Insurance, the way it is meant to be is just getting started

The future is inevitably shrouded in uncertainty, but there are many areas where technological and other developments are profoundly reshaping our way of doing business.

The insurance sector now looks a likely candidate for particularly transformative changes in the years ahead, not least because of a noticeable increase in the scale and diversity of risks.

The COVID-19 pandemic has heightened risk awareness about personal health, cybersecurity and supply chain disruptions.

In the Gulf, these shifts promise to refashion a sector still amid convergence-style growth. To date, insurance provision has revolved heavily around mandatory policies, and critical metrics lag behind the West.

According to Swiss insurance group Re estimates, insurance penetration — calculated as total premiums as a percentage of gross domestic product — reached 1.5 percent in Saudi Arabia and 3.3 percent in the UAE in 2020.

It pales in comparison to 7.4 percent globally, 7.9 percent in Europe, and 11.8 percent in North America.

Insurance matters

Insurance density — or per capital premiums — in Saudi Arabia reached $281 in 2020. The non-life total is $273 compared to a modest $8 life density. In contrast, the UAE’s total reached $1,291, rounded off from $1,041 in non-life and $251 in life.

The global average was $809, which comprised $449 non-life and $360 in life. The figures for Europe were $3,234, $1,341, and $1,893, respectively.

Changing perceptions of risk today entail far-reaching implications for the insurance industry. The growing global sensitivity to climate change is critical in the Gulf due to its extreme heat and aridity. In addition, much of the population resides in low-lying coastal areas with apparent vulnerability to extreme weather events and the prospect of rising sea levels.

Swiss Re estimates that worldwide natural disasters delivered over $2 trillion in losses in 2011-2020, of which only over a third was insured. Even as the Gulf population is young, increased longevity and gradually declining fertility mean it is now aging quite rapidly. This entails particular challenges in a part of the world with a high incidence of noncommunicable diseases such as diabetes and cardiovascular conditions.

COVID-19 has served as a potent reminder of other health-related risks. The evolving multipolar international order comes with new global trade and investment challenges. And while technological change promises much good, its growing remit comes with new vulnerabilities.

The turnaround in technology

Consumer and business behavior is also evolving. The transition to a society of users rather than owners appears to be accelerating worldwide, necessitating new insurance solutions as opposed to the traditional cover provided for assets. The growing adoption of robotics means that the role of human risk is diminishing. The internet of things will connect even more conventional assets and individuals through increasingly common wearable and in-car devices and other sensors, generating unprecedented amounts of data.

Technology is transforming insurance throughout the value chain. The traditional insurance problems of measuring and pricing risks are being handled more efficiently and cost-effectively while making fraud prevention easier.

The wealth of data and analytics drawing on artificial intelligence and machine learning will increase speed and drive down costs, partly thanks to more efficient risk segmentation and pricing.

Automated underwriting will make insurance provision almost instantaneous and ongoing. The B2C insurance market is likely to become increasingly fragmented and competitive rather than based on established relationships between customers and firms. Also, claims processing will be largely automated and much faster. Sensors and drones can provide evidence in real-time.

Changing dynamics of the industry

The role of insurance as a stand-alone service offering is already diminishing. Insurtech is accelerating bundling with other products and services, a process led by the rise of embedded car, travel, and property insurance.

Insurance will likely become more and more an integrated layer of different products and services which is available while such services are consumed, and hence no longer typically through the standard cycle of annually renewable policies.

These insurance elements of products will be increasingly offered on a B2B basis while the client interface becomes more diversified and less reliant on traditional insurance companies.

Provisions are likely to be almost entirely digital, fungible and personalized. Less product-based, it will be designed to cater to particular behaviors and events.

Insurers will focus increasingly on counseling their customers about avoiding and managing risk rather than selling traditional risk cover.

Health insurance is likely to prioritize preventive and precision medicine and leverage genomics and connected health to better profile customers and more effectively manage their vulnerabilities.

While data protection can curb the information available to insurers, customers are likely to be incentivized by insurers to share data that can deliver more efficient outcomes. Similarly, insurers will reward people for engaging in behaviors that improve their risk profiles.

Retirement security is also likely to increase in importance in an aging society where more and more people will likely look for supplementary cover for their government pensions. New personalized, integrated solutions may offer a way forward for a growing customer base.

Embracing the potent wave of change reshaping insurance offers an exceptional opportunity for the Gulf region. A stronger, more diverse insurance sector not only provides security in the face of a multitude of risks. But it also brings financial security to individuals and can enable the further rise of an essential class of institutional investors to power the development of other sectors.