The future of…

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The future of insurance

July 1999

I often deliver talks to insurance companies. Some are very aware of the changes information technology is bringing and expect rapid change in the future. They will adapt and survive. But other companies seem oblivious, dismissing it all as hype. They simply don't accept that things can change quickly. It is sad, but most of the latter will simply go out of business or be bought at low prices by their more observant competitors.

The two trends of most consequence are the spread of the net and the growth in computer capability. Both of these trends are very real and very rapid. They are not just hype. To ignore them is simply foolish.

The net is expanding rapidly but is currently still fairly low penetration and still so new that most companies in the UK aren't using its capabilities yet. Most UK companies still don't sell their products on-line and when they do, their site designs often make it difficult. Even in the US, at the time of writing, only 44% of US companies sell their wares on-line. But this will change quickly. Also, the net will not rely only on progress in home computer penetration - it will soon be available to anyone with a games console or digital TV. Interfaces will become much simpler too, so eventually almost everyone will be able to access the net and have the skill to use it. Coupled with faster and smarter computers, this will affect almost every area of our lives over the next decade. And on the way, business empires will rise and fall.

Computers are very good at information processing and can carry out a great many simple transactions or enquiries in a very short time. As e-commerce takes off over the next few years, companies will have to sell their wares on the net in addition to their other marketing platforms. If they don't, they will miss out on a large part of the market. Whether they do or don't, their products will be compared side by side with those from their competitors. Every aspect of the products can be compared, and reviews obtained, from industry experts and customers. Companies such as buy.com and compare.com are good examples from today, but even better offerings will soon exist. With one or two mouse clicks and minimal data entry, a person can find the best products available to suit their needs. Their search will consider almost all the products available in the networked world and they will be confident that they have found a good products at a good price. A few years ago, it was thought that user agents would do this shopping around, and we may yet see this in the future. But the arrival of companies that are prepared to do all the work for free, attracting just a little advertising revenue on account of each visitor, makes individual agents unnecessary. Companies can of course opt out of net marketing and try to keep their products secret, but only a small fraction of the market will consider doing business with them when a huge open market exists.

The net will thus make the insurance market global, and allow easy product comparisons. There is little place for the agent in such a world, and little opportunity to charge high prices. Companies can still exist for a while by overcharging customers who buy blind via other channels, but this market will presumably decline quickly as the net becomes ubiquitous. Competition will be fierce.

But that is just the beginning. Insurance is often just a part of a wider financial services offering. And of course, these other financial services will become equally global with equally fierce competition. But the next big change is the nature of money (see The future of money). Most money is already just records on bank databases, but the digitisation of cash at the consumer level will start a trend that will eventually result in global electronic cash, held, traded and managed securely by the customer, with no need for banks. People buying things regularly on the net will quickly demand pricing that uses the same units on every site, and electronic cash providers will capitalise on this demand. Very soon, we will have cash that is accepted as payment on any web site. Then this same cash will then be downloaded to pay for things on the high street. This will all require strong security to prevent cash from being duplicated or stolen. Digital signatures and encryption will together provide the key components of the security systems. When these mature, people will find that they can easily manage their own cash without any need for banks, or can outsource certain functions to other institutions. They can lend and borrow without the need for intermediaries, and can self-insure in networked groups. These groups can be non-profit, reducing the costs of insurance, but will still need to buy the functions of risk assessment and loss adjustment. There may be little role for the large insurance companies in such a marketplace, as these core functions crystallise out, since the people with these skills represent only a few of the employees of these firms.

So what we may see are small specialist companies that provide risk assessment and loss adjustment services. Actual insurance might be mostly based on non-profit network groups. This could apply equally well to private and corporate insurance.

Of course, some insurance companies will remain, offering the special service that makes people want to stay with them in spite of higher prices. But in a global marketplace, only the most efficient companies with the best customer service are likely to survive. They need good customer information, excellent communication and flexibility at the customer interface, and high quality internal systems to support this. In short, they will need the best that IT can provide. Ignoring IT or hoping that it will go away almost guarantees failure.