The context for change: What is different now?

10 July 2018

Ever since modern commercial insurance was conceived in Edwin Lloyd’s coffee house in London more than 300 years ago, the industry has grown steadily and profitability. Annual premiums now exceed $720 Billion1, with an operational model that has changed little over the centuries. Insurance by and large is still the business of transferring risk to a well-capitalized third party, which in return for a premium, deploys its balance sheet as a hedge.

To support risk transfer, insurers have created a large and complex infrastructure built upon the premise of checks and balances, fraud protection, and claims mitigation with insights and premiums derived from historical precedents.

Technology has played an important role, largely by optimizing individual components of the value chain, including distribution, underwriting, fraud protection, and claims. While the promise of technology advances delivered by InsurTech innovators is an often-quoted and heavily invested space, we have yet to witness truly industry changing solutions, particularly within commercial insurance. Rather, many of the current innovations focus on improving operations, automating business processes, or digitizing distribution.

It is clear that technology, the great disruptor of industries as diverse as travel, retail, and transportation, has yet to impact insurance in a fundamental way.

We believe fundamental change is about to take place in insurance.

The next technology revolution is underway, fueled by an abundance of sensors, commonly referred to as Internet of Things (IoT), that bring the physical world into the digital realm. Leading analysts have each predicted explosive growth in IoT, with an average market size totaling $400B by 2020. The number of installed IoT devices is expected to reach 30B in the same time frame.2

Supported by cost effective cloud platforms that provide near limitless capacity, advanced analytics and machine learning, this new revolution creates an opportunity for companies to solve systemic problems to drive improvements in the loss ratio. This will redefine the very meaning of insurance and change how risk is identified, mitigated, and avoided.

We expect this technology revolution to alter how commercial insurance is bought, sold, and serviced. It will impact the way commercial insurers operate, beginning with simple to medium covers and eventually permeating throughout the industry. Resulting changes to business models and sector economics stand to profoundly alter the relevance and balance of power among insureds, brokers, carriers, and re-insurers.

These advances present an opportunity for new, nimble, and well capitalized entrants to shape the evolution of the industry. Incumbents will need to reevaluate their fundamental value propositions to remain competitive. As with any industry in flux, there will be winners and losers. Those on the forefront will balance market timing, innovation and legacy transformation and evolve business models that blur the distinction between a traditional insurer and a technology company.

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1 “Commercial insurance: innovating to understand the scope of insurability”, Swiss Re Institute, May 2017 (refer to page 4 of the SwissRe report)
2 Forbes Article: https://www.forbes.com/sites/louiscolumbus/2017/12/10/2017-roundup-of-internet-of-things-forecasts/#77a3e3fe1480