Personal Lines: Increasing Digitalization Brings Fraud and Identity Challenges

Personal Lines: Increasing Digitalization Brings Fraud and Identity ChallengesThe frequency of customer interactions in personal lines has made these insurers fast adopters of technology, both to drive customer experience and to improve their own efficiency and profitability. While it is ahead of other sectors, COVID-19 has led to dramatic changes in personal lines, necessitating a revisit of current practices.

Distribution Trends

Integrating point-of-sale systems with multiple insurers’ core systems via APIs is accelerating direct sales growth. Direct auto insurers such as Progressive and GEICO are partnering with other insurers to offer homeowners, umbrella, and other coverages through their direct channels.

In addition to direct distribution, insurers are using other types of outlets such as banks, workplaces, associations, and car dealerships to access potential policyholders. Car manufacturers, dealers, and startup companies have been offering car “subscriptions,” which allow the use of cars for monthly fees — including insurance, maintenance, and roadside assistance — as alternatives to leases or purchases. Insurers are also experimenting with embedded insurance, using APIs to offer insurance at the point of sale or as part of ridesharing platforms.

The Internet of Things: Apps and Social Media

Insurers are white-labeling products from companies with specialized capabilities or expertise, such as American Integrity Insurance Company offering Centriq’s Home Platform App. The app alerts homeowners to recalls and enables them to catalog and manage appliances, equipment, and systems. It also offers maintenance tips and provides access to how-to guides, links to Amazon for ordering parts, parts and accessories guides, and online user manuals through a partnership with Hartford Steam Boiler.

Increased Fraud

As is common with any economic downturn, application, claims, and underwriting fraud have increased significantly. Some criminals are taking advantage of data pre-fills for applications, providing a small amount of data, obtaining even more from pre-fills, and turning around and using that data to falsely claim unemployment insurance.

Heavy digitalization has many advantages for insurers, but they must also make investments in fraud detection and prevention and identity verification. Personal lines insurers are investing most heavily in fraud solutions for the service and claims functions. A multilayered approach to fraud detection and prevention and identity verification is required. Aite-Novarica Group has addressed the issue in its report Insurance Fraud: Rethinking Approaches in the Digital Age.

Increasing Digitalization

In core systems, Aite-Novarica Group sees greater adoption of headless implementations in the personal lines space, where the insurer provides the user interface for agents and consumers on top of a vended solution. Insurers are developing new digital products with separate expense ratios, pricing algorithms, marketing, and self-service capabilities. Most of these new product offerings do not offer paper document delivery as an option.

Insurers and vendors are moving toward building architectures based on microservices instead of vended solution web services and APIs. Vendors that traditionally have focused on document creation and management, e-commerce, or marketing automation are positioning themselves as providers of portal capabilities. Low-code digital experience platform providers (DXPs) are also putting themselves forward in this space.

Mobile and Telematics in Personal Auto

Mobile applications are increasingly common in personal lines, with mobile accident checklists, agent locators, and claims submissions now considered basic capabilities, though consumer adoption is far from universal. Less common capabilities include capturing application information from photos of drivers’ licenses, real-time viewing of repairs, support for text to pay, and video chats.

Aite-Novarica Group estimates current telematics penetration rates at approximately 6%-8%, though policyholder adoption can vary substantially between insurers. Adoption is expected to increase slowly but regularly over the next several years. Insurers are seeing increased interest in telematics-based, pay-per-mile programs as COVID-19 continues to curtail driving activity. Some insurers have begun to partner directly with auto manufacturers to share telematics data and offer policies to drivers.

The Impact of COVID-19

Positive effects include the fast-tracking of digital initiatives that might have encountered institutional resistance before COVID-19. Reduction in business activity, claims frequency, and premium volume meant that insurers had to revisit existing models and their underlying assumptions. Claims frequency may be returning to pre-pandemic trends, though some observers note the duration and timing of driving is changing, particularly in urban areas. Hybrid work and remote work may explain some of the change.

Recent Financial Trends

A.M. Best reported improving personal auto profitability, thanks to an increase in remote work and shelter-in-place orders, with a 2020 pure loss ratio of 55.9 compared to a 2019 pure loss ratio of 64.6. Homeowners/farmowners insurance saw an 8.5-point increase in pure loss ratio between 2019 and 2020 because of higher-than-average catastrophe losses. Personal auto claims frequency declined, though severity has increased due to increased medical and repair costs, as well as some drivers taking advantage of the decreased traffic to drive faster, resulting in higher fatalities.

Technology Priorities

Personal lines insurers are investing in insuretech startups to accelerate learning and diversify R&D efforts, using AI to speed the claims process, deepening their knowledge of the customer, reducing earnings volatility through analytics, and improving self-service capabilities. Core systems remain a high priority to establish a base for future capabilities.

Read Aite-Novarica Group’s report Business and Technology Trends: Personal Lines for an in-depth look at the trends in this space.

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