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September 16, 2015

Risky Business: Risk Identification In Insurance

Posted by Manish Tandon (View Profile | View All Posts) at 10:43 AM

Risky Business: Risk Identification In Insurance

Given that insurance is all about risk and innovation is inherently a 'risky' process, it is no wonder that insurance companies are struggling with innovation. The magical ingredient that can really help insurance companies overcome this interesting dichotomy is data. We all know how insurance companies love their structured data, their rating tables, their statistical analysis...yet all this is post facto data, which at best is a mirror to history. With the proliferation of data sources (both structured and unstructured) and the impending revolution that is the Internet of Things (IOT) ... the best is yet to come.

I believe that the innovative use of data can really help insurance companies innovate in an area that is most critical to them: risk identification (which leads to new product development). What if insurance companies could predict their customers' insurance needs and offer tailored products and services? What if they could bring the 'power of one' to insurance underwriting?

I believe that insurance companies need to learn from other industries in this regard. Many oil companies use analytics to predict where the next pipeline problem will occur. Retailers use Big Data to offer customers a full basket of customized advertisements and specials based on their buying habits. If insurance companies were to use IT tools such as advanced analytics and Big Data, they could actually preempt the needs of their consumers instead of constantly changing rates based on the calculations of actuaries. Doing so would make the insurance industry far more responsive and customer-friendly.

I do believe that the crux of the issue is that insurance companies look at themselves more as financial companies as opposed to consumer companies. Nothing could be further from the truth. The insurance business is fundamentally about being consumer-focused. It's about being a force that insures the safety and well-being of policyholders. Despite this, insurance companies are yet to embrace the full array of digital tools that enterprises in other consumer-focused industries have.

Interestingly, this world view of insurance companies is also shared by regulators. Unrelenting legislation and regulations targeting the insurance and financial services sectors cause these companies to allocate resources to dealing with those rulings instead of innovating with their consumers in mind. This is especially important for large, established insurers that have difficulty prying themselves from their long-established business models. Insurance firms are among the last businesses to embrace the fruits of IT with the same vigor as, say, the retail industry which is more lightly regulated.

Truth is, digital commerce and tools enable organizations to better connect with their customers. Demographics are shifting, and an entirely new generation of consumers does not want to deal with an insurance salesman who goes door-to-door selling policies that don't seem to have any relevance to their needs. Insurers need to reassess how they perform their underwriting operations and soon. Without changes to their business model, old firms are going to see nimble new startups take advantage of a new landscape. The startups aren't afraid to utilize technology that wasn't developed in-house and therefore are enabled to develop better products more quickly and effectively - and at more competitive prices. What you're going to see more of from these startups is a melding of insurance and healthcare, for example -- something that should have happened decades ago.

The way forward involves re-thinking an industry that has largely remained unchanged for two centuries. Allowing the consumer to shed light into untapped areas such as healthcare insurance is a start. But equally important is a complete reinvention and overhaul of how insurers structure their businesses. Leveraging predictive analysis will allow them to take a glimpse into the future needs of consumers.

Consumer expectations change quickly and often. Insurers would do well to look at large retailers - both Big Box and web-based - to understand how to connect with the right audience and learn from their expectations. If they don't use the proper IT tools that are right in front of them, I predict some of these insurance giants may not make it in this dynamic environment. They will be eclipsed by smart upstarts that understand the power of delivering choice and catering to their consumers.

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