From transforming the core to new frontiers
Alexander Braun
The insurance industry is hurtling toward the digital future, with innovations in the value chain, the exploration of innovative business models and more. As it finds support and challenges from InsurTech startups, the sector must remain vigilant and adaptable to both ongoing and unforeseen trends.
With the digital transformation in full swing, the insurance industry finds itself at the dawn of a new era. The shift into the digital age, driven by the relentless advancement of technology and changing consumer expectations, presents a complex tableau of challenges and opportunities. The future of insurance is not merely about integrating new technologies; it calls for a profound reimagining of how value is delivered to customers, necessitating a gradual departure from entrenched business practices that have long defined the sector.
Legacy IT systems, legacy products, legacy distribution channels and legacy culture all act as significant barriers impeding agility and innovation (Braun and Häusle, 2024).[i] The digital transformation demands a fundamental shift within insurance organizations, urging them to embrace new technologies, data-driven decision-making and a genuine innovation mindset. Fortunately, the rewards of the transformation — such as operational excellence, enriched customer experiences, and new business models — appear to outweigh the efforts. While digital leaders benefit from increases in shareholder value, those insurers who fall behind are being outperformed on various essential business metrics, including customer satisfaction and growth.
As insurers navigate this landscape, two endeavors are determining the industry’s future. On one hand, the transformation of the insurance value chain promises enhanced customer interaction and streamlined operations. Advanced technologies, such as artificial intelligence (AI), the Internet of Things (IoT) and blockchain, enable efficiency gains through automation as well as novel approaches to risk assessment, underwriting and claims management. On the other hand, the digital reconfiguration of the “core” then paves the way for new business models — including digital attackers that challenge conventional paradigms with lean, technology-driven operations, ecosystem orchestrators that leverage interconnected services to deliver comprehensive solutions to customers, and prevention partners focused on mitigating risks through proactive measures (Braun and Häusle, 2024).
Amid these evolutionary strides, InsurTech startups have emerged as both collaborators and competitors, wielding technology to forge new pathways and challenge the status quo. Their influence is manifold, spanning from enabling traditional insurers with cutting-edge technology to pioneering revolutionary business models that redefine customer engagement and service delivery. The ascendancy of the InsurTech sector underscores a critical point: the journey into the future of insurance is not solitary but collaborative, and those who successfully add partnerships to their digital transformation playbook will have a major edge.
In the following, we assess the state of the digital transformation in the insurance industry across three sections and provide an overview of the dominant strategies for the future of insurance. First, we delve into how digital technologies are transforming the core of the insurance business, automating the value chain, enhancing operational efficiencies and establishing next-level customer experiences. Second, we examine the emergence of innovative business models that are extending the industry beyond the core, exploring new frontiers in risk transfer and risk management. The final section highlights the instrumental role of InsurTech startups, whose innovative solutions and collaborative efforts with established insurers are accelerating the transformation.
Embracing digital technologies to enhance the value chain
The digital transformation is affecting every aspect of the insurance value chain. Below, we’ll dissect the digital overhaul of core insurance operations, from marketing to product development, distribution, underwriting, customer service and claims management, highlighting how technology is reshaping processes and enhancing customer interactions.
Marketing, product development and distribution
Digital technologies have revolutionized insurance marketing. Insurers can now leverage big data and advanced analytics to gain deeper customer insights. This allows them to segment markets more accurately, personalize customer outreach and predict customer needs with greater precision. Social media and digital platforms have become rich sources of data on customer preferences and behaviors as well as tools for engagement (Braun and Häusle, 2024).
In product development, innovation is being shaped by telematics, wearables and smart home devices. These IoT technologies enable usage-based and dynamic insurance products, which offer more flexibility and customization than traditional policies. Telematics technology in auto insurance, for example, enables “Pay How You Drive” (PHYD) models, rewarding safe driving behavior with lower premiums. Similarly, health and home insurance policies can leverage data from wearable devices and smart home sensors to incentivize healthy lifestyles and prevention.
However, despite their potential for revolutionizing product design, IoT-based insurance policies raise several concerns. Privacy issues are at the forefront, with the extensive data collection involved sparking fears of surveillance and misuse. Additionally, the costs of data management and the potential inaccuracies in collected data, due to noise and errors, pose significant challenges.
On-demand insurance has emerged as a flexible product tailored to the contemporary consumer’s lifestyle. Allowing for episodic coverage, it is particularly appealing for customers with variable risk levels or for assets not in constant use. Examples include travel insurance activated only during trips or coverage for sharing-economy assets such as cars, homes and personal items during short-term and even spontaneous rental periods. Despite its theoretical appeal, adoption of on-demand insurance remains relatively low. One reason may be customer concerns about inaccurate monitoring leading to premium increases or misclassification.
The digital era has also brought about significant changes in how insurance products can be distributed. Online sales platforms, comparison websites (also known as aggregators), digital brokers and robo-advisors have become increasingly popular, offering customers the convenience of comparing and purchasing insurance products from the comfort of their homes. These channels offer 24/7 access and have the potential to reach a wider audience, including younger, tech-savvy generations who prefer digital interactions. They have also improved significantly in reputational effects. Recent research indicates that robo-advisors, when utilizing a conversational interface, are successful at fostering trust and enhancing a company’s image in the eyes of consumers.
Another effect of the digital transformation in insurance distribution is the evolution towards the “bionic agent,” who seamlessly integrates human expertise with AI and digital tools. This hybrid model leverages AI to automate routine tasks and analyze vast datasets, enhancing operational efficiency and decision-making. Meanwhile, the human agent focuses on providing personalized advice and handling complex customer interactions. This combination ensures a high level of service, leveraging technology to augment rather than replace human capabilities, and promising an insurance service that is intuitive, responsive and retains a personal touch.
Another relevant concept is embedded insurance: integrating insurance coverage directly into the purchase process of non-insurance products or services. Embedded insurance capitalizes on moments of need, ensuring that coverage is offered in a timely and convenient fashion when the customer best sees its relevance. It comes in at least two shapes (Braun and Häusle, 2024). The first, known as linked embedded insurance, allows customers to opt for additional coverage at the point of sale of a primary product or service, offering a seamless add-on. For instance, when buying a smartphone, a customer might be offered immediate coverage for that device as part of the checkout process. Conversely, bundled embedded insurance treats coverage as an integral part of the product or service being purchased, without the need for a separate decision or transaction. This model can simplify the insurance buying experience up to the point where insurance becomes completely invisible to the consumer. An example is when a car manufacturer includes comprehensive auto insurance coverage for new vehicles.
Underwriting and claims handling
The major impact of the digital transformation on insurance underwriting and pricing can be seen with the advent of machine learning and deep learning models that complement the actuarial toolbox (Braun and Häusle, 2024). These allow for the analysis of vast datasets, including non-traditional data sources like social media activity, shopping behavior and even real-time measurements from IoT devices — ultimately providing a more nuanced understanding of risk. For example, an emerging field in actuarial science analyzes how claims predictions can be improved based on telematics data, including new variables such as near-miss events in the case of auto insurance. This enhanced risk assessment leads to more accurate pricing, tailored to the individual risk profile of each customer.
Furthermore, the automation of underwriting processes reduces manual errors and speeds up the application and approval processes, improving operational efficiency and customer satisfaction. However, the integration of AI in underwriting and pricing also introduces the significant issue of biases, which can stem from the underlying data used to train the models. These biases may inadvertently perpetuate and amplify existing prejudices, leading to unfair outcomes for certain demographic groups and challenging the fairness and integrity of AI-driven insurance practices.
Digital technologies are also transforming claims management and customer service, making them more efficient and customer-friendly. Mobile apps and online platforms allow customers to file claims quickly and easily, while AI-powered chatbots can provide instant assistance and answers to customer queries. In addition, blockchain technology can help to reduce fraud by enabling the verification of identities, document authenticity and asset ownership. Finally, the use of AI in claims processing not only speeds up settlement but also helps detect fraudulent claims, reducing losses for insurers. By some estimates, AI-powered automation may lower the cost of claims handling by up to 30%. However, it should be noted that biases in AI, as already discussed above, equally apply to claims processing. They can potentially lead to the unfair treatment of certain policyholders in the assessment of claims.
The new frontier: business model innovation
Beyond the transformation of its core activities, the insurance industry is witnessing the emergence of new business models reshaping the landscape. Currently, the most prominent forms are digital attackers, ecosystem orchestrators and prevention partners, along with more dramatic innovations such as online mutual aid and decentralized insurance. These new models go beyond traditional insurance practices in terms of their target customers, value propositions, value deliveries and revenue mechanisms.
Digital attackers are redefining industry dynamics by using technology to streamline and automate operations, reduce costs and enhance customer experiences. They challenge incumbent insurers through a digital-first approach in combination with an end-to-end digitized value chain based on a modern technology stack. Digital attackers typically offer simplified but customizable insurance products through online channels that appeal to tech-savvy consumers. Prominent examples include Lemonade and Hippo in the United States and Neodigital in Germany.
The ecosystem logic emphasizes interconnected services and collaborations. Insurers explore roles of either suppliers, providing insurance products within digital marketplaces, or orchestrators, managing platforms that aggregate offerings from various providers (Braun and Häusle, 2024). The supplier role in digital ecosystems aligns closely with the digital attacker model discussed above.
Most insurers, however, aim to become orchestrators, likely because the lion’s share of the value created in ecosystems is associated with possession of the customer relationship. As an orchestrator, an insurer needs to become the central hub in a network of products and services that extend beyond traditional insurance policies. Orchestrators create the marketplace for these offerings and facilitate interactions among diverse participants, including suppliers and consumers. For example, an insurance company might aim to orchestrate a mobility ecosystem by partnering with car manufacturers, rental firms, and maintenance services — offering drivers a unified platform for vehicle purchasing, leasing, financing, insurance and repair services.
Becoming an orchestrator in a digital insurance ecosystem presents significant challenges, including the need for substantial investment to develop and maintain a robust digital platform with a large customer base and a high number of touchpoints. Insurers must also cultivate a broad network of partners across various industries, requiring sophisticated relationship management and integration capabilities. Given this complexity — in combination with the competition for the orchestrator role coming out of other industries and the “winner-takes-all” nature of the platform economy — many insurers will find it difficult to successfully transition to this business model.
Another innovative model is that of the prevention partner, which reflects a shift in focus from compensating for losses to actively preventing them (Braun and Häusle, 2024). This model leverages data analytics and IoT technologies to assess risks and monitor them in real time, with the goal of identifying and implementing measures to lower the frequency and/or severity of losses. A popular example is smart water valves, capable of autonomously cutting off the water supply to either a designated area or an entire house upon detecting a leak. By engaging in proactive risk management, insurers can reduce claims costs and foster deeper relationships with policyholders — for whom risk prevention, if sufficiently reliable, is clearly superior to insurance.
Finally, online mutual aid platforms and decentralized insurance models represent more radical innovations, challenging conventional insurance mechanisms. Online mutual aid platforms pool resources among participants to cover claims, relying on the collective support of the community. This peer-to-peer approach works without ex-ante premiums. It emphasizes transparency and mutual assistance and targets consumers who are disillusioned with traditional insurance.
Decentralized insurance relies on blockchain technology and smart contracts to eliminate intermediaries and reduce operational costs. This model allows for the automated execution of policies and settlement of claims as well as a tokenization of the risk, through which investors can provide risk-bearing capital in a trustless system without a traditional insurance company. Contributors to decentralized insurance systems on the blockchain are classified as “relayers” that facilitate customer access, “risk pool keepers” that manage collective funds, and “oracles” that verify claim events with external data, as well as specialized underwriters and claims adjusters. Although cases such as Etherisc and Nexus Mutual have delivered proofs of concept for decentralized insurance, this model is still in its infancy.
How InsurTech is shaping the future of insurance
InsurTech, an abbreviation for insurance technology, describes companies (typically startups) that leverage innovative technologies to transform the insurance sector. Funding of InsurTech startups, both by venture capital firms and industry incumbents, has grown significantly in recent years, reflecting the sector’s potential to create value by fundamentally reshaping the insurance landscape. Available empirical evidence on the relationship between InsurTech investments by insurers and their long-term performance suggests that tangible benefits emerge over time.
InsurTech models can be broadly classified into nine categories. These range from comparison websites that aggregate insurance products for easy consumer access, to digital brokers that streamline the insurance-buying process and embedded insurers that integrate insurance directly into the purchase of other products or services. Peer-to-peer (P2P) models, on-demand insurance and digital attackers are attempting to reshape the market with technology-first approaches. Finally, there are technology providers focusing on AI, IoT and blockchain technologies to enhance various aspects of the insurance value chain, from risk assessment to claims processing. These business models reflect InsurTech’s role in driving innovation, improving customer experience and introducing efficiency and transparency into the industry.
The impact of InsurTech also encompasses a cultural shift towards embracing digital transformation and fostering a mindset of continuous improvement and innovation. With their agile methodologies and customer-first approach, InsurTech startups serve as catalysts for change — pushing traditional insurers to reconsider their business models, operational processes and strategies for customer engagement (Braun and Häusle, 2024).
The relationship between traditional insurers and InsurTech startups is complex, and characterized by both competition and collaboration. On one hand, some InsurTechs act as competitors that challenge incumbents with innovative approaches and customer-focused solutions, capturing market share and redefining customer expectations. On the other hand, many InsurTech startups seek to partner with established insurers, offering their technological expertise to help these firms digitally transform their operations and improve product offerings. The symbiotic relationship between InsurTechs and incumbents is much more prevalent than the competitive relationship, which underscores a general trend within the industry toward leveraging technology partnerships to improve efficiency, reduce costs and deliver better customer experiences.
There is, however, one area where competition between InsurTech startups and incumbents has been intensifying: both aspire to attract the best talent to drive innovation and transformation (Braun and Häusle, 2024). InsurTech startups hold distinct advantages in this rivalry, offering a dynamic and agile work environment that encourages significant contributions and change. Their cultures value collaboration, creativity and risk-taking, appealing to those desiring an entrepreneurial setting with flat hierarchies and open communication. Additionally, InsurTechs typically provide first-hand exposure to cutting-edge technologies such as AI, blockchain and IoT, presenting unique opportunities for professional development and involvement in industry-transforming projects. The potential for rapid career advancement and leadership roles within these growing startups helps attract ambitious employees looking for accelerated professional growth.
The disruptions ahead
In the second half of the 2010s, disruption was a focal point in discussions about the future of insurance, capturing widespread attention. However, as the industry adapted and evolved, this emphasis on disruption gradually receded. Despite this shift, the possibility of disruptive future scenarios remains an important consideration.
As embedded insurance transitions from a mere distribution channel into a comprehensive business model, it integrates coverage early in the customer journey of the primary products. This concept caters to the many customers who prefer that the insurance question is simply taken care of, instead of actively engaging with the purchasing decision. Consequently, insurers that exclusively rely on traditional distribution channels could become sidelined.
The rise of blockchain technology heralds a new era of disintermediation, streamlining processes and reducing the need for intermediaries. Similarly, in the sharing economy, the concept of asset ownership becomes less relevant, shifting from ownership to usage and diminishing the volume of insurable objects. This, in turn, could have an adverse impact on insurance demand. Finally, climate change deforms insured loss distributions, causing higher-average and more frequent extreme claims. It thereby threatens the very fabric of insurability, with some regions facing the prospect of vanishing insurance markets. As the future becomes reality, the industry must stay vigilant and adaptable — recognizing that these scenarios and other potentially unforeseen disruptions could significantly impact the insurance landscape as we know it.
Alexander Braun
Alexander Braun is Director at the Institute of Insurance Economics of the University of St. Gallen (HSG) in Switzerland, where he also holds the Associate Professorship for Insurance and Capital Markets. He studied at the University of Mannheim (Germany) and Monash University (Australia), before starting his professional career in the Capital Markets Division of Lehman Brothers in London. Subsequently, he earned his Ph.D. and the Venia Legendi at HSG. Overall, Mr. Braun looks back on 15 years of combined scholarly and practical experience in risk management, insurance and the financial markets. His current focus areas include natural catastrophe risk, insurance-linked securities, digital insurance and InsurTech.