The Internet of Things (IoT) and increasing digital demands is resulting in major disruption in the insurance industry. Furthermore, Gen Y behaviours and emerging connected technologies are breaking the thresholds of existing business models.

This is according to the World Insurance Report 2016 (WIR) released by Capgemini, a global provider of consulting, technology and outsourcing services.

The report highlights that multiple threats are pushing the insurance industry towards massive disruption, and driving the urgent need for insurers to undergo significant transformation or risk falling behind emerging competitors such as FinTechs.

Understanding Gen Y

Capgemini's report found that Gen Y customers are much less likely to have positive experiences with their insurers compared to other age groups, despite communicating with them more frequently.

Gen Y customers have more interactions with their insurer across all communication channels, particularly digital ones. They interact with insurers up to 2.5 times more on social media than other customers and over two times more via mobile.

Those interactions, however, are resulting in positive customer experience levels that are nearly 20 percentage points lower than those of customers in other age brackets, suggesting that Gen Y customers have higher expectations for the standard of digital channels than their older peers, the report finds.

Given that more than one-quarter of all customers plan to purchase or renew their insurance through digital channels in the next 12 months, customer experience levels among Gen Y customers is particularly concerning for the industry, Capgemini says.

In addition, nearly one-quarter of Gen Y customers say they would be likely to buy insurance from non-traditional technology-led providers, highlighting the threat from emerging competitors to the customer base of traditional insurers, according to the report.

“By not providing adequate engagement for digitally-advanced customers, carriers run the risk of pushing them toward a growing population of market entrants and non-traditional technology-driven competitors,” says John Mullen, Capgemini corporate vice president and global insurance leader.

“Gen Y is clearly indicating that they do business differently and those insurers who respond to them on their terms will have a clear competitive advantage,” he says.

IoT looms large

A more fundamental threat, or enabler, to the future of insurers is the coming wave of connected technologies, in the form of such innovations as smart home ecosystems, wearable devices and machine-enabled drones, robots, and cars, the report shows.

These IoT technologies are expected to transform traditional insurance business models, including everything from the way insurers connect with their customers to their fundamental assessment and management of risk.

Yet despite this threat, insurers are significantly underestimating the degree to which connected technologies will be broadly adopted. Only 16% of insurers think customers will embrace driverless cars, for example, while 23% of customers express interest, the report shows.

More significant than age, affluence is the most compelling factor in determining customer uptake of IoT technologies. More than 45% of affluent Gen X customers are likely to adopt connected devices, smart ecosystems and wearables, compared to only 30% to 35% of younger, non-affluent Gen Y customers, the report finds.

Customers that are both Gen Y and affluent are the most likely to adopt connected technologies (50%). However, affluent customers are also more likely to purchase insurance from non-traditional technology-led firms. Nearly 31% of affluent customers globally say they are likely to purchase insurance from technology firms, a percentage that increases to 47% for affluent Gen Y customers, according to the report.

Redefining risk

In addition to its impact on customer connections, IoT is expected to have an even bigger impact on the core tenets of the insurance business, Capgemini says.

In a connected world, data provided by connected devices, smart ecosystems and wearables will increase risk transparency, a dynamic that will likely lead to new business models, especially in pricing and risk control.

Risk ownership will also shift with connected technologies, as responsibility for actions, for example in the case of driverless cars, moves from car owner to car manufacturer.

Finally and most important, IoT looms large in managing the level of risk exposure due to safer environments. This will shift premiums significantly, threatening some carriers, but providing opportunities for those who can understand the emerging risks that are inherent as the rate of technology change becomes more pervasive in the lives of people and commerce, according to the report.

Insurers must start preparing themselves for the transformation of the insurance business. The report advises insurers to build strong but agile foundations in the short term. In the medium term, they must sharpen their value propositions through strategic alliances and data-driven insights. Long-term strategies must focus on transforming the business to stay ahead of emerging risk profiles, new interaction models, changing customer behaviours and IoT's expected disruption of risk selection, pricing, and loss prevention.

“While already experiencing digital disruption, the insurance industry needs to brace itself for the massive, inevitable disruption brought on by Gen Y and the Internet of Things,” says Vincent Bastid, Efma secretary general.

“Those insurers who make it a top priority to improve their ability to manage and leverage data and risk will be the most prepared," he says.