PA Consulting spoke with Fredrik Wahlström, Head of Strategic Planning at Folksam, and Lars Engvall, Head of FutureLab at Folksam, about changes in the insurance industry, the reality of artificial intelligence (AI) and whether the incumbents are poised for success.
“We care about you” is Folksam’s well-known slogan, and it’s a message that’s reflected in their technical innovation work, such as testing children’s car seats or types of house paint. Their purpose is to help individuals choose safe, appropriate and risk-reducing products. Fredrik Wahlström, Head of Strategic Planning at Folksam, explains: “We want to incorporate risk prevention into our customers’ behaviour.”
It is not surprising, then, that one of Folksam’s focus areas is understanding customers’ product cycles. Folksam aspires to incorporate innovation in the whole value chain, from the customer meeting to the claim management. Lars Engvall, Head of FutureLab at Folksam, explains: “We at Folksam have a robust perspective of the customer’s value chain, making sure we focus on end-to-end service.”
Insurance in Sweden remains relatively traditional, compared to sectors like travel and music, where distribution channels have become almost entirely digital. Folksam believes that distribution channels for insurance are changing, although human contact via telephone is still vital. “Even though our own customers have started to move away from traditional channels, a substantial amount still prefer phone service,” says Fredrik.
"Even though our own customers have started to move away from traditional channels, a substantial amount still prefer phone service."
Head of Strategic Planning at Folksam
But just because a customer wants to speak to a human to discuss insurance doesn’t mean they want to buy over the telephone. Lars points out a growing trend where customers that compare different services or products online, or discuss products on the telephone, then want to buy insurance digitally. “We are responding to these new preferences by developing a service that enables our customers to do so, fast and simply,” says Fredrik.
Knowing your customers and understanding their touchpoints is the key to developing good products. “When it comes to these new types of customers, it is important to understand that they do not want to open their application every day to keep track of their insurance policy,” Lars explains. Instead, they will most likely check the app in those moments when they’re wondering if they’re covered or not. Both Fredrik and Lars agree that customers in different age groups have different preferences and need distinct types of insurance. While students might want to cover a few products, a couple with children living in a house probably wants to cover their whole home, including all its contents. Tailoring your insurance policy offering to the individual is vital. Personalisation isn’t limited to the type of product.
Lars points out: “If we know that a customer is a skier, we can take a role as an advisor and recommend a suitable car and appropriate winter tyres to promote product choices that enable risk-reducing behaviours.”
“Insurance policies are, in general, a jungle, and we need to change that perception,” Lars continues.
"Insurance policies are, in general, a jungle, and we need to change that perception."
Head of FutureLab at Folksam
Insurance companies need to change traditional thinking about where and when they provide service to customers. Fredrik says: “It is all about the ecosystem now, and finding the right place in it. We need to rethink and focus on what it is that makes us super relevant from the customer’s perspective.” Should insurance companies prioritise customer service during the claims process or when a customer signs up for a policy? “The customer is the one that needs to decide what he or she values the most,” says Lars.
However, both Fredrik and Lars believe that it’s Folksam’s response to an incident that may matter the most when it comes to gaining new customers. Fredrik argues: “It would be even better if Folksam were able to prevent the incident from happening by sending a plumber when there is a sign of a potential risk or damage to a home.” When the incident has already happened, it’s vital as a policyholder to manage the situation as conveniently as possible.
Incumbents aren’t losing policyholders yet
While InsurTech is on the rise, few of the incumbent players are feeling a sense of urgency. One of the reasons is simply that they aren’t losing policyholders. “The competitiveness between the incumbents today is healthy and no one is killing the others,” Fredrik explains. This in turn may be slowing down the development of the insurance industry. There is a danger that if the incumbents are slow to react, digitalisation will create bigger opportunities in the industry that more nimble players can exploit. Fredrik believes that Folksam needs to create a burning platform to avoid the risk of getting behind the competition. As Lars puts it: “When everything is on edge, that is when change is motivated.”
Despite the current industry complacency, there’s some movement. Like several other financial institutions, such as Nordea and SEB, Folksam has set up a dedicated innovation centre, called FutureLab. The aim of FutureLab is to develop products and test ideas. Lars explains: “The lab allows Folksam to test and fail fast without impacting our actual clients.” He points out that Folksam suffers from to slow speed of change, often due to its legacy technology systems, like other giants in the market. However, Folksams mindset is set to an agile way of working and they’re creating a set-up that allows failure. Lars adds: “The aim is to test small things quickly so we can scale up and benefit from the economies of scale.” FutureLab’s goal is to succeed with one in 15 test projects.
AI gives a competitive advantage to incumbents
There’s much hype about using artificial intelligence (AI) in the market, but not much reality. According to Lars and Fredrik, there’s a general belief that almost anyone can incorporate AI in business models, but this overlooks the high competency requirements that are needed in the field. “What distinguishes the incumbents from the new entrants is their huge amounts of data, in hand with sufficient capital and resources,” says Lars. Their access to resources give incumbents a potential advantage in the AI race.
When taking a hard look at the existing InsurTech applications which use AI , Lars argues: “They are not super advanced and are relatively simple to imitate, which gives the incumbents another chance to chase the new entrants.” Incumbents have the financial power, the in-house expertise and huge amounts of data to enable advanced AI solutions, but need to find ways to incentivise change within slow-moving, large organisational structures.
AI could be a key tool for Folksam to simplify and personalise the customer experience. “Customers are asking for personalised advice, which basically could come from algorithm-driven bots rather than a human,” explains Lars. He believes that in most cases, the customer probably wouldn’t notice the difference between the two. Fredrik argues that customers shouldn’t need to search for their insurance policy information. They should be able to ask their specific question digitally, either orally or in writing. “Insurance policies are, in general, a jungle, and we need to change that perception,” says Lars.
Folksam is working on making insurance less complicated and more accessible to customers by using AI. For example, if a customer has a motorcycle, they should be able to ask if it’s included in their policy or if a different policy would be more suitable to their situation. Fredrik explains that in general it’s easy to compare the prices of different policies, but it’s much more complicated. “When everything is on edge, that is when change is motivated”, says Lars.
"When everything is on edge, that is when change is motivated."
Head of FutureLab at Folksam
Internet of things (IoT) will change the insurance business
As the sophistication and ubiquity of IoT grows, incentivebased insurance policies are becoming more prominent. IoT data is widely seen to personalise insurance policies and reward people for less risky behaviour. Lars reflects that insurance companies must decide what outcomes they want to achieve. Some of the newer players within InsurTech are advertising lower premiums based on this kind of technology, for example in car insurance. This could have the effect of moving low risk drivers to InsurTech companies, leaving incumbents with a pool of higher risk drivers. However, if technology can be used to lower risky behaviour in all drivers, then the entire industry, as well as society could benefit.
Lars says: “It all comes down to what behaviour we want to enforce and how we go about that.” He believes that wearables and IoT are here to stay, along with the associated changes in the industry: “We are heading towards a proactive way of working and moving away from the reactive approach.” IoT also provides opportunities for different kinds of partnership and collaboration. Soon, Lars and Fredrik expect Folksam to work with external partners in areas such as self-driving cars.
Technology and new business models are driving change in the insurance industry, but it’s still early days when compared to other areas in the financial sector. Profitability, strength in capital, competence and data accessibility position the large incumbents like Folksam well. However, as we’ve seen from other industries transformed by digitalisation, profit today does not ensure profit tomorrow. Insurance companies can’t afford to be complacent. There may be barriers to entry for small start-ups, but there are international players out there with the power, ability and willingness to disrupt any profitable industry. So, the big question is when the appetite for the Swedish insurance market will be strong enough for these disruptors to make a move.
Explore further insights on InsurTech and RegTech in our latest publication Next Wave of FinTech