A $12 Trillion Disruption: Is the Insurance Industry Poised for a Major Shake-up?

Most of us don’t think much about insurance.

That’s by design, of course. Insurance is supposed to be a safety net that affords us the leisure of not thinking about it. Unless, of course, we have to. That generally happens about once a year when we’re reacquainted with our premium. Ouch. And, according to statisticians, most of us will have to think about our insurance about once every 7-8 years when we’ll encounter a loss of some sort. Ouch.

My insurance is pretty confusing. I pay for coverage of my house – a fairly precise calculation based on its quality, size, age, materials, etc. And, I get a guarantee that if I keep paying my premium, my home will be covered for its replacement costs. That’s pretty reassuring. But then it gets a little weird… I get a “blanket” (insurance-speak is very comforting) which is really a formula that assumes all the stuff I own is worth um, somewhere around 50-70 percent of the value of my home. Huh? Maybe there’s a bit of science to this, but surely there’s a lot of guess . . . and according to research, about 39 percent of the time it’s just wrong. (As one insurance CEO recently confessed to me, most folks are probably 50 percent underinsured).

It goes on: if I own something really valuable, some bauble or collectible, well that has to go on a list of things that are really valuable, and those things get their own coverage. Now, so that my stuff continues to be well protected, I have to re-estimate the value of those things from time to time – or employ an appraiser. What’s more, if I buy something new, donate something I own, or if any of my things goes down or up in value for whatever reason, my insurance doesn’t change – because my provider doesn’t know about these changes. And, if you’ve ever have a claim to file, the process starts with the assumption of fraud, with the burden of proof borne by the policyholder because most people don’t have an accurate accounting of their possessions and their value. Ouch.

So while I’m not supposed to be thinking about it, maybe I should be paying closer attention.

But change is coming like a freight train and its impact has the potential to shake one of the world’s largest industries to its core. For a little perspective, the property and casualty insurance industry (P/C insurance) collected some $1.2T (!) in premiums in 2012 (that’s about 2x the annual GDP of Switzerland). At the core of the P/C insurance enterprise is (and I know I am simplifying here) the insurance-to-value ratio, which estimates whether there’s enough capital reserved to insure the value of items insured – if values go up, there’d better be enough money around in case of a loss. All good, right? Except that for as long as actuaries have been actuarying, the value side of that ratio has been a guess – especially for personal property (the stuff I own other than my home). So if I forget to tell my insurer about something I bought, or if I no longer own that painting, watch, collectible or antique, or if the precious metal in my jewelry has increased . . . then what? Am I paying too much or am I underinsured for the current value of the things I own? Of course, these massive companies make calculated allowances for this value opacity . . . but these allowances also cost us indirectly in increased premiums, and the inefficiency costs the insurer in potential returns on capital.

The changes coming can be summarized by three trends that have the potential to impact the way we insure. First, is the expectation of the connected generation, now entering their most acquisitive years and set to inherit $30T of personal wealth. Second is the connected availability of current data about the value of things. And third is the emergence of the personal digital locker for things.

Data, data! I want my data!

The expectation of the connected generations

If they’re anything, the connected generations are data-savvy and mobile. If you’ve shopped for just about anything with a Millennial recently, you’re familiar with their reliance on real-time data about products, local deals, on-line values and even local inventories. (I was with one of Google’s brains and he showed me how retailers are now sending them local inventory data so now they can post availability and price of a searched-for item at a local store). Smartphone usage is nearly 90 percent for GenXers and Millennials, and data is mother’s milk to the children of the connected generations who are being weaned on a diet rich with direct (disintermediated) access to comparisons, descriptions, opinions, crowd-sourced knowledge and even current values. The emerging generations rarely rely on the intermediation of experts (unless validated on a popular blog with a mass following) and are not likely to be satisfied with an indirect relationship with those impacting their financial health. Smartphones in hand, and cloud-hosted data dependent, they will demand and receive visibility into the data shaping all their risk decisions.

And here’s where the insurance revolution will begin: a connected generation who is apt to disintermediate and has access to real-time info on just about anything will demand that they insure only what they own (bye-bye blanket), that their insurance should track to real values, not formulaic guesses, and they should have the ability to re-price more frequently than once a year. Maybe the time is coming for a kind of variable-rate insurance that reflects changes in the values of items insured, and is offered on a real-time basis for any item that the owner deems valuable.

The price is wrong

The real-time valuation of every thing

Over the past few years, several data services have sprung up whose charters are similar: something like developing the world’s largest collection of data about products – their descriptions, suggested retail price, current resale value, user manuals, photos and the like. Not one has yet dominated, but it’s early yet and someone (or probably a few) will conquer the objective. Similarly, there are a few excellent companies that are collecting and indexing for speedy retrieval, the information about every collectible that has been sold at auction for the past 15 years. I know something of these endeavors, since our core product relies on the availability and accuracy of these data providers to collect the values (and other attributes) of the items people are putting into their Trovs (our moniker for the personal cloud for things). It is only a matter of time before we will be able to accurately assign a fair market value to most everything – in real-time and without human intervention. This real-time value transparency will radically impact the way that insurance is priced and financial institutions view total wealth.

My stuff in the clouds

The automated collection and secure storage for the information about my things
Within the coming 12-24 months, connected consumers will embrace applications that will automatically (as much as possible) collect the information about all they own and store it in a secure, personal cloud-hosted locker. These “personal data lockers” will proliferate because of their convenience, real financial incentives from insurers and other service providers, and because data-equipped consumers will have powerful new tools with which to drive bargains based on the data about everything they own. These new tools will indeed pour fuel on the re-invention of insurance since all the information needed to provide new types of insurance products will be resident in the personal cloud-hosted data locker. Progressively (pun noted, not intended) engineered insurance products that account for a connected generations’ expectation of access to data, the abundance of data about products and collectibles, and the active collection and accurate valuation of the things people own may turn the 300 year old industry on its head. And doubtless, the disruption will leave some carriers grappling for handholds and wondering how they could have insured against a different outcome.

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