Insurance companies will need a greater focus on risk management to survive

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Insurers will need to start providing more risk management services or risk losing 40% of their premium income, according to a joint project by Capgemini and Pegasystems which addresses how insurers can survive in a heavily risk-managed future.

Traditionally, insurance is predicated on the premiums of the many paying for the claims of the few, without knowing who those few are going to be. But new technologies are creating a level of foreseeability around risks, making it possible to understand individual risks in much more detail, to anticipate where claims are likely to happen and to use this knowledge to prevent them from happening.

However, this new reality will require a transformation within insurance companies, says Christopher Ling, Capgemini vice-president of insurance.

“Insurers will have to change their mind set from collecting premiums and renewing contracts every 12 months, to continually being involved and partnering with key clients. Brokers have always done that much better and over the past 20-30 years the big brokers have gotten much more into the risk management space.”

Now it is time for insurers to also step into this space, or risk losing significant amounts of their premium income.

As better understanding and mitigation of individual risks will result in fewer claims, insurers could lose 20-40% of their premiums, says Tony Tarquini, industry principal of insurance at Pegasystems.

“So they could either sit back and let their business shrink, or they can provide risk management services to their clients and have a continuous dialogue with them by receiving data, monitoring it and helping to control the risk, and replace that lost insurance premium with risk management premium,” he explains.

“If they don’t, brokers or technology companies will step in because all the smart money is being invested into that distribution and risk management channel within the insurance industry. There’s more money into InsurTech at the moment than any other marketplace in the world and it’s all going into the interaction with the customer piece.”

However, Capgemini and Pegasystems think this transformation will not be easy for insurance companies. Ling says: “That ability to change, to reinvent themselves, to completely change corporate structures from what have been traditionally stable, resilient and robust corporate structures that move quite slowly to ones that are much more nimble and agile is going to be quite hard. Some will survive, some won’t.”