Insurers must jump into innovation as new tech threatens to erode traditional markets, warns Moody’s

Insurers are facing margin erosion on a variety of fronts as technology changes consumer behaviours and their future insurance needs, the Moody's rating agency has said in a new report.

Many technologies, especially around the internet of things, will be a double-edged sword, initially increasing the data about policy holders that can improve underwriting, Moody's analysts wrote. Driverless cars and wearable tech stand out as leading example.

But eventually, that same technology could reduce claims frequency and severity enough to erode the broader market for many traditional insurance products, Moody's suggested.

Insurers will be left with the much trickier insurance market for cyber risks, analysts noted.

"The spread of connected devices also brings new risks, notably those related to cybersecurity and software malfunction," the agency said. "However, these will be difficult for insurers to cover, as multiple interconnections between smart devices will increase event correlation, making severe losses more likely."

Automotive will see "significant, but gradual" contraction given that some 90% of current road accidents stem from driver error, Moody's said. The move to autonomous vehicles will render a "significant" reduction in premiums and potentially shift the business to manufacturers, Moody's warns.

That leaves retail non-life insurers in the "most vulnerable" position in the industry, followed potentially by health insurers. Moody's warned.

“To remain competitive, insurers may seek distribution partnerships with Big Tech groups, or with dominant players in adjacent sectors such as car manufacturing,” said Helena Kingsley-Tomkins, VP-Senior Analyst at Moody’s.

“But insurers risk profit margin erosion if they become reliant on their partners to generate sales and gradually lose control over their customer relationships,” she said.

Moody’s expects tech-driven disruption to be relatively gradual, giving innovative players time to adapt.

Insurers could choose to respond by seeking to manage full-fledged platform-based ecosystems, but that challenge could prove daunting with "significant upfront investments" required and "fierce competition" from all sides, analysts wrote.

Those who decide to act as "product manufacturers" selling insurance via third-party platforms will not escape the IT investments and will lose direct contact with consumers, analysts noted.