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Where’s the Innovation in Insurance?

May 5, 2020
5 mins
A professional woman wearing a suit works on a tablet while sitting on a leather couch in downtown office

Picture these scenarios:

  • You and another driver collide. Thanks to the telemetry on your vehicles, a system can autonomously calculate the degree of fault for auto insurance purposes, decide whether to notify the police and file the requisite paperwork with a reporting agency.
  • The long-term forecast for your flood plain region spells a dry spring and summer, so the flood insurance portion of your home insurance premium is reduced.
  • A potential pandemic develops a continent away. Without changing your premiums, in real-time, your commercial coverage shifts from property damage towards business continuity.

All of these scenarios are, given current technology, hypothetically possible. But “innovation” in the insurance industry is typically about process management — filing claims by email, mobile apps, even auto rate calculators — rather than changing the industry formula. To an extent, insurance substitutes automation for innovation.

Insurance is a tightly regulated industry, particularly in Canada. For example, in Ontario, it’s the Financial Services Regulatory Authority that governs how auto insurers operate in the province. That impedes rapid innovation, but it also ensures oversight. However, there’s a more fundamental issue. The actuarial business model (the compilation and analysis of statistics to calculate risks) for insurance has worked quite well for the last 50 years or so, thank you very much. An erroneous shift in the model could be the difference between an insurer’s solvency and bankruptcy.

A New Deal for Insurance

But there is a sea of change coming. Soon, the majority of consumers will have grown up with a smartphone in their hands. They will expect options to be a click away. And, from the sea of data that is being collected about them, they expect value. This generation is the first to put a dollar value on their data, and they expect value from it. Electronic pink slips alone won’t cut it.

“Seventy per cent of Millennials say no one should have access to their data or online behaviour,” writes Forbes contributor Diane Mehta. “Yet 25 per cent will trade it away for more relevant advertising, 56 per cent will share their location for coupons or deals, and 51 per cent say they’ll share information with companies if they get something in return.”

In North America, only about 5% of drivers are willing to have insurance-company provided telematics on their vehicles in exchange for a reduction in their insurance premiums. In Italy, that number is about 19%.

Canadians are cautious by nature. But the issue around what’s being done with their data is about more than privacy. Is the information that’s collected reflected in insurance premiums? If I take a safer route to work, or drive mainly in rural areas, stay within the speed limit and manage to avoid hard braking, will my premiums go down in real-time? That would be genuine innovation: Insurance premiums that reflect actual risk in real-time.

Managing Risk for Autonomous Vehicles

Insurance is risk management: Spread the cost of an incident for one policyholder over an entire risk portfolio. This formula gets more complicated when you introduce autonomous vehicles into the equation.

Autonomous cars monitor their surroundings, behave in a fashion that’s consistent with a schedule of safety rules, and get you from Point A to Point B with minimal intervention. In 2016, Business Insider predicted — quite hilariously as it turned out — that there would be 10 million self-driving cars on the road by 2020. There aren’t. And therein lies the challenge of insuring them.

Autonomous vehicles are essentially self-aware. They know their speed and direction, where other cars are, what the conditions are. Where they will shine is when they start communicating with each other the way human drivers don’t. Imagine merging into highway traffic where all the vehicles in range know what the other cars are doing and will do – no more white knuckles.

And that’s a wonderous scenario if 10 out of 10 cars on the road are autonomous. Five out of 10, even. But that’s not the case and won’t be for some time because many people feel unsafe in a self-driving car.

What Does the Future Hold?

So how will the industry calculate the cost of car insurance for autonomous cars, given that autonomous vehicles and driving is still in its infancy?

First off: Define the driver. Is it the owner of the vehicle drinking coffee and reading the paper on his or her morning commute? Is it the software algorithms guiding the car? Is it the hardware? Is it the vehicle manufacturer?

Perhaps another approach would be to allow the insurer to control the behaviour of the vehicle. The routes it takes, the speed it travels at, where it parks, all according to a comprehensive risk management model. The data is there; the technology is available, and it might significantly reduce car insurance rates.

Dave Webb

Dave Webb is a writer and editor of 30 years’ experience. He has written about municipal politics, conservation issues, information technology, medical technology, music, and the manmade diamond industry along with insurance. And some sports. He is also an avid semi-professional roots musician. He lives in Toronto.

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