Transforming Commercial

Given that insurance is fundamentally the trading of information (data for a policy product), the personal lines market in Canada today is being disrupted by a number of developments: traditional broker-based companies going direct, direct insurance carriers taking steps to increase market share, and new technology disruption via start-ups employing untraditional distribution models.

Personal lines, though, is not alone as a target for disruption. The most logical next steps for disruption for the Canadian insurance industry should be to focus on the commercial insurance space.

FOCAL POINT

Making changes

On many levels, focusing on innovation and disruption in the commercial lines market makes sense. Commercial lines are becoming a tremendous source of value creation and hold significant promise for new partnership models. In addition, commercial insurance policies are complex financial instruments, unlike personal lines, which is more a commodity transactional business model.

Clinton D’Souza, Manager, Canadian Operations, Starr Insurance & Reinsurance Limited

As technology is changing the interaction between consumers and insurers in personal lines, so can it also increase interactions between insurers and business owners. Businesses want to purchase insurance through a trusted channel and have access to coaching and guidance through what can be a complicated decision process involving risk management and data.

Outside of investments in Canada’s small commercial insurance space by new entrants – including a Canadian insurance brokerage dedicated to commercial insurance for small business enterprises and a flexible, home-based business insurance offering for those who work from home – these investments are small compared to investments that are being made globally on other commercial lines segments.

One need only consider what is happening outside of Canada to ask why the Canadian industry is not following suit? Why is Canada lagging behind other countries in commercial lines innovation?

Still, Canada’s insurance industry is seeing major investments in creation of innovation labs with a number of insurers and potentially others. Already, investment has led to technology labs in Kitchener, Ontario and Toronto.

Taking advantage

Carriers and brokers each do a lot to bring innovations to market, but, unfortunately, insurance buyers do not always appreciate or take advantage of them. Consider, for example, usage-based insurance (UBI) and its slow adoption in Canada, likely because of how the auto insurance product is regulated in this country. However, commercial lines is not subject to these same hurdles.

The industry is not doing enough to champion innovation in commercial lines because the focus has been on the personal lines market because of its size. However, the personal lines market continues to face unprecedented competition from new distribution models, including peer-to-peer insurance.

Having never before seen this amount of new entrants coming into the business, unfortunately, that history may lead some in the personal lines market to underestimate the potential challenges posed by entrants such as large retailers, online shopping sites and more.

IDENTIFY NEED

Listening to customers

Innovation must start with understanding the need or problem. That understanding comes from ordinary interactions with customers and business partners.

The innovator must then determine how existing tools and approaches could be employed to fix the problem, or understand why current capabilities are inadequate. Innovation can then fill the gap between the need and the lack of available solutions.

Ask any innovator where good ideas come from, and the answer is likely to be “everywhere.” That is equally true in the insurance industry, although the best ideas tend to come from conversations with consumers. Commercial lines is ideally suited for this type of innovation since brokers, loss control representatives and claims adjusters have direct contact with a business during the underwriting and/or claims processes.

Sourcing IoT

A significant part of the opportunity in commercial lines is to curate the experience, as well as leverage the Internet of Things (IoT) and the connectivity of devices and data generated by those devices. A factory, an airplane, machinery, a boat, an oil rig or a truck are all fundamentally things that are connected and can offer valuable opportunities to try new business models and gain insights into customers.

Consider that locations like offices, warehouses and factories have environmental sensors able to detect conditions such as temperature, smoke, fumes and other hazardous conditions.

A Forbes article from February notes that with two-way communication, these IoT devices can provide predictive alerts on potentially dangerous conditions in the near future. Carriers offering homeowner, commercial property and general liability lines would all be able to “write right risk” and improve loss ratios based on IoT-connected environmental sensors, the article suggests.

For insurance companies, these new types of business models need to be incorporated into product pricing. Business owners vary widely: some may want commodity pricing; others demand premium-quality policies and services today from their policies. This might include innovations in pricing and underwriting, such as UBI being extended beyond the auto product to include such coverages and liability.

In addition, collaboration is key to innovation and to changing the forecast of the insurance industry. Tapping into the knowledge of partners, peers and competitors will be essential, and in response, insurers should work with them to innovate something new and gain fresh perspectives on new approaches.

Strengthening bonds

Some of the very first applications of connected sensors, the precursors to IoT, were in factories using process control automation, the Forbes article notes. As manufacturers enable IoT, specialty insurance carriers providing extended warranty protection on these products will also offer predictive and preventive service prior to product breakdown or component failure. This could, in turn, present opportunities to cross- and up-sell for additional insurance products.

Insurers can use IoT and its enriched relationships to connect more holistically with customers and influence their behaviours. New business models could emerge, perhaps including buying devices from insurers or partners of those carriers.

In Holland, for example, a lighting company is helping drive adoption of smart homes by partnering with telecom, insurance and energy companies. With lighting being a main interest in connected homes, along with energy and security, these sorts of collaborations not only help drive adoption of IoT, but create new business models for insurance.

As part of that venture, the insurer has synced the lighting company into its app, thereby allowing its customers to do their parts to prevent the risk of theft, water damage and fire. Through the app, for example, lights will turn red when the alarm goes off, and a notification will be sent to the customer’s smartphone to alert the client of the risk.

The possibilities of such an approach are endless, given that lighting systems in manufacturing, retail and other commercial insurance product lines could use this same type of solution.

Possibilities also exist around another company’s move to link its elevators to the cloud. Sensors in the lifts or the associated linked systems gather information about movements, temperature and pre-emptive service, while the software further has dynamic predictive models to show where and when service is needed. The potential benefits are a huge reduction in down time and lower maintenance costs.

This IoT application could easily be used in other industries, and the implications for the insurance industry are endless with regard to better maintenance and risk control.

FULL BENEFIT

Research released by McKinsey & Company in June 2015, Unlocking the potential of the Internet of Things, indicates that IoT and its potential use in commercial insurance business-to-business (B2B) applications can create more value than pure consumer applications.

While consumer applications such as fitness monitors and self-driving cars attract the most attention and can certainly create significant value, researchers estimated that B2B uses can generate almost 70% of potential value enabled by IoT.

As well, most IoT data is currently not being used, the report points out. For example, only 1% of data from an oil rig with 30,000 sensors is examined.

Data used today are mostly for anomaly detection and control, not optimization and prediction, which provide the greatest value.

Consider that there is great potential for carriers that specialize in energy insurance products to create partnerships with a manufacturer of oil rigs or solar panels, for example.

TECHNOLOGY REBOOT

For the full benefits of IoT to be realized, however, improvements are needed in insurance technology, skills and processes. Additionally, conditions in the industry must be conducive to IoT adoption, including that there be sufficient demand to justify investment, support and collaboration among industry players.

These conditions can only exist if the industry in Canada realizes it needs to focus its efforts on commercial insurance innovation before clients demand it or seek other alternatives.

The insurance industry currently has the ability to know in advance of an event, ultimately improving the experience, security and well-being of both customers and potential customers.

Data is becoming more important for all lines, but there needs to be a call to action by the insurance industry to start focusing on commercial lines getting their systems prepared to manage the data being produced by IoT.