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Climate change, with its intensifying storms, rising sea levels, and unpredictable weather patterns, is dramatically reshaping the risk landscape. It means higher premiums for property owners in flood zones, increased coverage exclusions in regions susceptible to wildfires, and more frequent and severe payout triggers for weather-related insurance claims. And that’s just home insurance. For car insurance, climate change could lead to higher rates due to increased weather-related accidents, more costly repairs, and greater total losses in areas prone to flooding or severe storms.

In short, as the frequency and severity of climate-related disruptions surge, the insurance sector finds itself at a pivotal moment. Will insurance carriers be able to keep pace with these accelerating risks? And most importantly, how can technology be harnessed to pave the way for a sustainable future?

Consumers want eco-friendly products

There’s a strong consumer appetite for environmentally friendly products and services. For example, a recent Solera survey of 10,000 drivers and 500 claims experts found a significant interest in ESG considerations within the car insurance sector. This aligns with broader consumer trends. The World Economic Forum reports that 65% of consumers try to make purchasing decisions that contribute to a healthier planet.

However, widespread accusations of ‘greenwashing’, where a company makes a product appear more environmentally friendly than it is, have eroded consumer trust in these schemes. Greenwashing can come in many forms. Some common examples include advertising a product as “recyclable” when it’s not widely accepted for recycling or claiming to be carbon-neutral without providing clear evidence of their offsetting efforts.

In other words, to succeed insurers must demonstrate genuine commitment to sustainability through tangible actions, not just marketing rhetoric. And one way to do this is through technology that’s proven to work. Let’s look at some of these technologies.

Telematics & Usage-Based Insurance (UBI)

Insurers are using devices that monitor driving behavior to encourage safer, more efficient driving habits. This not only helps in reducing accidents but also lowers carbon emissions, as smoother driving leads to less fuel consumption. Policyholders can benefit from lower premiums by demonstrating safe driving habits, thereby promoting environmentally friendly behavior.

Additionally, insurers can leverage data to inform customers about vehicle emissions. By analyzing vehicle data, insurers can identify models with lower emissions and offer incentives like premium discounts to encourage policyholders to choose greener options. Essentially, insurers can help support the transition to a more sustainable transportation sector.

Smart home technologies

Increasingly, we’re seeing insurers partnering with smart home technology providers. These technologies can help reduce risks and promote better sustainability practices. For example, smart thermostats can adjust heating and cooling based on usage patterns and weather forecasts, reducing energy consumption. Smart sensors can detect leaks or electrical faults that could lead to more severe damage if left unattended, thus preventing waste and promoting sustainability.

AI & Machine Learning for risk assessment

Advanced algorithms are revolutionizing risk assessment in the insurance industry. By analyzing vast amounts of environmental, climatological, and socio-economic data, AI can predict natural disasters with greater accuracy, enabling insurers to proactively manage risks associated with climate change. This includes designing insurance products that encourage building in safer, more sustainable locations and offering incentives for climate-resilient property modifications.

AI can also assess individual risk profiles with unprecedented precision. By analyzing driving patterns, claims history, and telematics data, insurers can identify low-risk drivers and reward them with lower premiums, fostering a culture of safe and environmentally conscious behavior. This data-driven approach also means insurers can develop products tailored to specific customer segments, such as electric vehicle owners or those living in high-risk areas.

However, as is always the case with AI, insurers need to proceed with caution. AI algorithms can contain bias and sometimes exacerbate existing inequalities. This is a big topic in itself, but to touch on it briefly here – insurers need to ensure they’re not punishing people living in high-risk areas who can’t relocate.

Blockchain for transparency & efficiency

Insurers can leverage blockchain to create more transparent and efficient processes in insurance. Blockchain sounds complicated, but at its core, it’s simply a decentralized and immutable database. This means fraud becomes almost impossible and insurers can more easily and reliably go paperless.

Blockchains can be used for all sorts of things. For example, initial policy issuance can be streamlined, with smart contracts automatically generating policies based on customer inputs. Claims processing can be accelerated, with blockchain providing an irrefutable record of events and reducing the time it takes to verify information. Even reinsurance processes can be simplified, as blockchain allows for secure and transparent sharing of data among multiple parties.

Green building incentives

Some insurance companies offer reduced premiums for buildings that meet certain environmental standards or use sustainable materials and technologies. For example, an insurer might provide discounts to homeowners with energy-efficient appliances, solar panels, or green roofs. These structures are often more resilient to natural disasters such as hurricanes and wildfires, resulting in fewer claims and lower overall costs for the insurance company. By incentivizing sustainable building practices, insurers can help promote a greener built environment while also benefiting their bottom line.

Additionally, some insurers offer premium reductions for buildings certified by green building rating systems like LEED or BREEAM. These certifications provide a standardized measure of a building’s environmental performance, allowing insurers to assess risk more accurately and offer appropriate incentives.

Investing in green technologies

Insurers are increasingly investing in renewable energy projects and green technologies as part of their asset management strategies. This helps in offsetting the carbon footprint of the companies themselves and supports wider industry shifts towards sustainability.

Final thoughts

Technology impacts almost every facet of our modern lives, and the insurance sector is no exception. Technology is now a necessity for the insurance sector. By harnessing the power of data and automation, insurers can mitigate climate risks, drive sustainable behaviors, and offer products that align with consumer values. The future of insurance is green, and technology is the key to unlocking its potential.

In an earlier article, we looked at how Augmented Reality (AR) and Virtual Reality (VR) are impacting the insurance industry. VR places users within a digitally simulated environment, while AR overlays digital information onto the real world, enhancing users’ perception and interaction with their surroundings.

Digital Twins take this a step further by creating digital replicas of objects and systems, enabling insurers to make precise predictions about these objects.

These predictions enhance insurance functions from risk assessment, distribution and marketing, to claims settlement and more.

What are digital twins?

Digital twins, which are virtual replicas of physical objects, systems, or processes, are revolutionizing the insurance industry. They use real-time data, advanced modeling, and simulations to create dynamic digital counterparts of real-world entities.

This allows insurers to gain deeper insights into risk management, asset monitoring, and customer behavior, driving more informed decision-making and enhancing operational efficiency.

Insurance is inherently data centric. Traditionally, insurers relied on historical data to assess risks and set premiums. However, the advent of digital twins offers a transformative shift.

By simulating various scenarios, from everyday incidents to rare disasters, insurers can predict and evaluate risks more accurately. This proactive approach enables better preparedness and response strategies, ultimately benefiting both the insurer and the insured.

How digital twins transform the insurance sector

The integration of digital twins and the Internet of Things (IoT) is propelling the insurance sector toward a new paradigm. Traditional insurance models, which focus on compensating for damages, are evolving into assurance models that emphasize risk prevention and mitigation.

Real-time risk mitigation

Digital twins, combined with IoT, enable continuous monitoring of assets and environments. For example, consider a cargo ship equipped with IoT sensors. If a digital twin detects an approaching storm, it can simulate the impact on the ship and suggest optimal actions, like altering the route.

This proactive measure prevents potential damage and reduces the likelihood of claims.

Enhanced customer expectations

Customers now expect insurance companies to adopt technological advancements swiftly. Digital twins facilitate this by providing more personalized and efficient services. For instance, smart homes and connected vehicles generate vast amounts of data that can be fed into digital twins.

With this data, digital twins can predict and prevent potential issues like poor conditions and bad weather that could lead to road accidents. This enhances customer satisfaction and loyalty.

Organizational efficiency

Insurance companies can also create digital replicas of their operations, known as Digital Twins of Organizations (DTOs). DTOs simulate internal processes, predict client behavior, and optimize workflows, leading to improved efficiency and better service delivery.

Examples of digital twins in insurance

Let’s look at some real-world examples of how digital twins are being used in the insurance industry:

• State Farm Ventures: A subsidiary of State Farm, has invested in the computer vision startup Nexar. Nexar uses a vast network of dash cameras to collect and contextualize trillions of images using AI, creating a digital twin of US roads and their surroundings. This AI digital twin platform provides cities, transportation departments, and automotive and insurance companies with real-time updates regarding work zones, road signs, road markings, potholes, and other elements related to road safety.
• Cerebri AI: This startup focuses on seamless integration, handling raw data and engineered features to create model-ready datasets in real-time, and scoring Key Performance Indicators (KPIs) and actions almost instantly.
• Donan Engineering: With a dedicated flood team that monitors catastrophic weather events in real-time, Donan Engineering ensures quick and efficient mobilization of resources and personnel when needed.

Bottom line

Digital twins are transforming the insurance industry by enabling more accurate risk assessment, enhancing claims processing, and improving fraud detection.

By leveraging real-time data and advanced simulations, insurers can provide more personalized services through precise customer profiles, better manage risks, and improve operational efficiency.

Previously, we explored the evolution of the insurance distribution model from traditional standalone products to the embedded model we see today.

Insurance is no longer driven solely by physical agents and incessant spam. Cold calling is outdated and now gives the industry a negative image.

We discussed how insurtechs and consumer brands partner to offer insurance products seamlessly alongside primary purchases, enhancing convenience and relevance for customers.

While this approach simplifies the insurance process, ensures timely coverage, and introduces innovative products like on-demand ride-sharing insurance and event ticket insurance, it also faces challenges such as scalability, regulatory compliance, and data security.

Building on this foundation, lets now delve into how advanced technologies are further transforming embedded insurance

 1. Artificial Intelligence and Machine Learning

AI and ML enable real-time data analysis and predictive modeling, revolutionizing how insurance products are offered. These technologies can sift through vast datasets to identify when a customer might need insurance and what type would be appropriate.

For instance, AI and chatbots from Allianz can suggest travel insurance now of flight booking while others offer extended warranties for new electronic purchases.

Impact: This predictive capability ensures that insurance offers are timely and pertinent, increasing purchase likelihood and enhancing customer satisfaction.

 2. Blockchain technology

Blockchain offers a secure and transparent way to handle insurance contracts and claims through smart contracts—self-executing contracts with terms directly embedded in code.

This technology automates underwriting and even the claims process, which reduces the need for insurance intermediaries like agents and brokers.

Impact: Blockchain enhances trust and transparency while cutting administrative costs and mitigating fraud, which ensures that customers can confidently make their insurance purchases through digital channels without needing assistance

 3. Internet of Things (IoT)

IoT devices gather real-time data that can be leveraged to offer personalized insurance products. For example, telematics in cars can monitor driving behavior, providing real-time insurance quotes based on driving patterns. Likewise, smart home devices can offer data on home security, leading to customized home insurance policies.

Impact: IoT enables highly personalized and dynamic insurance offerings, aligning premiums with actual risk and usage, making insurance fairer and more efficient. This is particularly useful for embedded insurance since it allows for innovative solutions such as travel insurance customized to the actual travel distance or trip insurance per ride.

 4. Cloud computing

Cloud computing supports the scalable and flexible delivery of insurance products. It allows insurers to manage large volumes of data and provide real-time processing capabilities, crucial for the seamless integration required in embedded insurance.

Impact: Cloud computing facilitates the rapid deployment and scaling of embedded insurance solutions, ensuring they can handle high transaction volumes efficiently.

 5. Advanced analytics

Advanced analytics helps insurers understand customer behavior and preferences at a granular level. By analyzing purchasing patterns, insurers can pinpoint the optimal times to offer insurance products, ensuring relevance and value for the customer.

Impact: Advanced analytics drives efficiency in marketing and sales strategies, leading to higher conversion rates and an improved customer experience.

According to a study by McKinsey & Company, companies that leverage advanced analytics in their marketing and sales strategies report improved customer satisfaction scores, with an average increase of 15-20%.

An increase in margin of more than 10% is always good news for an insurance business, especially given that many premiums are offset by fewer claims.

Future prospects

Ernst & Young (EY) predicts that more than 30% of all insurance transactions will take place within embedded distribution channels by 2028.

As these technologies evolve, they will enable more sophisticated and personalized insurance offerings. Ongoing advancements will also spur new business models and partnerships, reshaping the insurance industry landscape.

With inflation high, many people are already feeling the squeeze. From groceries to gas to utility bills, everything seems more expensive by the day, forcing many to tighten their belts and make tough choices about what they can afford. Unfortunately, the pain doesn’t stop there.

Home and auto insurance are also surging, adding another layer of stress to household budgets. The average insurance rate is already a hefty $2,377 annually, but homeowners across the country are expected to see a 6% spike in average premiums by the end of the year. This comes on top of a whopping 20% increase over the past two years. US home insurance rates are even expected to reach a record high this year, with the biggest increases hitting hardest in states prone to severe weather events.

Car insurance isn’t any better news. The national average cost for full coverage sits at $2,543 annually, and that number is climbing too. With these rising costs, many families are having to choose between essential coverage and other necessities. It’s a tough situation, and hopefully, some relief is on the horizon.

But why exactly are costs surging? Let’s get into it.

Why are home insurance costs rising?

As you may have guessed, the reason behind surging premiums is varied and nuanced, but we must start somewhere. Let’s start with extreme weather events. Here’s why these events are impacting your home insurance bill:

• More frequent and severe disasters: The White House itself reports a dramatic rise in economic damage from extreme weather. We’re experiencing, on average, more than one-billion-dollar disaster every month, compared to just a handful per year a decade ago.
• Increased risk for insurers: These frequent and intense weather events translate into billions of dollars in payouts for insurance companies. Floods, wildfires, hurricanes, and other catastrophes are becoming more common, forcing insurers to re-evaluate their risk models.
• Higher payouts, higher premiums: With a greater likelihood of claims due to extreme weather, insurance companies need to raise premiums to maintain financial stability. This means homeowners are paying more to ensure their property is covered in a disaster.

Secondly, inflation is playing a significant role. The cost of repairs and replacements following weather damage has risen sharply. Lumber for rebuilding roofs, parts for car repairs after hailstorms – everything is more expensive. The Insurance Information Institute reports that for every dollar collected in home and auto premiums last year, insurers paid out a whopping $1.10 in claims and expenses. This imbalance means insurance companies are essentially losing money on every policy, prompting them to raise rates just to stay afloat.

Pricing power also plays a role here. While state regulators have some power to limit these price hikes, insurance companies often have more leverage. Regulators know that if they move too aggressively to limit premiums, insurance companies might stop offering coverage altogether in certain areas or for certain types of properties. This can leave homeowners with limited options and potentially force them to pay even higher premiums for less comprehensive coverage from a smaller pool of insurers. This dynamic, where insurance companies have significant “pricing power,” also contributes to the overall rise in home insurance costs.

Why auto insurance is rising

Auto insurance is surging a lot – It’s hitting levels not seen since 1976. In 2024, the average annual premium for full coverage in the U.S. spiked to $2,543, a 26% increase from the previous year. This hike in rates is contributing significantly to overall inflation, adding half a percentage point to March 2024’s inflation rate of 3.2%.

Several factors are driving this surge. First, the cost of car repairs has increased by 6.7% over the past year. While this rate of increase is slower than in recent years, it remains substantially higher than pre-pandemic levels. The higher repair costs are partly due to more advanced and expensive technology in cars, which requires more specialized skills and parts to fix.

Additionally, the U.S. is experiencing more severe and frequent car accidents. Data from the National Highway Traffic Safety Administration shows a concerning rise in traffic deaths, with figures reaching 42,795 in 2022, up by about 7,000 compared to pre-pandemic numbers. Naturally, an increase in accidents has led to a rise in insurance claims, particularly due to the severity of these incidents. In fact, insurers saw losses on 27% of collision claims in 2022, a significant increase from the previous year.

Compounding the issue, there’s been a shift in driving behavior, although experts aren’t exactly sure why. More drivers are engaging in risky behaviors like speeding, texting while driving, or operating vehicles under the influence. These habits increase the likelihood of severe accidents but also lead to another costly problem – more legal cases. More claims now involve representation, further driving up costs for insurers. This combination of factors means that finding affordable car insurance is becoming increasingly difficult for many drivers.

Will the surge continue?

Predicting the future is tricky, but the factors driving the surge (extreme weather, inflation, risky driving, and insurer pricing power) aren’t likely to vanish overnight. So, some continued increase in home and auto insurance premiums is likely. However, regulatory changes or advancements in mitigating weather risks could offer some relief down the line.

Final thoughts

The rising cost of home and auto insurance is a significant burden for many households. While the future is uncertain, the factors driving this surge are unlikely to disappear quickly. This suggests that continued increases in premiums are probable. However, there’s still hope. Regulatory changes or innovative solutions to mitigate weather risks could bring much-needed relief in the long run.

In the meantime, homeowners and drivers must be proactive. Shopping around for competitive rates, seeking discounts offered by insurers, and adopting safer driving habits could help lessen the financial strain. While navigating this complex landscape might be challenging, acting can make a significant difference in managing these rising costs.

In the past, insurance was typically sold as a standalone product. Endless calls from insurance agents pitching motor vehicles or homeowners’ insurance made it seem like a money-mongering practice. This approach has gradually evolved.

The first significant change came with bancassurance, where banks began offering insurance products alongside loans, deposits, and other financial services. Another example is travel insurance, which became an add-on to include when booking a flight.

Today, advanced technologies enhance the insurance purchase journey, providing more coverage options, less hassle, and a more convenient experience for consumers.

What is embedded insurance?

Leveraging consumer data and purchase habits helps make insurance products more relevant to customers.

Insurtechs—tech startups in the insurance space—partner with businesses to offer a digital insurance journey where consumers purchase insurance products alongside their primary purchases. This is known as embedded insurance, which involves “embedding insurance” products alongside other purchases.

Simplicity

Partnerships are not new in the insurance industry, but the elegance of the embedded approach lies in its simplicity. Insurtechs handles the complex task of developing the technology, while the partner only needs to integrate a few lines of code into their website.

This seamless process enables the partner to offer insurance products effortlessly, creating a streamlined experience for customers without requiring significant effort or resources.

Insurance at the right time

By leveraging data analytics and real-time insights, businesses can offer insurance products precisely when customers need them most.

For instance, travel insurance can be presented when booking a flight, or smartphone protection plans can be suggested when purchasing an iPhone.

This timely approach not only enhances the customer experience by providing relevant coverage but also increases the likelihood of purchase. The convenience of receiving insurance at the optimal moment ensures that customers are protected without having to go out of their way to seek coverage independently.

Innovative products

By partnering with consumer brands, insurtechs can address and bridge the insurance gap for newly sought products and services. This is particularly relevant for startups offering new products that bring new, unaddressed risks.

For example, on-demand insurance for both drivers and passengers using ride-sharing services exemplifies the perfect marriage of convenience and protection. Available when booking a ride through apps like Uber or Lyft, this kind of embedded insurance ensures both parties are safeguarded throughout the journey.

The availability of ride-sharing coverage enhances the overall safety and trust within the ride-sharing ecosystem, reassuring users that they are protected against unforeseen incidents.

INSHUR partners with Uber to offer insurance to the latter’s drivers via their mobile app. Drivers can get quotes and purchase policies directly through the Uber app. This not only elevates the user experience for riders but also promotes a sense of security, encouraging more people to utilize ride-sharing services with confidence.

Another example can be drawn from the entertainment industry.

Event ticket insurance offers coverage for cancellations, postponements, or personal inability to attend events due to reasons like illness. This type of insurance is seamlessly embedded into the ticket purchasing process for concerts, sports events, and festivals.

By reducing the financial risk associated with these events, customers are more likely to commit to their plans, knowing they have a safety net in place.

Event ticket insurance, like that offered by Allianz on ticketing platforms like Ticketmaster, enhances the purchasing experience by providing peace of mind, ensuring that unexpected changes do not result in financial loss. This, in turn, encourages higher attendance rates and boosts the overall success of events.

Not all is gold

As embedded insurance continues to grow, scalability is a significant challenge.

Typically, embedded insurance products are designed to be simple and will provide limited coverage, leading to low premiums. For these offerings to be viable and successful, they must achieve scalability—selling a high volume of policies.

Regulatory compliance is another critical concern. With insurance regulations varying across different industries and jurisdictions, insurers must navigate a complex legal landscape.

Finally, data security is crucial in today’s digital age. Protecting customer data from breaches and ensuring privacy requires robust cybersecurity measures.

By addressing these challenges, embedded insurance can continue to provide convenient and effective coverage solutions, enhancing customer experiences and driving industry growth.

In recent years, the mainstream move to electric vehicles (EVs) has led to a rise in autonomous vehicles. EVs like Tesla have pushed the boundaries of driving with features that can be automated.

Aside from that, Tesla also launched its own insurance business in 2019 to address the growing rates of auto insurance. Though there are mixed results, this initiative has also prompted other insurance companies to revise existing rates by offering discounts on vehicles equipped with Advanced Driver Assistance Systems (ADAS).

In attempting to address this, two critical issues emerge:

• How does ADAS affect the likelihood of road accidents?
• Are insurance rates directly impacted?

What are Advanced Driver Assistance Systems (ADAS)?

At the heart of EVs are Advanced Driver Assistance Systems. Although ADAS have also been found in non-electric vehicles for decades, their impact on insurance has only been studied recently with the emergence of EVs.

ADAS are car safety features powered by smart technologies. In the past, they were mostly developed in-house by car manufacturers as most didn’t require proprietary tech.

Nowadays, start-ups mainly in the spare-parts space specialize in developing various Advanced Driver Assistance Systems. From Lane Departure Warning and Blind Spot Detection to Automatic Emergency Braking and Automatic Cruise Control, ADAS helps drivers avoid and reduce road accidents caused by human error.

Types of ADAS

Advanced Driver Assistance Systems can be divided into two categories: Active and Passive.

Passive ADAS: These systems are designed to alert the driver of a potential hazard or impending collision. Examples include Lane Departure Warning and Blind Spot Detection, which alert the driver in case of an unintentional lane departure or detect obstacles the driver might not readily see, respectively.

Active ADAS: These systems actively intervene to prevent an accident or reduce the risk of one. Examples of Active Automatic Driver Assistance Systems are Automatic Emergency Braking and Adaptive Cruise Control. These take control in critical situations to avoid or mitigate accidents.

Impact on auto insurance

Automatic Driver Assistance Systems are designed to enhance safe driving by reducing human errors. Studies have shown that vehicles equipped with ADAS experience fewer accidents compared to those without such systems. For instance:

Reduction in rear-end collisions: Automatic Emergency Braking can significantly reduce rear-end collisions by automatically applying the brakes if a potential collision is detected.

Lane departure prevention: This Automatic Driver Assistance System can alert drivers if they unintentionally drift out of their lane, reducing the risk of side-swipe road accidents.

As a result, the integration of ADAS in vehicles can lower the overall frequency of road accidents whose leading cause is human errors. This, in turn, can lead to fewer insurance claims and a reduction in the costs associated with accident-related damages.

Impact on insurance rates

The effect of Advanced Driver Assisted Systems on insurance premiums is multifaceted.

Insurance companies are now using data collected from Advanced Driver Assisted Systems to refine their risk assessment models. This data can provide insights into driving behavior and vehicle performance, allowing insurers to offer more personalized and accurate pricing.

Moreover, such analytics can form the basis for road incident assessments during the claims process.

In terms of premiums, some insurance companies offer discounts on rates for vehicles equipped with certain ADAS features. These discounts are based on the reduced risk of accidents and the enhanced safety provided by these systems.

While Automatic Driver Assistance Systems can reduce the frequency of accidents, the cost of repairing ADAS-equipped vehicles can be higher due to the complexity and expense of the technology. Sensors, cameras, and other components can be costly to repair or replace, potentially leading to higher claim costs.

Insurance initiatives

Tesla’s entry into the insurance market is a notable example of how ADAS and vehicle data can be leveraged to influence insurance. By using real-time data from their vehicles, Tesla aims to offer more competitive rates based on actual driving behavior rather than traditional risk factors.

This approach has the potential to revolutionize the auto insurance industry by making premiums more reflective of individual driving habits, otherwise known as Usage-Based Insurance.

Other U.S. auto insurers, like GEICO and Liberty Mutual, are also incorporating ADAS into their pricing models:

GEICO: Provides various discounts for safety features, including ADAS. Policyholders with vehicles that have advanced safety features like Automatic Emergency Braking and Lane Departure Warning may qualify for reduced rates.

Liberty Mutual: Their RightTrack program offers discounts to drivers who use Automatic Driver Assistance Systems and demonstrate safe driving behaviors. The program tracks driving habits and provides personalized discounts based on the data collected.

Final thoughts

The integration of Automatic Driver Assistance Systems in vehicles is reshaping the landscape of auto insurance. By reducing the likelihood of accidents, these systems can lead to lower insurance claims and potentially lower premiums for drivers.

However, the increased repair costs and the need for specialized knowledge to fix ADAS-equipped vehicles must also be considered.

As technology continues to evolve, so will the insurance industry’s approach to pricing and risk assessment.