Transforming the Future of the Insurance Industry
The insurance industry exists as a tool for mitigating the costs and damage associated with a single incident occurring for an individual or organization.
But this is nothing new. The Babylonians developed an early form of insurance that was recorded in the famous Code of Hammurabi as early as 1750 BC.
Over time, the idea of risk pooling has evolved into the complex insurance industry we have today.
Disruptive entrepreneurs have methodically sought out the business world’s most lucrative revenue streams and begun chipping away at the edges. Insurance, fortified by an onerous regulatory environment, remains one of the last strongholds of profitability.
It is in this context that we see a new set of crosshairs coming into focus as the next generation of insurance begins to emerge. Here are some of the changes that lie ahead.
Five Categories of Change
Factors most influencing the future of the industry can be grouped into five primary categories:
A. Shifting Principles
B. Emerging Technology
C. Escalating Pace of Change
D. Evolving Nature of Risk
E. Changing Demographics
Even thought these categories tend to overlap and are highly dependent upon each other, the morphing of insurance pooling over the coming decades will happen primarily in these areas.
Technology is causing the pace of society to increase, thus changing the nature of risk. Shifting demographics are forcing communities to restructure, using new technology to accomplish their objectives.
Using these five categories, the objective will be to use a combination of scenarios, trends, and other methods of visualizing of the future to craft a better picture of the world ahead and the likely implications it will have on the insurance industry.
A.) Shifting Principles
At the heart of the insurance industry lies a set of core principles around which the industry has been formed. As we look at how this industry will evolve over time, it is easy to see that insurance will be most affected by a subset of the core principles, with most changes forming around these six basic principles:
1.) Law of Large Numbers – The law of large numbers states that the larger a sample size, the more precisely insurance actuaries can calculate the probability of a risky event. The mortality of a group of 10 people, aged 65 years old, cannot be calculated in advance without substantial guesswork. However, if the sample size were 10,000 people instead of 10, the mortality figures would vary less from year to year. Large numbers of members in the pool help insurance companies evaluate probability and manage risk.
2.) Risk Transference – Risk is uncertainty. For a risk to be insurable it must be unusual and unforeseeable. If a negative event can be predicted, it is not insurable because it is not a risk. It is a certainty. In the medical insurance world, for example, a preexisting condition is a known circumstance, not a risk. While some insurance plans can offer discount plans on the treatment of medical conditions, there is no transference of risk, and therefore there is no insurance on these conditions.
3.) Insurable Interest – The beneficiary of the insurance policy must experience harm if the risk should become a reality. Insurance payouts should not profit the insured or the policyholder. Payouts should be structured so that if the insured had a choice, he would not choose the insurance benefit over not having experienced the catastrophe at all. Insurance should compensate for a negative event. It should not overcompensate, lest it attract false or fraudulent claims or cause the insured to take less care than otherwise. A stranger may generally not purchase life insurance on another unless she can demonstrate substantial economic harm would befall her if the other party should die prematurely.
4.) Loss Minimization – According to the Principle of Loss Minimization, the insured must always try their best to minimize the loss of an insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses.
5.) Utmost Good Faith – The legal doctrine of “utmost good faith” is the foundational underpinning of all insurance contracts. It requires both sides to fully disclose all material facts related to the assessment of risk. The insured must answer all risk questions, such as health-related questions fully and truthfully. The insurer must fully disclose all material terms in the contracts.
6.) The Precautionary Principle – The future will be neither as good as some would lead us to believe, or as bad as other would have us think. But it is the onus of responsibility that becomes the industry’s “hot potato”, with innovators squaring off against product safety experts and consumer advocates over who should bear the ultimate cost and responsibility of insuring compliance with increasingly detailed safety standards.
With technology growing in complexity on a daily basis, it is no longer reasonable to live in a “buyer beware” society. The Precautionary Principal, as a foundational underpinning of the sustainability movement, places the burden of protection on the shoulders of those creating the products.
The Shifting Nature of the Basic Principles
With the emergence of new technologies, better analytics, and viral forms of human connectedness, some of the core principles of today’s insurance industry will need to be revisited in the future.
The Law of Large Numbers currently pertains to the number of insured based on a pool of uncertainty. As our ability to micro analyze every insured entity improves, we may have the ability to craft reliable probabilities around small groups, even a single individual or event.
Risk Transference is steeped in black and white thinking, when in reality, there are no certainties in the future, only probabilities. As an example, if a preexisting condition is currently deemed untreatable by today’s standards, there may indeed be a viable cure for it in the future.
When it comes to Insurable Interests, just as money is not a good replacement for someone who dies, or loss of an heirloom, insurance claims in the future will become increasingly difficult to remedy with a monetary-only solution.
The Principle of Loss Minimization will become a focal point of many future court battles as the pervasiveness of photos, voice, and video recording becomes more prevalent.
The legal doctrine defining Utmost Good Faith will soon be reframed around the nuances of social networks. With the floodgates of personal information expanding exponentially, it will be relatively easy to apply a “truth meter” to the lives of every individual.
The Precautionary Principle represents a long-term shift in the lawful definition of responsibility parties. As technology moves beyond what we can knowingly see and understand on the surface, in areas such as nanotechnology, it is the far-reaching affects that will most impact our future.
Like a single pixel on a trillion pixel image, we quickly lose our ability to find significance in a single pixel. But it is exactly that, the single pixel, single atom, or single molecule on the masterpiece of life that will determine whether we as a technically sophisticated society will become known more for the net gains or net losses that we hand off to future generations.
Inside these tiny pieces of nature come the world’s most formable, buildable, and shapeable materials. They will allow us to tap into the earth’s greatest sources of energy, health, technology, and business opportunities, and at the same time, enable us to create the world’s greatest disasters.
Never before in history have we seen so much new technology happening all at once. Innovative technology is redefining every industry and will greatly transform the nature of insurance and risk pooling along the way.
For this reason we will focus on the following six emerging technologies:
- Exploding Mobile Marketplace
- Awareness Technology
- Smartphone Peripherals
- 3D Printer Technology
- Printable Houses
- Driverless Cars
1.) Exploding Mobile Marketplace
With a global population exceeding 7 billion people, projections show the number of mobile broadband subscribers will climb to five billion by 2016. Mobile network capacity will need to increase 20 to 25 times to handle the growing load.
The Chinese telecom company, Huawei, is predicting their traffic levels will rise 500 times by 2020.
Even with these dramatic numbers making their way into industry reports, as you read through the remainder of this article you will begin to understand how and why this newfound connectedness is dramatically altering the human condition.
Communication technology is the great enabler, but at the same time, the great disrupter. This one technology will displace more jobs than any other.
2.) Awareness Technology
In a “surveillance society,” where an increasing number of cameras are used to monitor public areas and the general public is equipped with smartphone cameras and other recording devices, we reduce the rick of deviant behavior.
Consider the following:
One of the most notorious serial killers of all time Pedro Alonso Lopez, known as the “Monster of the Andes,” who butchered enough people to fill a small town. After killing around 100 tribal women in Peru in the 1970s, he was apprehended by tribal forces that were just about ready to execute him when they were convinced by an American missionary that was staying with them at the time to take him to the police instead.
Unfortunately, the police then just let him go, after which Lopez travelled to Ecuador, where he proceeded to kill about 3-4 girls a week, claiming that girls in Ecuador were “more gentle, trusting, and innocent”. This carried on until he was caught in 1980, but police were still unsure as to his guilt. However, a flash flood uncovered a mass grave that had hidden many of his victims, which then led to his arrest. However, the Ecuador government then released him in 1998, deporting him to Columbia. Lopez allegedly said that he was being released for “good behavior”. His whereabouts today is unknown.
In an “awareness society,” the odds of this kind of deviant behavior are dramatically reduced. At the same time, we run the risk of “wronging” much of the quirkiness that makes us human.
Future video technology, much like what is being used by TSA at airports today, will enable investigators to “see behind” masks and clothing and expose the criminals for crimes that were committed 20, maybe even 30 years earlier.
While this kind of technology seems appropriate for uncloaking heinous criminals, people are far more reluctant to shop in stores if they think some voyeuristic cameras are capturing them “naked” walking through the store.
3.) Smartphone Peripherals
The whole mobile apps revolution began in March of 2008 when Steve Jobs announced the software developer’s kit for the Apple iPhone. When Apple’s App Store officially opened on July 11, 2008, there were a whopping 552 apps to choose from. Over 60 million apps were downloaded within the first 3 days and tech companies around the world began to sense a market shift, and we now have well over a million apps to choose from.
While apps have been getting tons of attention, the piece getting very little is the exploding field of smartphone peripherals that extend our current communication systems far beyond simple person-to-person communications. Virtually every object we come into contact with has the potential for being controlled by our smartphone, and interface designers are working overtime to make this happen.
Look for literally thousands of new peripheral devices to hit the market over the coming year or two.
Apps and peripheral devices will be used increasingly to monitor conditions, submit insurance claims, and collapse the time an underwriter uses to assess a situation and make a determination.
4.) 3D Printer Technology
Unlike a machine shop that starts with a large piece of metal and carves away everything but the final piece, 3D printing is an object creation technology where the shape of the objects are formed through a process of building up layers of material until all of the details are in place.
The first commercial 3D printer was invented by Charles Hull in 1984, based on a technique called stereolithography.
Three-dimensional printing makes it as cheap to create single items as it is to produce thousands of items and thus undermines economies of scale. It may have as profound an impact on the world as the coming of the factory did during the Henry Ford era.
Using 3D printer technology, the cost of replacing a damaged or missing component will plummet.
5.) Printable Houses
All the way back in March of 2004, working in his laboratory at the University of Southern California in San Diego, Dr. Behrokh Khoshnevis, was working with a new process he had invented called Contour Crafting to construct the world’s first 3D printed wall.
His goal was to use the technology for rapid home construction as a way to rebuild after natural disasters, like the devastating earthquakes that had recently occurred in his home country of Iran.
While we have still not seen our first “printed home” just yet, they will be coming very soon, perhaps within a year. Commercial buildings will soon follow.
For an industry firmly entrenched in working with nails and screws, the prospects of replacing saws and hammers with giant printing machines seems frightening. But the biggest construction boom in all history lies beyond this hesitancy.
Insuring buildings and other structures takes on a whole new meaning when a damaged area can simply be “reprinted.”
6.) Driverless Cars
Over the next 10 years we will see the first wave of autonomous vehicles hit the roads, with some of the first inroads made by vehicles that deliver packages, groceries, and fast-mail envelopes.
The first wave of driverless vehicles will be luxury vehicles that allow you to kick back, listen to music, have a cup of coffee, stop wherever you need to along the way, stay productive in transit with connections to the Internet, make phone calls, and even watch a movie or two, for substantially less than the cost of today’s limos.
Driverless technology will initially require a driver, but it will quickly creep into everyday use much as airbags have. First as an expensive option for luxury cars, but eventually it will become a safety feature stipulated by the government.
The greatest benefits of this kind of automation won’t be realized until the driver’s hands are off the wheel. With over 2 million people involved in car accidents every year in the U.S., it won’t take long for legislators to be convinced that driverless cars are a substantially safer and more effective option.
The privilege of driving is about to be redefined.
From a safety standpoint, driverless cars will cause car-related accidents and injuries to plummet. Traffic cops and traffic courts will go away.
With most of the traffic-related risks going away, vehicle insurance may no longer be mandatory in the future.
C.) Escalating Pace of Change
In less than two decades, we will see over 2 billion jobs disappearing. This represents roughly 50% of all the jobs on the planet. This prediction isn’t intended as a doom and gloom outlook. Rather, it is intended as a wakeup call, letting the world know how quickly things are about to change.
A recent New York Times article points to early indicators that this trend is well underway: “Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department.”
Driverless vehicles will eliminate millions of “driver” positions. House printing technology will eliminate millions of construction workers. Fishing bots will replace fishermen. Mining bots will replace miners. Ag bots will replace farmers. Inspection bots will replace human inspectors. Warrior drones will replace soldiers. The list goes on and on.
Every new wave of automation has the potential of eliminating hundreds of thousands of jobs at a time.
We are not well-equipped culturally and emotionally to have this much technology entering our lives. There will be backlashes, “destroy the robots” or “damn the driverless car” campaigns with proposed legislation attempting to limit technology’s influence.
At the same time, most of the jobs getting displaced are the low-level, low-skilled labor positions. Our challenge will be to either upgrade our workforce to match the labor demand of the coming era, or simplify the technology so lower skills people can handle the work.
The transition will not be easy, but in the midst of all this change we will see unprecedented opportunities for new business and industry to emerge.
The insurance industry will be front and center as all these changes occur. Fewer employees will mean less risk. As efficiency increases, the downward pressure on the cost structure of insurance will also increase.
Most of the financial world is predicated on the rise or fall of perceivable risk. The same is true for insurance.
Many of the new technologies will reduce the risk of accident and injury. But at the same time, new areas of risk will materialize.
Below are five scenarios that bring to light the new areas of risk that will need to be accounted for:
Scenarios for Five High Risk Situations in the Future
- Identity Theft: A city recycles 200 computers to a recycler who guarantees a thorough process of wiping the hard drives. However, these computers get into the wrong hands and advance forensic data recovery systems are used to extract everything from bank accounts, to credit card numbers, to passwords and IDs for hundreds of thousands of people. Using sophisticated data tracing technology, the loss of data is traced directly to the business or organization and several hundred victims of the breach file a class action lawsuit.
- Wrongful Termination: An employee is placed on leave for suspected embezzlement of funds. Even before the employee is escorted from the building, a viral social media buzz launched by inside staffers has intimate details of the accusations pulsing through the Internet. Before the accused employee ever has a chance to defend themselves, the person’s reputation has been permanently damaged with highly libelous accusations.
- 3D Printer Technology: 3D printer technology is quickly becoming one of the fastest growing industries, with some printer units now selling for less than $1,000. Incorporating downloadable designs and simple setups, most high school age kids are now able to use them. The same 3D printers that can be used to make perfect fitting shoes and clothing can also be used to make plastic knives and guns that are undetectable with current scanning technology. Printable weapons represent a new kind of risk to society.
- Driverless Cars: With several models of driverless vehicles currently being designed by the auto industry, we will begin seeing the first models appear as early as 2013. However, driverless cars can also be equipped to deliver the things we fear most – bombs, biological contagions, and other forms of terrorism.
- Automated Trash-Scanning Scenario: One of the biggest risks any community will have in the future has to do with the way they deal with trash.
A community that prides itself in being on the cutting edge of the latest technologies decided to automate trash pickup. Working with an automated pickup service, trashcans signal when they are full and a driverless disposal vehicle is dispatched to empty the trash bin. Residents of this community like this service because they are only billed when they have a full trash bin, not on a weekly or monthly basis.
In addition to automating the trash removal process, the community institutes a new trash scanning system to determine if there is anything harmful or dangerous over the long term, and whether the trash will contaminate the nearby landfill.
As soon as businesses realize the community is collecting data on trash, a number of proposals are submitted with offers to buy the data, and the value of the data goes up dramatically if it can be tied directly to individual businesses and residences.
Controversy explodes when the police begin using trash data to track down criminal activity.
The community quickly becomes embroiled in a battle between two factions, one that thinks the new scanning technology offers additional protections against unforeseeable problems, and the other that thinks their privacy is being intruded upon.
As a result, multiple lawsuits are filed costing the community a considerable amount of time and money before a resolution can be reached.
These are but a few of the areas where risk will be increasing. Every new technology has unintended consequences. And it will be the unintended consequences that drive the insurance industry of the future.
What does it mean to “be human” today, and how has that changed over the past 100 years? How will it continue to change over the coming decades?
There are almost 40 million people aged 65+ in the United States. That is almost 13% of the population. By 2030 there will be more than 72 million older persons making up 19% of the population.
Today someone turns 50 every 8 seconds. Each year more than 3.5 million boomers turn 55. By 2012, America’s 50 and older population will reach 100 million.
According to the Administration on Aging of The Department of Health and Human Services:
- The number of Americans who will reach 65 over the next two decades increased by 31% during this past decade.
- If you reach 65 you can expect to live almost 19 more years.
- Not surprisingly women outnumber men by almost 6 million.
- Seventy two percent of older men are married; 42% of women are married.
- About 31% (11.2 million) of older persons live alone.
- Almost a half of a million grandparents have primary responsibility for their grandchildren.
- The population of 65+ will increase from 35 million in 2000 to 55 million in 2020.
- The 85+ population is projected to increase from 4.2 million in 2000 to 6.6 million in 2020.
- Minority populations are projected to increase from 5.7 million in 2000 to 12.9 million in 2020 representing 23.6% of the elderly.
In addition, aging is a global phenomenon. By 2030, 55 countries are expected to see their 65 and older populations swell to at least 20 percent of their total. There are more people aged 65 and older than the entire populations of Russia, Japan, France, Germany and Australia—combined. By 2040, the global population is projected to number 1.3 billion older people, increasing to 14 percent of the total.
Unlike their elders who are remaining true to their roots, boomers will move to places that accommodate their lifestyle – mountains, beaches, islands, and college towns. Half expect to work at least part-time once they retire.
Nine out of 10 seniors prefer to grow old in their own homes according to the AARP.
It is evident that the population is aging and will need a variety of services in order to age with a good quality of life. If you have been reluctant to dip your toe in the water of aging services, this article should help you understand the size of the opportunity out there. And frankly given the size, there is room for many players. Yes, there will be competition but there were also be room for everyone to own their share of aging services.
Well-understood industries are being replaced with chaos and opportunity.
Just as existing forms of government have taxing authority, other entities in the future will emerge with what will start out as self-imposed taxing authority, and move to other forms of compliance-mandated tax.
Our aging populations represent a lucrative and growing pool of clients, currently underserved by insurance companies that have traditionally taken a stricter actuarial approach to evaluating client risk.
From an actuarial point of view, insurance is about taking factors like age and gender and finding an expected mortality for each group based on these factors.
However, companies that employ forward‐thinking evaluations will be able to take into account other critical factors, such as current lifestyle and activities along with past health patterns, to enable them to offer better underwriting terms and, ultimately, more competitive premiums.
Leading Indicators of Change
Some leading indicators are showing changes are well under way for the insurance industry.
New software programs now allow underwriters to take on three times as much work as in the past, collapsing the need for new hires. Underwriters can now punch in the data, and have a computer spit out whether a potential insuree is approved or not. As a result, industry projections show the number of people employed in the field will decline by 4%, or 4,300 jobs, by 2018.
Retainer Practices: Oregon, Utah, Washington and West Virginia are all states that have enacted special Retainer Practice laws that allow doctors to bypass insurance companies completely. Retainer practices operate in at least 18 other states, but those states have no laws expressly allowing or disallowing them.
According to Oregon-based Dr. Steven Butdorf, “The burden of third-party health insurance reached a point where it just wasn’t fun to do it anymore. It was burdensome in so many ways. I just decided I was going to pursue a different path.”
Even though these remain a tiny piece of the U.S. health insurance industry, it’s growing quickly. A 2010 survey of members of the American Academy of Family Physicians found 3% of those responding had some form of retainer practice. That’s up from 1.2% in the academy’s 2009 survey.
Rapid-Form Insurance Pools: The Internet is creating far more efficient ways of connecting the needs of people with possible solutions. The insurance industry will not stay exempt from this for long.
Risk pooling, in its current form, only works well when there are common well-understood problems.
In the future, whenever the insurance industry makes abrupt changes, or fails to react quickly enough to satisfy an emerging need, enterprising people are sure to step in and fill that need. In much the way retainer practices circumvent the need for insurance company involvement with medical practices, crowd-sourced solutions will soon arise in other areas as well.
In a perfect world, the insurance industry wouldn’t exist. With no risk, the insurance industry would disappear. Even if it were greatly reduced, most of it would be gone.
On the other hand, if risks were dramatically increased, and losses became erratic and unpredictable, the insurance industry would also not be able to survive.
Insurance exists today as a well-refined science, providing coverage in areas where the risks are well understood. As the world continues to evolve, many of the emerging risks are yet to be identified, and the large industry players will be slow to react.
It is in these frayed edges of the future that disruptive entrepreneurs will make their greatest inroads, and some will become overnight sensations as a result of it.
With rapid changes happening in virtually every industry, it’s not possible to give a clear over-arching view of the changes that will occur in the years ahead. Instead, this was intended as a brief look at key data-points through a futurist lens while providing some observations of the likely issues and challenges that lie ahead.