The upside of niche product offerings in insurance

More than one year into the COVID-19 pandemic, its economic impact continues to reverberate, and insurers haven’t been spared.

Faced with mounting losses, U.S. P&C insurers took a 27.5% hit to their net income after taxes in the first nine months of 2020. To shore up their bottom lines, many insurers have turned to niche product offerings such as usage-based insurance (UBI), IoT-connected policies, and on-demand insurance.

As the post-pandemic normal takes shape, these niche products offer a vital pathway for insurers to diversify their offerings and meet the needs of customers who expect tech-savvy, personalized coverage.

A new landscape

While much of the world is returning to some degree of normalcy as more people are vaccinated against the novel coronavirus, the pre-pandemic status quo won’t be restored. Even as more people return to their offices, millions of more workers will work at least part of the week from home. McKinsey estimates that there will be four to five times more remote work than there was pre-COVID.

Naturally, as people spend less time commuting to and from offices, they’re beginning to wonder why they’re still paying full insurance coverage if they don’t use their vehicles as much. With UBI, they don’t have to. Customers who drive less will pay less for auto insurance — paying per minute driving rather than a flat monthly fee, for example.

Not surprisingly, the notion of UBI is intuitively appealing to many consumers, with 61% of drivers in a TransUnion survey saying they’d consent to having their insurers collect data on their driving behavior and mileage if it meant lower premiums.

Such sentiment bolsters the case for IoT-connected policies that leverage data from internet-connected devices to better understand risk. IoT sensors in cars and homes can be utilized to monitor factors like driving habits and flood risk, respectively, while wearable devices generate information that can enable health or life insurers to better calibrate premiums according to policyholders’ lifestyles and well-being.

About one-fifth of insurers have piloted, tested, or already deployed IoT offerings — and while most have yet to integrate IoT, 60% consider it a project for a five-year plan. Indeed, market forecasters project that the IoT insurance market will surge at a compound annual growth rate (CAGR) of 40% from 2021 to 2026.

The burgeoning on-demand insurance market reflects the growing appetite for niche offerings that offer coverage for insureds with periodic risks, including home shares, renters, small businesses, mobility, and more. Advanced monitoring solutions can help insurers guard against the risk of fraud in such cases. Not only do insureds benefit from paying a lower price than they would for an annual policy, but as KPMG analysts note, insurers enjoy higher profit margins due to higher per-use rates.

Parametric insurance, meanwhile, offers pre-specified payouts based upon a triggered event.

Enhancing the insurer-insured relationship

What does the increasingly diverse array of product offerings mean for the future of the insurer-insured relationship?

Providing coverage options like UBI or on-demand insurance can help insurers meet customers’ expectations for relevant, truly personalized coverage — providing insureds the incentives they need to share more data in order for insurers to more accurately measure risk. What’s more, amid fundamental shifts in the nature of work, education and commerce, niche offerings empower insurers to craft policies that reflect the reality of the world’s new normal. This will be especially critical in appealing to younger, digitally savvy customers who are less accustomed to paying for annual policies and have come of age in the on-demand economy of Uber, Netflix and TaskRabbit.

As insurers tap into new offerings, it will be crucial to achieving the proper balance between digital and human interactions. Many customers still prefer live engagements with their insurers over digital interactions. Just as work is becoming increasingly hybrid, insurers must be able to move seamlessly between the analog and the digital — with robust data and technological capabilities providing the backbone needed to support superior customer experiences both online and offline.

The world is evolving. If insurance product offerings evolve with it, insurers will be better positioned to seize the opportunities that lie ahead.

Colleen Wells (colleen.wells@sapiens.com) is vice president of Global Digital Product Strategy at Sapiens.

Also by this contributor: How insurers can successfully achieve true digital transformation