Insurers have significant advantages in competing against companies from outside the industry. They should focus on three core sources of value – proprietary data, segmentation and greater efficiency -- to reinforce these competitive advantages.

In my previous blog I talked about how the flood of external data is transforming the way insurers do business.   This is happening at a time when the insurance industry is experiencing an influx of new competitors.  Recently, for example, insurance aggregators have focused on simplifying the purchase of insurance products with modern, fast, mobile-first design and on providing a frictionless customer experience.

The entry of non-traditional competitors onto the insurance playing field does not necessarily signal the demise of traditional insurance companies.  In fact, insurers have many significant advantages when it comes to competing against companies from outside the industry.  They have, for example, developed vast quantities of proprietary data, and they have used this data to successfully price risks.

In addition, most insurers have created a proven methodology for pricing risks and processing claims, along with acquiring a deep understanding of the specific industries or business segments they serve.  This proprietary data, technical expertise and industry knowledge can be combined with new sources of external data to create deeper insight into risk factors and substantially improve loss ratios.

In establishing competitive advantage, insurers should focus on three core sources of value:

  • Continuing to develop proprietary insights into risk selection and pricing. This will remain critically important, as the loss ratio will continue to drive the lion’s share of economic value for insurers. 
  • Using internal and external data to improve the ability to segment the available market. This also means improving the purchasing and servicing experience for both existing and potential customers.
  • Increasing efficiency and reducing overall costs. Insurers can do this by using data to digitize and/or automate existing processes.

Data-driven insights make it possible to create new products and new revenue streams, typically in partnership with players from outside the industry.  For example, homeowners renting out their homes on a short-term basis via Airbnb or similar services often want and need additional home insurance, as their standard homeowners’ policies typically do not cover such rentals.  Central Beheer, a Dutch insurance carrier and part of the Achmea group, has since July 2015 included insurance for sharing one’s home through platforms like Airbnb in its standard home insurance package, without customers having to pay extra.

Similarly, Cuvva, a Scotland-based broker, launched a product in October 2015 that offers temporary insurance to those who have borrowed someone else’s car for a short period (for a weekend away, an errand, or an airport drop-off).  Customers select for how long they require cover, and the app then generates a one-off price.  Coverage starts immediately and can be extended using the app.

In my next blog I will look at what insurers need to do to create these new income sources.

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