Future of insurance: Commodity or service of choice?

Until recently, choosing the right insurance was a service provided by insurance agents and brokers. The agents mapped the insurance needs of their customers and helped them navigate the complex world of various insurance offerings. They also kept the necessary paperwork up-to-date. Insurance cover was seen as an essential service that minimized the risk of people and businesses and was tied closely to the financial planning of the insured. Many factors were considered before choosing an insurance product, and the price of the policy would be just one of these factors.

With the digitization of the insurance sales process, customers are now able to buy insurance from the company directly. They can do their own research, map the right product for their needs by entering their requirements on the insurance company’s website, and get quotes from different companies via an aggregator portal. The online channel brings a lot of flexibility and choice in the hand of the insured and also reduces the overhead of the insurers.

However, this sales model has also turned the buying process into a commodity transaction in which the price point of a product seems to be the sole criterion for making the decision. This practice is especially applicable for property & casualty personal insurance as customers see these products as must-haves and are always looking for a better price, switching insurers if they get a better deal elsewhere. So where does the P & C insurance industry go from here? Is it doomed to turn into a commodity or is there something that we can do about it?

First, let’s define a commodity and see if it’s something that insurance products should become. A commodity is a mass-produced, economical and generalized product, which may be produced by different companies but is essentially interchangeable in its application. An insurance product can be one-size-fits-all and economical in nature, but it loses its potential for making an impact in a person’s life when it is generalized and turned into a commodity.

Related: Personal lines auto: The differentiator’s dilemma

How to prevent insurance from becoming a commodity

1. Using claims settlement as a key differentiator. Claims settlement is at the core of an insurance product. A commodity is bought and used, and it’s not expected to do anything more than its intended function. On the other hand, an insurance product’s value is established when a claim is made. If the claims settlement process is hassle-free, accurate, and swift, then the insurance product and the company become reliable service providers. They are automatically distinguishable from commodity-style products.

Many insurance companies are working toward making their claims processes more efficient and customer-focused with the help of artificial intelligence (AI) technologies. AI’s impact on claims settlement is increasing, and it has the potential to turn customer satisfaction into customer delight and help retain customers by spotting red flags in their interactions or behavioral markers.

2. Adding value without increasing the cost. It is possible to add value to an existing product without increasing its cost. One sure way to add value is to track the metrics that are important to the customers. An insurance company can identify information that is important to convey to its customers, personalizing it for every customer — for example, providing information about the customers’ driving habits and how they can improve.

3. Shifting focus from being the cheapest option to being the lynchpin of financial decisions. Insurance companies have a large amount of customer data, both generic and sensitive. With their customers’ permission, they can leverage this data to generate an investment and expense profile that will help them make financial decisions more easily. They can choose to add insurance cover to their big purchases and riskier investments. In fact, it is possible to extend the cover to almost all areas of a person’s life.

Related: By the numbers: How technology is reshaping auto claims

Insurance can be a highly specialized service with financial risk cover as one of its functions. It can make the life of its clients — especially high-net-worth clients — easier and more comfortable, along with helping them manage risks to their lives and businesses.

In this brutally competitive landscape, under the status quo, low-cost insurers are likely to dominate the market in the next few years. Because large insurance companies generally can’t afford to lower their price points further due to costs associated with following standard operating procedures, they need to start improving their processes using modern technology and reorienting thought leadership to bring innovative products and services to their consumers.

To preserve their market share and retain customers long term, insurers need to move away from being product-oriented and become customer-driven services organizations. Consumers will find insurance cover one way or another; the key to surviving the numbers game lies in becoming more valuable to the end users than just a product that is indistinguishable across brands.

Related: Insurance game changers to watch in 2019

Varun Chutani is a solution architect at insuranalytics.ai with more than 11 years of experience in the P&C insurance industry, working on product development, actuarial modeling and AI/ML solutions.