What if you knew the precise possibility of things going wrong today, including falling sick, having a freak accident, and anything happening at home? Imagine waving off Nikola (your personal AI companion) who is telling you about a few things particularly to watch out for on that day, alongside your morning briefing. Having an absolute certainty that, as annoying as any of those risks are, it would not be the end of the world if it happened: you will receive absolutely the best medical treatment and any of the assets will be quickly and seamlessly replaced. You tell your AI companion: “Stop being such a worrier, Nikola!” In response you hear a light chuckle in your ear: “George, I’m here to worry so you don’t have to.” That’s the world of tomorrow for insurance, where, in a not so distant future, this will become completely integrated into our everyday lives to the degree that it will fade away into the background. In the same way we don’t think of an Apple iCloud subscription as insurance for our phone and computer data, we will stop thinking of insurance as a product and just start relating to it as our everyday-life backup, which will have an impact on our monthly insurance bills as shown in Figure 1.

Welcome to the future where the proliferation of data about each and every one of us and our environment, together with a deep understanding of that data using machine learning, means the world becomes a lot more predictable. As we speak, our civilization is advancing quickly in the understanding of human genetic coding and how that might increase our predisposition to certain diseases. That understanding, combined with an explosion in data from IoT, wearables, and things that surround our everyday lives, does mean that we can pinpoint exact risk probabilities. It’s not as far-fetched as it sounds. Companies have already started using data to predict certain events like an individual’s risk of heart attack hours before it happens and elderly fall rates even weeks before they occur.

The first question that comes to mind when most people think about that future possibility is whether we’d be open to sharing all this private data. It is likely to become a societal norm in the same way we get used to the idea that Google has the potential to scan our emails and web searches while Facebook can control our social media status. What used to be taboo less than ten years ago has become something that we have got used to. This data surveillance will not only take the form of real-time monitoring and management of risk but will be an indispensable day-to-day companion. It certainly sounds like an attractive future and one that can bring insurance back to its purpose of acting as a social safety net.

Let’s take a step back and look at where insurance is now and how it will get to this future.

Back in Time: Back to Reality

Imagine a time when oil lamps dimly lit up streets. If you had the privilege of having one of those contraptions outside your home, you could be forgiven for not feeling overly joyous the majority of the time. While it certainly had an important purpose, it was difficult to service and oil had a nasty tendency to catch fire during storage and transport. Moreover, it needed someone to light it up and put it out on a daily basis, apart from regular cleaning. At that time, manufacturers were coming up with ever better and safer oil lamps but the “benefit” had a high overall ownership cost. It would have been very difficult for oil lamp manufacturers to realize that society needed the “utility of light” and not a better oil lamp. As a result, it wasn’t lamp manufacturers that enabled the revolution of electricity and electric lighting that most of us now take for granted. The story of insurance is not dissimilar to the story of the transition from oil lamps to electricity. There are a lot of parallels and using this story is a powerful step change as a proxy that will give us a useful reference on how things could potentially evolve for the insurance industry on the way to becoming a utility.

The Power of a Utility

Over the years, insurance has evolved into the equivalent of a “complex oil lamp contraption”. Complexities are profound in the need to address the inherent structural limitations of the current risk transfer model.

The only way forward for insurance is for it to become a utility, just like electricity or water. As a consumer you want insurance for exactly the same reasons that you want electricity: to enable greater joy, safety, and productivity. In the same way we do not think about electricity, insurance is something that is at the core of societal needs. Furthermore, similar to electricity, which expanded from the original purpose of lighting to powering everything from the Internet to transportation, once insurance becomes a utility there’s a world of opportunities for insurance to impact our society positively on a much broader scale (see Table 1).

Insurance has been trying to solve its own problems incrementally for a long time. Despite all the investments and resources that have been thrown at it, insurance has only managed to move marginally in the past 20 years. There are challenging constraints together with powerful lobby groups that have continued to side-track progress.

Journey to the Future

As we progress from the day of “oil lamp” insurance to the future of insurance as a utility, there are going to be broadly three major phases of industry InsurTech transformation:

1. Optimization
2. Product redesign
3. Insurance as a utility.

This transformation will take place over the next 10 years and will see a combination of significant industry job losses as well as redistribution of value across the value chain in the history of the insurance industry. As we discuss the value redistribution, it’s going to be important to keep in mind the current “value stack” as it will give us a good reference point in terms of how things are likely to progress.

Insurance Value Stack: Quick Refresh

The insurance value stack (see Table 2) is the average allocation of a dollar of customer insurance premium across broad areas of insurance expenses. This has been validated across an array of industry stakeholders and appears fairly uniform across major product lines of general insurance, life insurance, and commercial insurance.

First Phase: Optimization

The first phase is focused on introducing operational and distribution efficiencies to insurance firms, by applying digital solutions. Prime candidates include low hanging fruit like auto-underwriting of simple risks, self-servicing policy changes, instant claims handling, sophisticated fraud detection, social marketing, and process automation for 80% of back-office tasks. While the application of technology is bringing costs down across sales, risk evaluation (underwriting), policy servicing, and claims, the released benefits will not be redistributed equally across the value chain. Distribution partners are expected to retain a disproportional share of the value while customers will likely see a modest increase in value in the form of discounts and expanded coverage. Value improvements combined with a step improvement in the service and sales experience encourage consumers to buy more insurance. Still, the scalability is challenged as customers are likely to struggle when trying to understand off-the-shelf insurance products and their inherent technical complexities.

Phase 2: Product Redesign – Closer Mirror Risks and Needs

The next phase will focus on digitizing insurance products. Conventional products will go through a redesign to simplify them. The granular nature of the products, both in terms of their size (sum assured) as well as their term, will mean that they can be custom-packaged to match customer’s actual risk profile closely. This will pave the way for mass tailoring of insurance. Based on an understanding of customers’ unique risks, technology will allow us to create a package that will precisely address their needs. Think of the Uber driver who just needs insurance for his or her passengers during a trip. An Airbnb host now only needs coverage for that one night a month when he rents out one of his rooms. Risks that were previously non-insurable will become understood and insurable (e.g. food poisoning, epidemics, pre-existing medical conditions, and traffic delays). Being niche and digital as a channel will be the only way to distribute these products.

Value redistribution will accelerate through this phase with customers seeing a significant 25% boost, which, together with simpler, mass-tailored products, helps insurance to regain consumer trust. This in turn will help insurance to enter an exponential growth phase.

Phase 3: Insurance as a Utility – Welcome to the Future!

In the next decade, as both insurance products and operations undergo a profound transformation, insurance will start to resemble a utility. On the supply side you have risk capital and on the demand side there’s a customer consumption of risk capital. Rather than pre-buying insurance, insurance will move into a realm to real-time consumption where risks are mitigated appropriately. Customers will be charged based on the exact protection provided to them on a usage basis. For example, if you played a risky sport on a Thursday and chose to eat unhealthily on the next Friday evening, you might find your insurance charges would spike over that micro period. In this last phase, value redistribution happens and the ecosystem achieves equilibrium with customers gaining 60%+ in extra value through the three phases. The boundaries between insurers and reinsurers could blur to the point where they become indistinguishable. At this point, insurance could go viral and quickly achieve the status of a universal Life Backup Companion, there to either help you identify and avoid risks or quickly fix whatever does goes wrong.

Table 3 shows the new insurance value stack.

“Hello, Nikola, how much did you say that ski trip is really going to cost me?”