Insurance Industry Stands To Benefit as Digitalization Progresses

As digitalization is revolutionizing a host of industries, for the insurance industry it holds the promise of a new source of growth, new risk pools, and new efficiencies, according to Swiss Re.

In a recent sigma report from the Swiss Re Institute, titled The Economics of Digitalization in Insurance: New Risks, New Solutions, New Efficiencies, the reinsurer suggests that there has been something of a "productivity paradox" thus far with technological breakthroughs.

Despite those technological advances—and, recently, considerable hype in the field of artificial intelligence (AI)—the boost thus far to overall economic productivity growth has been weak, at an annual average of just 1.1 percent in the Organization for Economic Co-operation and Development countries over the last 2 decades, the Swiss Re report says.

But digitalization will likely impact economic growth, labor productivity, and inflation in the future, as well as the insurance industry, the sigma report contends.

The report notes that for insurers, digitalization changes how risks can be assessed and mitigated with new and more granular data. Risk mitigation efforts can benefit as well, Swiss Re says, using the example of the automotive industry and advanced driver assist systems.

In addition, "Digital data has become a source of competitive advantage and wealth, as the steady rise in the share of firms' 'intangible assets,' mostly uninsured, shows," the report says. "Just 17 percent of intangibles are estimated to be insured currently, compared with 58 percent of tangible assets, presenting a growth opportunity for the industry."

Increased digitalization does not come without risks, however, according to Swiss Re. The expansion of digital technology creates both new risks and the potential for large losses.

"As digital ecosystems grow, the associated network effects raise business interruption and cyber vulnerabilities," the report says. "Insurers have developed solutions to protect against such earnings and cash flow risks."

The report notes that survey respondents indicate that cyber attacks are the top risk facing business today, a view reflected in the rapid growth in demand for cyber insurance. Swiss Re estimates that global cyber-insurance premiums will reach $16 billion this year, increasing to $25 billion by the end of 2026.

"The increased use of AI across the economy, meanwhile, may also raise new liability concerns," the report says. "A lack of explainability for systems that operate as black boxes can raise challenges in understanding liability attribution."

Digital transformation continues to occupy a high spot on the insurance industry's agenda, the Swiss Re report says. The industry's initial focus was on distribution, with apparently positive results, the report says. "In a global survey, we found that more than 40 percent of consumers in advanced markets had bought new or additional insurance cover online, and that 50 percent in emerging markets had done so," the report says.

Meanwhile, insurers are experimenting with digitalization across the value chain as they seek efficiency gains, Swiss Re says. As an example, the report says insurers pursuing digitalization initiatives are targeting a 3 to 8 percentage point reduction in loss ratios and up to 20 percent in savings in other parts of their value chains.

The report further notes that today 31 of the 50 largest (re)insurers are investing in InsurTech in hopes of gaining first-mover advantages. More than one-third of InsurTech investments have been in distribution technology, Swiss Re says, with pricing and underwriting processes being the other main areas of digital investment.

The Swiss Re report discusses the reinsurer's new Insurance Digitalization Index, which indicates progress made thus far in different countries with regard to the digitalization of insurance. Advanced markets with relatively strong physical infrastructure and more people having online connections rank highest in the index, the report says, with South Korea, Sweden, and Finland holding the top three spots in the most recent ranking. The United States ranks fourth, up from sixth in Swiss Re's 2010 index ranking.

"Emerging markets rank relatively lower, but they have become more digital and faster over the last 10 years," the sigma report says. "China, for example, rose 10 places over the course of the 2010‒2020 analysis period."

Swiss Re says its broader analysis of countries' resilience suggests that those that are more digitally advanced are typically more resilient against other exposures such as natural catastrophe risks.

"All told, our index results suggest gains from digitalization are far from exhausted, even in the highest ranking countries," the Swiss Re report says. "The gap between the laggards (typically emerging markets) and the 'best in class' countries remain[s] large, pointing to higher catch-up potential in the former. It means digitalization is both the source of new risks and solutions."

To achieve positive returns on the investments in digitalization, insurers will need to re-engineer workflow processes and invest in data engineering capabilities to maximize the potential of digital data and algorithms across the enterprise, Swiss Re says. They'll also need to adapt to regulatory requirements with respect to data privacy and analytics.

The potential for insurance industry digitalization will vary by region, and is somewhat constrained by individual countries' digital progress, the sigma report says. Insurers can play a part in promoting that progress, however, according to Swiss Re.

"For a start, going digital requires the building and operating of various infrastructure assets, which entail various exposures, including construction and operational risks," the report says. "Insurers can provide risk transfer solutions for these risks, working together with businesses and governments to achieve their digital goals."