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What Can Insurers Do About Rising Digital Connectivity Exposures?

Three Key Trends All Insurers Need To Know To Make the Digital Economy More Resilient

A Wave of Digital Disruptions

Globally, a seismic shift is occurring. The way we work, commute, travel, and consume is transforming before our eyes. The main driver for these changes has been the digitization of our lives. Consumers, businesses, processes, devices, and data are becoming more interconnected. As a result of this ongoing transformation, new, uninsured risks are emerging. Network, Service, and Internet outages and degradations can wreak havoc and cause significant business interruptions impacting both revenues and reputations.

Currently, only a fraction of these new risks are insurable leading to a significant protection gap and a large and yet untapped opportunity for the insurance industry. The foundations of this protection gap are contract uncertainty, the lack of scalability of most claims processes, the exclusion of third party risks, and internal legacy systems problems. Riskwolf estimates this is a multi-billion dollar growth opportunity for the insurance industry. Digital assets and infrastructure need to be covered today just as physical plants and equipment have been covered in the past.

In the upcoming decade, new InsurTechs and incumbent Insurance Companies will need to close this protection gap and actively embrace the seismic shift from the physical to the digital world.

In order to achieve this, the insurance industry must tackle the challenges in these three areas:

  1. Insurers need to understand the shift of the risk landscape in the digital space and how the shift impacts their top-line.

  2. The dynamics of the platform economy brings a new type of disruptive competition into insurance and its distribution.

  3. Insurers need to adapt their processes to fit the requirements of the digital economy.

1. Risk Landscape Shift Creates New Top-line Opportunities

The first wave of digitization happened over the last two decades, moving consumption from physical locations to digital channels. The core value generated is a function of the quality and quantity of digital connections and relationships instead of solely physical stores and factories. The current state of the digital platform economy is the result of this transformation. From food delivery drivers to large enterprises, the global economy depends on digital platforms and 3rd party services to execute their businesses.

In the digital economy, the platform model defines the new paradigm of how consumers and producers will interact and be served. Internet penetration and smartphone usage are still increasing but will reach a plateau in most locations across APAC in the next few years. More critical business activities will rely on uninterrupted access to the digital connectivity infrastructure. Its quality, availability, and resilience will become increasingly relevant and hence extremely competitive assets. In Europe, for instance, in 2018 more than 1 billion user hours were lost due to network outages in telecommunications systems. That is a lot of hours.

Further, digital transformation is accelerating as working from home and the gig economy expands apace. With this shift towards home offices, less traditional office space is required. Demand for commercial property lines is likely to come under pressure and car and travel insurance might face a deflationary pull as well as people commute less and business travel remains depressed.

New digital vulnerabilities will surface and cyber threats, network resilience, and uptime will be critical factors affecting the new work from home paradigm. Excluding cyber attacks, most network outages are caused by weather events and man-made disruptions such as digging, cable cuts, and software configuration issues. These perils will not go away and are currently underinsured.

Internet outages have many consequences for businesses:

First, a business is likely to lose connectivity to its customers, driving down expected sales. Second, one may lose connectivity to its suppliers, disrupting the normal flow of goods and/or services. Further, a business may also lose connectivity to its staff, particularly if they are working from home or are out in the field. Even a single digital connectivity link can lead to significant financial losses.

These new risk classes around digital business interruption and customer reputation risk are currently not covered well by the insurance industry. This protection gap creates a significant, multi-billion-dollar growth opportunity.

2. Don’t Leave This Field to the Tech Giants

Internet giants and Unicorns are actively looking to move into the global USD 6 trillion insurance market. Already, these tech leaders are investing in and engaging with InsurTechs. They can bring some very strategic assets to the table: Billions of data points, the technology to process this data, as well as direct access to potential customers, partners, and suppliers.

Having a local presence in a market might be less relevant in the future. Underwriting and processing might be done anywhere, enabled by real-time data, and allocating processing power where it is most efficient. Reinsurers might focus on addressing the digital risk pool directly and reach out to clients via e-commerce and ride-hailing platforms.

Regulatory pressure to tackle Internet vulnerabilities to achieve better consumer protection has been relatively weak in APAC. There have been initiatives to position cyber protection in public-private setups however success has been limited. As regulatory frameworks continue to evolve, there will be a stronger push towards consumer protection as recent initiatives in Singapore, Malaysia, and India show.

Incumbent insurers need to proactively embrace the afore-mentioned threats and must build the core competencies to move into new digital markets. If they do not, they will be left with niche business and decreasing risk pools.

3. A New Data-Centric End-to-End Digital Insurance Model Is a Necessity

Insurance processes are still too fragmented and disconnected. The production of insurance coverage needs to be more cost-efficient. The digital platform economy is fast-paced and constantly evolving. With the threat of new entrants, incumbent insurers need to adjust their processes to the needs of digital economy clients, not the other way around.

Traditional underwriting cannot cope with the dynamics of the digital economy. The nature of the Internet and its constantly evolving landscape also demands an adjustable, flexible, and dynamic underwriting approach. In the traditional underwriting world, data history and loss experience are relevant for decision making and pricing risk. In the digital sphere, exposures and vulnerabilities change much faster than in the physical world. Faster data aging implies that underwriting should shift towards shorter prediction windows, AI-enhanced machine learning models, shorter policy turnarounds, and the ability to use real-time data for more flexible and transparent pricing.

Moving forward, providing products that are robust, simple, and maintain lean and automated claims processes will be critical to reducing customer pain points. Ideally, the claims process can be fully embedded in an automated proof-of-loss using a predefined payout of the insurance products.

Digital Coverage is an Opportunity for Insurers

Taking advantage of the emerging platform economy is the digital paradigm for the future of insurance in APAC.

New entrants from big tech will try to tap into the insurance market - leveraging their abilities in large scale data processing as well as distributing insurance to their existing pool of customers, partners, and suppliers.

In terms of user base, digital businesses already have reached a strong penetration with limited room for quantitative growth. Digital infrastructure will stay vulnerable. There will be a stronger focus on the quality of service and the resilience of the digital infrastructure - driven by the needs of millions of gig workers, e-commerce merchants, food delivery drivers, online teachers, and the remainder of the traditional economy as it transforms.

This is a huge opportunity for insurers to address these customers and close the protection gap.

Insurance can play a pivotal role in providing risk protection but only can do this when fully taking advantage of the ubiquity of the platform economy - using real-time data, automated underwriting, and claims and deploying shorter product innovation cycles.

About Riskwolf

Riskwolf has built a platform that allows insurance companies to create coverages and help close the protection gap for growing digital risks. Working hand-in-hand with their partners, Riskwolf enables the creation of innovative insurance coverage to automatically compensate digital business interruption losses due to connectivity issues.




Thomas Krapf is the Co-Founder & CEO of RiskWolf.

RiskWolf is a part of our Batch 4 Insurtech Program in Singapore.

Interested in joining our programs, click here!

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