Insurance: Are We a Commodity Yet?
Insurance Experts' Forum, April 26, 2011
Insurance, like any other industry, wants to thrive and survive—and that means continuing to employ lots of people to do meaningful work. Yet one has to wonder—in an age of increasing automation—how much longer we’ll need lots of people to do that work.
One of the fears I hear voiced by some in this industry is that once our systems have become sophisticated enough to compute the variables on any and all risks, insurance will become a “commodity,” which is to say, a static product whose only changes are made up front in nanoseconds by very sophisticated computers. Some already believe that auto insurance, for example, has gone a long way toward being a commodity, and some have tried to set up online services that will automatically do the underwriting and crank out the premiums based on customer input.
Is this our future? Are our services to become mere “things” like gold, silver and (shudder) pork bellies? Will our products be casually swapped back and forth like lunches in 4th grade? If we take current trends to their logical extreme, the answer would seem to be in the affirmative.
It takes no leap of imagination to envision that, eventually, just about every variable related to insurance customers will have been programmed into expert systems similar to IBM’s Watson, which allegedly defeated human Jeopardy! champs at their own game. Once that happens, anyone who wants to buy insurance will simply answer questions (probably online), and have the computer spit out the resulting premium. Very few, if any, humans will be needed to complete the process.
But the technology to do what I have described already exists today, so the real question is: Why haven’t we done this yet? The answer is, simply: We don’t want to. Take the online aggregator sites that seek to deliver auto insurance quotes. My own research has shown that, using different sites, the same input will result in different premium outcomes, depending on a wide variety of factors, including the pricing policies of the companies themselves. Yet in a perfectly automated world, any site should yield the same premium quotation.
But we do not sell pork bellies at so much per ounce or pound or ton or dozen or gross. We sell services that are unique to each individual, and we seek to be better at doing so than our competitors. That’s the reason our current “automated aggregators” come up with different quotations based on identical input. It’s true that all companies and all aggregators could agree on pricing schemes that would account for just about everyone in the potential client base, but we really don’t want to do that, because that really would make us a commodity. In that case, what would be the point of having many different insurance companies that essentially sold the identical product? Other than playing games with profit margins, what could insurers possibly do to differentiate themselves?
If ours were a worldwide company, we would have to build an expert system that would account for some 6.8 billion variations (to match the world population). But it is probably safe to say that no one will undertake that particular IT project because, since the world population doesn’t stop growing, the project would never be completed.
More than that, however, we want to survive as profit-making entities that deliver an essential service. The fear of becoming a commodity may grow as the sophistication of our expert systems grows, but it seems unlikely that insurance, at least, will ever be completely commoditized.
Meanwhile, would anyone like to trade a ham sandwich for my peanut butter and jelly?
Ara C. Trembly (www.aratremblytechnology.com) is the founder of Ara Trembly, The Tech Consultant, and a longtime observer of technology in insurance and financial services.
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