The economics of digitalisation in insurance

Digital technology has revolutionised value creation. Today, "intangible assets", including digital data, constitute a significant share of economic value and are the source of new risk pools.

Digitalisation is also enabling significant operational efficiencies. Even so, and rather like the productivity paradox that has afflicted the global economy over the last 20 years, the full transformative impact of digital technology on the insurance industry remains pending. Our new Insurance Digitalisation Index affirms this state of play, indicating that in no country have insurers exhausted the economic potential of digital technology. There's more to come.

The index suggests that advanced markets with relatively strong physical infrastructure and where more people have access to the internet, have made most progress in digitalising their insurance sectors. Emerging markets have most catch-up potential and over the last 10 years, they have been doing so, fast. Notably, this sigma finds a correlation such that economies which are more digital are typically more resilient to other exposures like natural catastrophes.

Average Insurance Digitalisation Index rankings over time, advanced and emerging markets

Digitalisation has fundamentally reshaped the corporate sector. As firms have shifted from producing physical goods to providing information and services, the composition of their balance sheets has changed too. The so-called intangible assets represent a main growth opportunity for the insurance industry. The global value of intangibles of listed companies has increased fivefold over the last 20 years, and close to 80% of that value is uninsured.

Intangible risks

The ongoing expansion of digital ecosystems present business interruption and cyber risk pool opportunities. For example, we estimate that the global cyber insurance market has grown by 60% over the last two years, and we forecast a more than 50% gain over the coming five years.

Digitalisation also makes insurance processes more efficient. For instance, digital data enables more holistic underwriting based on more granular data derived from different sources (eg, wearables). It is enabling significant operational efficiencies, such as a 3-8 percentage point reduction in loss ratios that this sigma finds insurers are targeting in underwriting processes. The report also says that digital technology could generate savings of 10-20% in other areas/processes of the value chain.

Savings potential from enhanced digital capabilities

New technologies also can be used to improve risk mitigation processes. The increased use of data and data analytics, in particular of sensor technologies and the networking of factories, buildings, machines and other physical objects can reduce the frequency and severity of accidents, for example with smart home applications and the adoption of sensors in plants and equipment. One challenge, however, is that the lack of explainability that comes with the use of artificial intelligence in innovations such as Advanced Driver Assistance Systems, could raise challenges for liability attribution.

Going digital to mitigate risks

Digital transformation remains high on the industry agenda. The initial focus of investment was on digital distribution channels, but attention has since moved to other parts of the insurance value chain, including in pricing and underwriting processes.

All said, the further transformation of the industry through digitalisation will be a longer-term play. For starters, at the macro level, going digital requires the building and operating of various infrastructure assets. And for insurers themselves, successful implementation of digital technology is dependent on data availability, interpretability requirements and system complexity. To this end, insurers will need to re-engineer workflow processes and, crucially, invest in data engineering.

Investments in the insurance industry value chain