers that are keen to embrace it, but significant risks
for the laggards. While some aspects of technological change are common to many
industries, several challenges are specific to insurance.
*See page 2 for all contributors to this report
1 Morgan Stanley
2 Morgan Stanley
3 Morgan Stanley
4 Morgan Stanley
5 Morgan Stanley
6 Morgan Stanley
Branch+
& Co. International plc.+
& Co. LLC
Asia Limited+
MUFG Securities Co., Ltd.+
Australia Limited+
& Co. International plc, Seoul
BOSTON CONSULTING GROUP
G l o bal
A step change in consum er engagement is needed. Our global survey suggests that
consumers are less satisfied w ith their digital insurance experience than w ith other
industries. They w ould like a simpler, more direct relationship w ith their insurer.
Michael Niddam
Digitisation of distribution and operations is vital for insurers to stay com petitive.
‘Digitally born’ insurance models can gain an advantage over traditional models, reducing
expenses (by ~10% of premiums) and claims (by ~8%).
Ugo Cotroneo
We could see disruptive m odels em erge, enabled by the Internet of Things, Big
Data and the ability to access broader ecosystems than before. These could have a
dramatic impact on the insurance industry all along the value chain, changing the nature
of risk assessment and management, as w ell as the consumer engagement model.
We also see opportunities for technology players as insurers invest in digitisation.
The major challenges, w e think, w ill be in consumer channels and new data sources
(Internet of Things, Big Data). Investment w ill also be needed in core systems to enable
digitisation and cut costs. Vendors exposed to these areas should see strong grow th.
Nicholas Barsley
Jean-Christophe Gard
Boston Consulting Group is an international
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September 8, 2014
Insurance and Technology: Evolution and Revolution in a Digital World
Morgan Stanley contributors
European Insurance
Jon Hocking 1
1
Maciej Wasilewicz
1
Marcus P Rivaldi
David T Andrich1
1
Xinmei Wang
1
Janet Van Den Berg
+44
+44
+44
+44
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+44
Australia
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Marcus.Rivaldi@morganstanl ey.c om
David.Andrich@morgans tanley.c om
Xinmei.Wang@morganstanl ey.c om
Janet.Van.Den.Berg@morganstanl ey.c om
US Life Insurance
2
Nigel Dally
Hayley Locker 2
Laura Sanchez
Bolanos2
+1 (212) 761-4132
+1 (212) 761-6271
+1 (212) 761-1330
[email protected]
Hayley.Locker@morgans tanley.c om
Laura.Sanchez@ morganstanley.com
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+1 (212) 761-3640
[email protected]
[email protected]
Ben Lin
Jenny Jiang 3
6
Sara Lee
+85 2 2848-5830
+85 2 2848-7152
+82 2 399-4836
[email protected] om
[email protected] om
Sara.HS.Lee@morgans tanley.c om
Hideyasu Ban
Koki Tanaka4
+81 3 6836-5410
+81 3 6836-5409
Hideyasu.Ban@ morgans tanleymufg.com
Koki.Tanaka@ morganstanl eymufg.c om
Australia Insurance
Daniel P Toohey5
Andrei Stadnik5
+61 2 9770-1315
+61 2 9770-1684
Daniel.Toohey@morgans tanley.c om
Andrei.Stadnik@ morganstanley.com
European Softw are
Adam Wood1
Sid Mehra1
+44 (0)20 7425 4450
+44 (0)20 7425 2686
Adam.Wood@ morganstanley.com
Sid.Mehra@morganstanl ey.com
+1 (212) 761-4149
+1 (415) 576-23889
+1 (212) 296-5569
[email protected]
Jennifer.Lowe@ morgans tanley.c om
[email protected] om
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[email protected]
+88 6 2 8722 2028
[email protected] om
+33 1 4017 1135
Gard.Jean-Christophe@ bcg.com
+49 211 3011 3202
[email protected]
+91 22 6749 7049
[email protected]
+972 3 793 1017
[email protected]
+39 02 65599 213
[email protected]
+81 3 5211 0670
[email protected]
+31 20 548 5863
Kuenen.JanWillem@ bcg.com
+351 21 3214 846
[email protected]
+44 207 753 5621
[email protected]
+1 646 448 7637
[email protected]
China
Koh Loon Loh
France
Germany
Astrid Stange
Alpesh Shah
Israel
Italy
Ugo Cotroneo
Japan
Yasushi Sasaki
Netherlands
Jan Willem Kuenen
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+82
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3 6836-8412
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Miguel Abecasis
UK
Nick Barsley
Asia Technology and Internet
Philip Wan3
Tetsuro Tsusaka4
Shawn Kim6
Parag Gupta7
Benjamin Rehberg
Spain
US Softw are
Keith Weiss2
Jennifer Lowe2
Brian Essex2
[email protected] om
Canada
Michael Niddam
Japan Insurance
4
+61 2 9323 5677
India
Asia ex. Japan Insurance
3
Sam Stewart
Jean-Christophe Gard
US P&C Insurance
Kai Pan2
Quentin McMillan2
Boston Consulting Group contributors
[email protected]
Tetsuro.Tsusaka@ morgans tanleymufg.com
Shawn.Kim@morganstanl ey.com
Parag.Gupta@morganstanl ey.com
US
Benjamin Rehberg
European Semiconductors
Francois Meunier 1
+44 (0)20 7425 6603
[email protected]
+1 (212) 761-6249
Katy.Huberty@ morganstanley.com
US IT Hardw are
Katy Huberty2
1 Morgan Stanley & Co. International plc+
2 Morgan Stanley & Co. LLC
3 Morgan Stanley Asia Limited+
4 Morgan Stanley MUFG Securities Co., Ltd.+
5 Morgan Stanley Australia Limited+
See page 123 for recent Blue Paper reports.
6 Morgan Stanley & Co. International plc, Seoul
Branch+
7 Morgan Stanley India Company Private
Limited+
September 8, 2014
Insurance and Technology: Evolution and Revolution in a Digital World
Table of Contents
Executive summary .........................................................................................................................................................................
6
Setting the scene .............................................................................................................................................................................
9
Implications for insurers...................................................................................................................................................................
17
Implications for technology providers..............................................................................................................................................
23
Exploring scenarios for insurers......................................................................................................................................................
32
Deep Dive
The consumer view today ..............................................................................................................................................
38
Significant evolutionary change under w ay..................................................................................................................
48
Case study: Allianz – digitising a traditional insurer .....................................................................................................
56
Digitally born insurer.......................................................................................................................................................
59
Updating IT systems – a painful process......................................................................................................................
64
Disruptive business models ..........................................................................................................................................
70
Internet of Things / telematics ........................................................................................................................................
78
Case study: Ping An – early ecosystem leader ............................................................................................................
93
Consumer w illingness to adopt new technologies ........................................................................................................
96
The evolution of insurable risk pools .............................................................................................................................
102
Risk of anti-selection.......................................................................................................................................................
114
Appendix I: Vendor profiles .............................................................................................................................................................
118
Appendix 2: Global consumer survey methodology .....................................................................................................................
112
3
September 8, 2014
Insurance and Technology: Evolution and Revolution in a Digital World
The insurance industry is on the brink of technology-driven change
Exhibit 1
Up until now, consumers have interacted less with
insurers than with any other industry…
% of respondents
Exhibit 4
However, the Internet of Things and Big Data could
drive fundamental change…
Devices / users (MM in Log Scale)
Internet of Things
100%
Many times a day /
Daily
80%
,000,000
Mobile Internet
Weekly
60%
Monthly/Quarterly
Billions
PC
Yearly
40%
100
20%
Mainframe
1
Never
0%
Minicomputer
Less than once a
year
10 MM
1
Bn
100
MM
1 MM
Search
Engine
Social
Media
Website
Banks
Online Mobile Energy Insurance Insurer
Retailer Company Utility
Broker
Co
1960
Source: Morgan Stanley/BCG Global Consumer Survey 2014, BCG e-intensity index
Exhibit 2
…so the consumer experience with insurers tends
to lag behind others…
% of respondents which indicated they are satisfied with their interaction with service provider
1970
1980
1990
2000
2010
2030
2040
Exhibit 5
…such as multi-product ecosystems, which
insurers may not be able to keep up with
Ecosystems
Worst Case Scenario
Avg. 60%
60%
2020
Source: Company Data, BCG, Morgan Stanley Research
80%
Current Situation
40%
Lots of new entrants,
lev eraging detailed
consumer insights
Growth of multiproduct ecosystems –
e.g. in car or home.
Very f ew adjacent
entrants.
20%
0%
Tens of
Billions
Desktop Internet
10,000
Search
Bank
Retailer
Social
Media
Insurance
Mobile
Majority of insurance
sold through traditional
channels
Energy
Source: Morgan Stanley/BCG Global Consumer Survey 2014, Sigma, EIU
Adjacent entrants
Exhibit 3
Source: BCG analysis, Morgan Stanley Research
…especially at the claims stage
% of respondents
100%
15%
12%
13%
28%
25%
34%
80%
Exhibit 6
35%
40%
20%
21%
0%
Net
Promoter
Score
5%
4%
Research
Very Unsatisfied
38%
26%
9%
5%
Purchase
Unsatisfied
4-5%
6-7%
6-10%
22%
10%
8%
12%
15%
Modify
Claim
Renew
Neutral
99%
30%
20%
14%
We estimate technology could reduce the combined
ratio by as much as 21% …
Combined Ratio (%)
34%
44%
60%
19%
Satisfied
Very Satisfied
Source: Morgan Stanley/BCG Global Consumer Survey 2014, Sigma, EIU
Claims
expenses
67%
Claims
expenses
Non Claims
expenses
32%
Baseline insurer
78-82%
Non Claims
expenses
Automating
Digital & online Big data (pricing &
processes (admin,
sales
fraud detection)
policy servicing,
claims mgmt)
Digitally born
insurer
Source: BCG Analysis, Morgan Stanley Research. Numbers may not add due to rounding.
4
September 8, 2014
Insurance and Technology: Evolution and Revolution in a Digital World
Exhibit 7
…and we also we also see technology reducing risk pools over time…
Current risk / losses
Motor
Accidental Damage
Bodily injury
Cause of
claims
Connected meters
~20-30%
Water
Leakage
Active leakage
detection devices
~70%
Fire
Smart smoke detector
~70%
Theft
Advanced alarm
systems
Other
Home
Prevention
potential
Connected devices
available
Home:
Property damage
Theft
Future potential
home risks / losses
Risk reduction through adoption of
smart devices
40-60%
Reduced
risk in Home
15-25%
Reduced
risk in Motor
.
.
~10-80%
Fire
Water Damage
Motor:
Theft
Poor
driving
Electrical
False
Claims
Other
Safer driving & fraud
detection through
~5%
Telematics
~10-20%
Source: BCG case experience, smart systems suppliers; BCG analysis, Morgan Stanley Research
Exhibit 8
…which begs the question: how well placed are insurers to deal with the changing technology environment?
Weaknesses
Strengths
•
Established brands
•
Limited frequency of consumer interaction
•
Expertise in pricing risk
•
Legacy IT systems, operational complexity
•
Detailed understanding of claims patterns
•
Lagging other industries in the ‘digital’
•
Large existing consumer base
•
Ownership of face-to-face distribution
•
High degree of consumer trust
consumer experience – especially in claims
•
Insurer
Threats
Opportunities
•
Channel conflict
Development of new flexible products – meeting
•
Risk of adjacent entrants into insurance
unmet consumer needs
•
Disruptive models – e.g. peer-to-peer
•
Increased cross-selling potential
•
Industry is not a natural ecosystem host
•
New emerging risk types – e.g. cyber risk
•
Smaller risk pools given IoT/telematics
•
Step change in operational efficiency
•
Anti-selection if late adopter of technology
•
Improve service offer to clients
Source: BCG analysis, Morgan Stanley Research
5
September 8, 2014
Insurance and Technology: Evolution and Revolution in a Digital World
Executive summary
A collaborative global report
Step-change in consumer engagement needed
This Blue Paper w as prepared jointly by Morgan Stanley Research and
Boston Consulting Group (BCG). We hav e collaborated globally ,
inv olv ing the insurance and technology groups at each organisation.
Players that are slow to implement new technology run the
risk of anti-selection – w e note that the w orst quintile of risks
in a market can produce 9x more losses than the best quintile.
Deep dive on the subject
Today, mobile is key, even more than the w eb, and this
requires an engagement model specifically conceived for a
digital w orld – w e believe that insurers are not yet there.
Overall, consumers are far less satisfied w ith their digital
insurance experience than w ith other industries (Exhibit 9) –
particularly w hen it comes to ‘moments of truth’ such as
paying claims. Consumers have significant unmet needs, w ith
many products perceived to be expensive and inflexible.
In researching this report, w e conducted 56 interv iew s w ith senior
ex ecutiv es of insurers and technology prov iders globally . In addition, w e
commissioned a proprietary global insurance consumer surv ey in 12
countries in order to gauge perceptions about technology .
Overview
We believe that the insurance industry is on the brink of major
technology-driven change; this creates major opportunities for
insurers that are looking to embrace it, but it poses significant
risks for the laggards.
While some aspects of technological change – such as better
operating efficiency, the need to engage creatively w ith
consumers digitally and increased disintermediation – are
common to many industries, others are specific to insurance.
Fundamentally, insurance is about the pricing and selection of
risk. We believe that the Internet of Things (IoT) and Big Data
w ill change the type of data that insurers use to assess risk,
the w ay in w hich information is analysed and ultimately the
size of the actual risk pools.
Our aim is not to identify relative w inners or losers in the
insurance industry, but to provide insights into the impact of
technology on the industry as a w hole.
Exhibit 9
Consumer satisfaction with online experience, by industry
Relative satisfaction utility score
8.0
~7.3
4.3
4.2
4.1
4.0
3.8
3.5
Telco &
Cable
5.0
Real Estate
Hotels
Supermarkets
Airlines
Investments
Electronics
Retail
Apparel
Retail
Media Retail
Personal
Banking
Online
Merchants
5.8
Insurance
8.5
Government
Services
Health Care
Providers
8.5
Automobiles
8.9
Electricity,
Gas, Water
10.0
Companies born in the digital age can operate at substantially
low er cost – due to automation, self-service and efficient
distribution models – w ith substantially low er loss ratios driven
by better risk selection thanks to new data sources, claims
management and loss prevention techniques.
Business models w ith sufficient scale to support the fixed
costs of building the infrastructure as w ell as marketing
investment are proving highly competitive. This is show n by
the success of GEICO in the US (see case study on pages
62-63).
Risk pools are likely to shift and shrink
New risks are emerging – for example, cyber risk is grow ing,
w ith the market set to grow by on average 10-15% per year,
according to Sw iss Re, potentially surpassing the size of the
aviation market w ithin 10 years.
15.2
11.1
‘Digital natives’ could threaten incumbents
We expect current technological trends to drive a profound
shift in risk pools.
Insurance online experience lags behind
11.8
Encouragingly, our research also show s that consumers are
w illing to consider innovative products, w ith younger and more
affluent consumers show ing the greatest propensity.
Source: BCG digital satisfaction survey March 2013, Morgan Stanley Research
In parallel, w e could see greater loss prevention, especially in
traditional business lines, w hich could lead to a sharp
contraction in non-life premiums (10-20%).
How ever, w e believe technology also has the potential to
reduce risk pools materially. We have analysed the risk pools
for the personal home and motor segments and tentatively
calculated that they could shrink by $62-109 billion in today’s
6
September 8, 2014
Insurance and Technology: Evolution and Revolution in a Digital World
terms. This is equivalent to 5-9% of global non-life premiums
(excluding health). A similar argument can be made, w e think,
for commercial lines, although w e have not quantified this.
Those devices enable insurers to collect new datasets, gain a
much better understanding of their customers and assess risk
in a completely different w ay.
New digital models for consumer engagement, as w ell as
more flexible, on-demand types of insurance cover, could also
boost demand and accelerate penetration in emerging
markets.
How ever, w e believe insurers w ill need to orchestrate or join
‘ecosystems’ (netw orks of companies, individuals and
institutions that interact and provide services) in order to
promote supply, installation and service of those devices –
see Exhibit 10. They w ill also need to ensure harmonious
development of insurance offers, together w ith new
applications and services to link in w ith those devices. An
example of this trend is the partnership betw een State Farm
and ADT for protected, connected homes.
New entrants can cause disruption
We see a risk that new entrants w ill disrupt existing
equilibriums.
Companies w ith strong customer relationships and hence a
deep know ledge of their needs may be able proactively to
identify and meet their specific insurance requirements.
Rakuten – the Japanese online marketplace – has moved into
insurance (acquiring an underw riter) and is using its broad set
of consumer interactions as a platform to identify sales leads
and as an extensive source of data.
Such ‘adjacent’ players (operating in industries w ith high
degrees of customer engagement) are w ell positioned to
embed the insurance cover in the product and services they
sell.
Ecosystems drive the need for partnerships
Cheap, connected sensors have the potential to transform the
insurance offering – be it in motor, home or health insurance,
or industrial settings.
Exhibit 10
An example of a digital ecosystem – we believe
these will become increasingly important for
delivery of insurance products
Technology companies are moving in this direction to build
connected-home offerings – for example, Google has
acquired smart-home device maker Nest Labs and Samsung
recently purchased home-automation company SmartThings.
Insurers need to move quickly to form partnerships, as there
are a finite number of relevant potential partners.
The shift tow ards ecosystem-based insurance also reinforces
the risk of adjacent entrants, w here non-insurers w ith key
consumer insights from their ow n core operations seek to
leverage that competitive advantage and offer their ow n
insurance products.
Exhibit 11 summarises this scenario compared w ith the
current situation.
Exhibit 11
Ecosystems and the risk of adjacent entrants
Ecosystems
Worst Case Scenario
Smart data
Current Situation
Energy
Car
Health
Insurance
Smart
consumer-
Very f ew adjacent
entrants.
Majority of insurance
sold through traditional
channels
Telecommunica
tions provider
Platform Owner
Lots of new entrants,
lev eraging detailed
consumer insights
Growth of multiproduct ecosystems –
e.g. in car or home.
Adjacent
Source: BCG analysis, Morgan Stanley Research
Source: BCG analysis, Morgan Stanley Research
7
September 8, 2014
Insurance and Technology: Evolution and Revolution in a Digital World
Pace of change should leave time to adapt
Facing these challenges, insurers need to focus on:
The pace of change is hard to predict given that some of the
technology is in its infancy.
•
Consumer centricity: insurers w ill need to tailor their
offers and services to the real needs of their customers.
For many, this w ill entail a radical shift in their core
processes, such as new product development, customer
contact and claims process design.
•
Cutting across silos: the new digital paradigm requires
that silos betw een branches and functions be broken.
•
Partnerships: insurers need to identify/sign up suitable
partners to develop more immersive ecosystem offerings.
•
IT evolution: digital technology needs IT systems to
operate at a different level. Consumer data must be
simply accessible; operations need to happen in real
time. Consequently, IT systems have to find a w ay to
manage the evolution of insurers’ core systems at a
measured pace w hile enabling rapid absorption of
technological innovation. In short, they need to manage a
‘tw o-speed IT’.
•
Innovation: adapting to the digital w orld requires a sound
know ledge of the technology on offer; ability to develop,
test and pilot at the right pace; readiness to fail in an
entrepreneurial spirit; and capacity to do all that w ithout
jeopardising the core business. Insurers w ill also have to
scan the horizon for new , game-changing technology that
may be too far ahead to commercialise now , but could
have a significant long-term impact on the industry.
•
Data analytics: new capabilities offered by Big Data
technologies need to be embedded w ithin insurance and
to support most of the underlying changes.
Taking telematics in motor insurance as an example, w hile
several pilots are in progress globally, the product has only
made a significant impact in tw o discrete markets: UK young
drivers (w here premiums for traditional cover are very high)
and Italy (w here claims fraud is an issue).
At the core, the digital transformation is likely to take time.
Insurance is largely a stock business and replacing the
portfolios w ill not be quick.
The frequency of interaction is low , slow ing dow n consumer
push for a change. Key disrupters have yet to take the
necessary steps tow ard targeting a business that is partially
protected by a complex regulatory environment (w hich is often
highly local in nature).
Which parts of the industry will be affected?
Risk segments (property & casualty, protection and health)
are likely to see the greatest long-run impact from technology,
w e believe, as the industry moves from actuarial risk
assessment (statistical techniques) to include new sources of
data, Big Data techniques and new datasets from connected
devices (potentially real-time risk observation and modelling).
Savings business is also likely to be significantly affected by
technology, but in a similar w ay to many other industries –
w ith digital channels driving greater price transparency and
competing aw ay frictional costs.
As for consumer journeys, our research show s high
expectations for research, purchase and claim experiences.
Implications for insurance companies
Insurance com panies face challenges on several fronts:
•
Their legacy IT systems are complex, w hich limits
insurers’ agility.
•
A bias tow ard largely intermediated distribution and the
technical nature of products hinder a shift tow ards greater
consumer orientation.
•
Complex insurers, often siloed by branch as w ell as longterm orientation w ithin the industry, tend to have a limited
focus on innovation.
•
In many countries, the economic environment creates
significant pressure in terms of investment capability,
increasing the short-term focus of insurance companies.
Implications for technology companies
We expect overall Insurance technology spending to grow
modestly (mid-single digits), w ith most insurers looking to
reallocate spend from legacy areas. How ever, technology
vendors exposed to priority spending areas should see
double-digit grow th. The main priority areas, w e think, w ill be
interaction/distribution channels and analytics – particularly in
contextualising data from telematics/IoT devices. How ever,
w e believe insurers w ill also have to invest in core systems
(policy, claims, billings) and middlew are solutions (w rapping
the legacy systems so they integrate w ith state-of-the-art
capabilities) to benefit fully from the channels/analytics spend.
We expect spending here to increase, albeit not at the same
pace as the key priority areas. The technology landscape for
insurers is fragmented, w ith many specialist products but no
established all-encompassing solution that insurers are w illing
to migrate completely to today. We estimate the top 10
providers have only a 25% market share today, so w e w ould
expect some consolidation in the market.
8