Although the question of traditional insurers’ potential demise is something of a hot topic, Jerry Anthonyrajah (pictured), the chief commercial officer of Old Mutual Insure, says it is unlikely.
In an opinion piece released this week, Anthonyrajah shared his thoughts on emerging trends and how they were likely to impact the insurance industry within the next decade. Among them is the emergence of generative artificial intelligence (AI).
Read: Prepare for the world of AI with MBSE’s Entrepreneurship course
According to Anthonyrajah, insurtech disruptors are often viewed as the biggest threat to the future of traditional insurers. But, he says, insurtechs that have attempted to take over the entire insurance value chain are struggling, “with the likes of Lemonade punished by the market”.
The Lemonade case
Lemonade (LMND) was founded by Daniel Schreiber (former president of Powermat Technologies) and Shai Wininger (co-founder of Fiverr) in April 2015 in Tel Aviv, with its headquarters in New York. As Business Wire described it, Lemonade – powered by AI and behavioural economics – “set out to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything”.
By the end of 2020, the company seemed on track to do just that when it announced it had more than one million customers – a milestone that took most industry leaders decades to achieve. LMND reached it in about 1 500 days after its initial launch.
Offering renters’, homeowners’, and pet health insurance in the US, contents and liability insurance in Germany and the Netherlands, and renters’ insurance in France, the company seemed unstoppable. However, following the harsh reality of the insurance landscape these past few years, Lemonade’s market cap plunged.
In February 2023, NTT DATA Insurance, which forms part of the NTT Group (a global innovator of IT and business services headquartered in Tokyo) published a case study titled “The Lemonade Case”.
In the case study, authors Richard Calvo, the head of insurtech at NTT DATA, and Alvaro Takashi Yamashiro, digital insurance analyst at NTT DATA, write that, “while this company represents everything the insurance industry ever wanted, its market cap has been consistently decreasing”.
According to statistics provided in the case study, the company went from almost $7 billion in 2020 to $1bn at the end of 2022, following a cash flow of $194 million (in the past 12 months) – a gross loss ratio of 94% and a net loss ratio of 105% (in 2022 Q3).
The authors did add that it might be too early to discard this “first-wave” insurtech model.
As the case study explains, more than 50% of the company’s traffic comes from people aged 18 to 34. This audience is at the centre of LMND’s strategy, focusing on young generations with short-term convenient insurance products, while establishing brand loyalty to get long-term profits with their ecosystem strategy (first insurance for renters, then car insurance, and pet home and life insurance when this audience is getting older).
LMND’s founder Schreiber said the insurtech company was built to scale.
Calvo and Yamashiro say this implies that Lemonade has negative marginal costs for every new customer, and the level of process automation, underwriting ability, risk and pricing models will get better and better according to the company’s growth.
“The company foundation essentially means that either Lemonade grows to surpass the number of critical users, or all this effort will be in vain.”
Potent partnerships
While time will tell whether this AI-centric model sinks or swims, Anthonyrajah believes that potent partnerships between traditional insurers and insurtechs will be a more likely and sustainable model going forward.
He says traditional insurers stand to benefit from the technology and innovation insurtechs have used to solve problems while insurtechs will benefit from traditional insurers’ extensive distribution, underwriting expertise, and compliance resources.
“AI will be a tool that enables traditional insurers to reduce costs, enhance compliance and increase customer experiences by giving them choices in how to engage with a company,” says Anthonyrajah.
Another major trend Old Mutual Insure sees dominating the industry over the long term is personalised underwriting.
Stating that AI and machine learning have created the potential for hyper-personalisation – think Netflix anticipating your viewing preferences and Amazon marketing what you need when needed – Anthonyrajah says insurance is already benefiting from this personalisation enabled by advanced data analytics and customer-centric underwriting.
But, he says, insurers must put the foundations in place and build to extract the necessary data that underpins hyper-personalisation.
“Analytics capabilities, the foundation of personalisation, can either be built in-house or in partnership with a specialised service provider that focuses exclusively on mining the data. The technology architecture needs to be cloud- and API-based so that the data analytics can be deployed.”
He again emphasises the importance of forming partnerships.
“Partnerships provide the best of both worlds in which automation and digitisation sit comfortably alongside the necessary distribution, underwriting and compliance capabilities.”
The changing role of financial advisers
As insurance provision becomes increasingly digital, the prevailing view is that the role of financial intermediaries is under threat.
This too is unlikely, says Anthonyrajah, adding that customers still want to engage with people, “not only robotic-enabled chatbots and digital services”.
He says as underwriting becomes more personalised based on an individual’s lifestyle, geographic location, and patterns of behaviour, the role of the financial intermediary in short-term insurance is likely to increase.
“Insurers will need to get granular in understanding the different types of risks. Service financial intermediaries are ideally positioned to provide, mitigate, and manage customers personal risks properly and avoid being under- or over-insured.”
Climate risk
According to the World Economic Forum’s Global Risks Report 2023, the “failure to mitigate climate change” is the most severe global risk over the next 10 years. It comes in at number 4 over the next two years.
Read: Insurers and their clients count the cost of extreme weather
Anthonyrajah says insurers seriously need to consider how to provide more sophisticated insurance coverage for weather-related risks.
“Insurers are already using advanced pricing, underwriting, and risk mitigation measures, such as early warning systems, especially in regions that are either more or less exposed to climate change, customer service and sales, proactive risk management and claims strategies.”
He says new product trends are emerging. One such product is using smart contracts to underwrite crop insurance.
“Farmers take policies on small land plots with predefined climate conditions, which are measured continuously. A claim is then automatically triggered when one of those thresholds is crossed. This can be applied to differential coverage for green homes and cars. And it is even expanding to commercial facilities.”
Anthonyrajah says after four decades of vibrant economic growth built on low inflation, low interest rates, and globalisation, insurers now face a future that will look remarkably different.
“And as long as the transition is under way – highly unpredictable. It is a landscape that will be challenging, but it will also provide opportunities,” he concludes.
