Episodic insurance struggles to gain traction as new business line
Episodic insurance - short-term policies to cover discrete events and experiences - are not being fully exploited but "have the potential to impact the business model fundamentally and how insurance is consumed", according to Deloitte Canada's strategy and innovation chief, Mukul Ahuja. The model is concentrated in the sharing economy and can be extended to cover short policy periods, however, as it would alter companies' cashflow cycles, some incumbents are unprepared to think about it, he said. 
Insurance carriers need to more seriously consider the potential that exists in episodic insurance and how such an approach could alter offerings, Mukul Ahuja, leader of insurance strategy and innovation at Deloitte Canada, suggested Thursday.

“Not nearly enough carriers are looking at that seriously as an opportunity right now in terms of the potential,” Ahuja commented during the Canadian Insurance Accountants Association’s Tech IT Forward event in Toronto, sponsored by Deloitte Canada.

“How do you start to think about policy outside of this traditional one-year term or two-year term?” he asked attendees. “Think about being able to provide policies just in time or on-demand for the needs of the consumer.”

Beyond things like ride-sharing or home-sharing are niches such as flight insurance and protecting specific possessions (like expensive camera equipment) for, say, the duration of a vacation, he noted.

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“These types of business models are essentially providing a different flavour to the kinds of products and services that can be provided, and providing different underwriting models for carriers to think about,” Ahuja explained.

With the proliferation of ride-sharing and home-sharing, “there’s real potential opportunity to bring a newness of model and adjacent products into mainstream.”

Still, Ahuja told those in attendance, given the many sharing economy-type offerings and products now available, “incumbents are just not well-prepared to think about – or haven’t been able to – provide the necessary offerings and models to support that kind of model at this time.”

Related: Sharing economy not fully served by insurance industry, but opportunity is there: Kovacs

Consideration must also be given to the influence of a shortening policy lifecycle, he advised.

With going from insuring assets to insuring user journeys or experiences, along with people “getting more and more comfortable being able to insure things for a short period of time – a ride, a rental home, some of your equipment or things – you might see a real move towards a shortening policy lifecycle in the future,” Ahuja noted.

Such a change would certainly have implications for insurers. “You no longer have the stability or cash flow of knowing that you’re going to have premiums start here and end here in your annual cash flow cycle,” he pointed out.

Because there is a lot of variation through the course of the year, “what does that mean in terms of how you think about your financial portfolio and how you actually manage that? How do you pool those risks? And what kind of market erosion might take place?”

Episodic insurance is one – peer-to-peer (P2P) insurance, digital intermediaries and third-party capital are the three others – of the four big items that Ahuja suggested have the greatest potential to transform insurance.

“These four, in particular, were what I found most impactful because they truly have the potential to impact the business model fundamentally and how insurance is consumed as opposed to enabling capability that may provide some level of efficiency or revenue generation or loss reduction,” he told attendees.

Consider, for example, that the insurance industry is witnessing “a tremendous amount of expansion of digital intermediaries and the role they play,” Ahuja said.

“This is about fundamental challenges to the business models of insurance,” he maintained. The expansion of digital intermediaries is part of efforts to simplify the front end – including sales and distribution – of the insurance value chain.

“What’s happened here is digital intermediaries or brokers or MGAs (managing general agents) are taking on a greater role within this value chain,” Ahuja pointed out.

“They are spending more time with the customers, they are creating new and different types of experiences through their offerings and they’re expanding their ability beyond the traditional bastions of personal home and auto into small commercial in a major way,” he said, with some using “unique business models to really captivate the consumer on the front end.”

One digital broker in the United States, for example, is looking to provide small business owners end-to-end service.

There are also so-called social brokers who identify “commonalities and trends in different user groups or customer groups,” Ahuja said. In essence, they are forming social communities of very specific groups so that they can manage that community and are able to understand its specific nuances and specific risks.

They are then “able to package that pool of customers and, as a social broker, present that pool of customers to a carrier,” pitching how the group and its risk profile might suit the carrier’s offering, he said.

“So they essentially sell or resell that community to carriers and ask them to tackle that particular community,” Ahuja told attendees.

Related: Silicon Valley Insurance Accelerator launches insurtech innovation lab

There has also been a proliferation of third-party capital, which is “about creating the environment to remove the traditional barriers of entry for new entrants to try and have a play in the insurance market,” Ahuja said.

“Traditionally, it’s been the bastion of traditional insurers to be able to say, that’s the value of our financial stability and security and risk capital allows us to play a valuable role and manage the value chain and protect all our consumers in the event of major events and risks,” he pointed out.

Beyond the four innovations unfolding within the insurance industry, though, are outside disruptive forces such as the sharing economy, self-driving cars, blockchain, machine learning, Internet of Things and big data, Ahuja said.

“I think in isolation alone – one technology alone or one innovation alone – is not going to be the key determining factor in the long term,” he maintained.

“There may be some interesting applications of the technology,” Ahuja said.

“But in the long term, it’s already about the convergence of two or three or four of these that will create the necessary scenarios, if you will, scenarios of the future that will help us think about what can insurance look like? What can your world look like 10 years out, 15 years out?”

More coverage of the Canadian Insurance Accountants Association’s Tech IT Forward event

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