Insurance firms are facing increasing competitive pressure on all fronts due to the emergence of a number of insurance technology (insurtech) start-ups, according to a report.
With the integration of technologies like artificial intelligence, blockchain and drones entering the insurance mix, the sector is being forced to rethink its model.
The World Insurance Report, published Wednesday by consulting giant Capgemini and non-profit industry body Efma, found that nearly one third (31.4%) of customers relied on insurtech solutions - either exclusively or in combination with an established insurance company.
"Customers are seeking more digital touch points for convenience, as customers experience in their daily lives that degree of personalization," Keith Webb, vice president at Capgemini and co-author of the report, told CNBC via phone call Tuesday.
"And the insurance industry can't actually lag behind, although I think that it still is lagging behind other sectors. But certainly it's waking up to the fact that working in partnership with more insurtech firms - working in partnership with technology firms generally - through their innovation labs now which are fairly common, is definitely enabling more rapid, and more innovative engagement models with customers, that take them into that personalization stage that really customers are beginning to expect."
There are several accelerator programs such as the U.K.'s Startupbootcamp and Germany's Allianz X (part of the Allianz group) which mentor insurtech businesses and help them scale up.
Insurtech, an offshoot of the financial technology (fintech) sector, is a rapidly evolving movement aimed at simplifying and improving the efficiency of insurance.
But the report also found that more traditional insurance channels still found favor with many consumers. Out of the 8,000 consumers surveyed by Capgemini and Efma, 46 percent said mainstream insurance firms performed better than insurtech vendors at security and fraud protection, while 44 percent said they performed better than insurtechs at brand awareness.
Trust was also relatively low as a whole for the industry. Although mainstream insurance businesses again topped insurtech in this regard, with 40 percent of customers saying they trusted their insurers, and only 26 percent saying the same of insurtechs.
Capgemini's Webb said that incumbents (established insurance firms) tended to have better customer relationships and financial capital than insurtechs.
"The factor though that is a drag on customers is the fact that the incumbents currently do have very strong balance sheets, they have been regulated, their brands are well known, there is a degree of trust that they still have - all of those are major assets," he said.
Last week, accounting giant EY said it planned to launch the first blockchain platform for the marine insurance sector, in collaboration with Microsoft, A.P Moller-Maersk and other companies.
But he added: "I think that drives them towards working much more through this whole collaboration. I think the model is increasingly moving to want more and more collaboration."
Consensus on industry-wide collaboration
The conclusion of the report pointed towards more collaborative efforts rather than direct competition to improve the efficiency of the sector.
The vast majority (75%) of senior insurance executives interviewed by the two organizations said that developing their own insurtech capabilities would help them meet demand.
Webb added that, despite the fact that insurtech start-ups struggled to make their long-term business both scalable and sustainable, they have still been "majorly disruptive".
"I think the insurtechs have been majorly disruptive, because when they do come in with their new models, they have a different pricing structure, as well as different experience. So I think when they come into play, they're highly disruptive on the industry," he said.
He added: "The market is maturing to realize that it's both the innovation and the challenge the insurtechs bring - the bravery if you like to exploit some of the emerging technologies - with the more mature firms with established customer bases. And bringing them together seems to be the optimal combination."
According to the report, AI, blockchain and drones were among the driving factors of the "insurtech revolution".
"The continued reliance of consumers on digital technologies that support mobile apps, social networking, on-demand services and the like makes it clear that the mass market has entered a new phase," Vincent Bastid, secretary general at Efma, said in a press statement Wednesday.
"The insurance industry serves the masses and must adapt to the new terms of engagement. Collaborating with insurtechs is an optimal way of incubating and accelerating digital innovation."
Drones, analytics could have role to play in disaster relief
Report author Webb said that insurtech could have a role to play in reducing the losses caused by disasters such as Hurricane Irma.
"I think there's the possibility of insurance playing increasingly, especially in these kinds of disasters, a more proactive, value-adding community societal system," he said.
Losses forecast by risk modelling firm AIR Worldwide were initially estimated to total up to $65 billion. This projection has since been reduced to $20-40 billion.
Webb said that the knowledge of which areas Hurricane Irma was going to impact could have been combined with drones and analytics to reduce risk to the industry.
"The ability therefore to fly over those areas before it hits, and then fly over them after Irma's gone - it's fairly devastational, I accept that - but the ability then to use those and basically be proactive in finding and getting compensation and getting relief is very plausible, but probably has not been done," he said.
Webb added that the availability of such technology was present, but "not quite (being) deployed yet".
