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The impact of the metaverse on the insurance industry
2022-07-15
Introduction: The six components that make up the metaverse
In the article ‘Demystifying the metaverse’ PwC defines the following six components that make up the metaverse:
- Economy
- Interoperability
- Governance
- Identity
- Experience
- Persistence
While the metaverse has the potential to provide novel experiences not available in the real world and give rise to a new economic sphere, governance—the development of a unified set of rules—is also essential for this new virtual space. In this report, we focus on these three concepts—experience, economy and governance—to examine the potential impact of the metaverse on insurance companies (Figure 1).
1. The potential impact of the metaverse on insurance companies
Each user experiences the metaverse through an avatar, which is a kind of ‘second self’ used to represent the user in a virtual space. Insurance companies will be able to use their own avatars to approach customers’ avatars, and provide experiences free from the physical constraints of reality (for example, simulated experiences such as fire, natural disasters or hospitalisation).
By a ‘new economic sphere’, we refer to a booming virtual economy where blockchain-based transactions involving virtual assets such as cryptocurrencies and non-fungible tokens (NFTs) occur more frequently and at higher volumes than ever before, eventually reaching a scale equivalent to that of financial transactions in the real world. In this future economy, digital data representing virtual land, buildings and other property will be considered a regular part of an individual’s economic assets, which will lead to the need for such assets to be insured. And insurance companies will also be able to add NFTs and cryptoassets to their own investment portfolios.
In this article, we examine the business opportunities that the increasing pervasiveness of the metaverse could bring to the insurance value chain, as well as the capabilities that insurance companies will need to fully leverage such opportunities to enhance customer value.
2. Business opportunities that the metaverse brings to insurance companies
The pervasiveness of the metaverse and the corresponding increase in social and economic activities conducted via avatars will create new customer needs and require insurance companies to take a different approach to serving their customers. The metaverse will accelerate the digitisation of administrative procedures from contracting to, and asset management in the form of NFTs and cryptoassets may become more common. Figure 2 below shows the changes we expect the metaverse to bring to each aspect of the value chain.
A. New risks posed by the metaverse and corresponding insurance products (primarily in the non-life insurance field)
Existing insurance products primarily cover damage caused by natural phenomena that are difficult for humans to control, such as typhoons, earthquakes and illnesses. Virtual spaces, on the other hand, are created by humans, and thus bring with them the following man-made risks.
a. Attacks on the metaverse by malicious third parties
Customer data managed by a platform provider may be stolen or lost as the result of malicious hacking, thereby damaging the customer’s economic value in the metaverse. Similarly, the malicious use of avatars could result in risks such as harassment and reputational damage.
b. Unintentional infringement of real-world rights
Since the sharp rise in popularity of NFT transactions in 2021, a wide range of NFTs have come to be traded, including NFTs representing digital art and music as well as items that exist in real space. NFT technology records transaction history data, including the object, transactors, and transaction amounts, as well as the data itself, on a blockchain. However, because the legal positioning of this technology is still largely unclear, litigation cases have arisen in relation to infringement of trademark and intellectual property (IP) rights. We expect that legal positions on issues such as the permissibility of activities conducted in virtual spaces that infringe on real-world rights will gradually be defined through court cases and other legal developments.
c. Damage caused by unexpected events
c1. Failure of a platform or service provider to provide the expected value to customers
There is a risk that avatar, NFT data and other assets managed by a platform provider could be lost as the result of a failure resulting in server downtime. There is also a risk that paid events scheduled to be held in a virtual space may be cancelled for the same reason. In both cases, the platform or service provider faces the risk of having to compensate customers for economic damages.
c2. Incidents caused by user negligence
With currently available technology, users must wear VR goggles in order to have a truly immersive experience in a virtual space. This introduces the possibility that they may not be fully aware of risks that exist around them in the real world, and may injure themselves or others as a result. Similarly, if a user unintentionally leaks confidential information while immersed in a virtual space, they may be held liable for damages.
As metaverse technology continues to gain popularity and the number of metaverse users increases, we believe that these risks will become an even more prominent issue. In theory, insurance companies should be able to monetise this business opportunity and make a profit by selling insurance products that mitigate these risks and cover related damages. However, as legislation in many of these areas is still being developed, insurance companies will need to determine which of these risks can currently be covered and which cannot (Figure 3).
B. Operational transformation from sales to insurance payouts
New experiences in virtual spaces and the spread of economic activities powered by blockchain technology will likely lead to new product development, and with it the operational transformation of various insurance operations such as sales, premium billing, contract management, and claims and payouts.
a. Sales
The main actors in the metaverse are avatars. Through their avatars, potential customers participate in events within the metaverse and interact with the avatars of others. Going forward, insurance companies are therefore likely to conduct sales activities directly with avatars a number of ways.
Firstly, insurance companies could use the metaverse as a venue for marketing and branding activities to raise brand awareness of their companies. For example, the absence of physical constraints in a virtual space makes it possible for them to try new and innovative marketing activities, such as placing ads in mid-air. Branding activities in the metaverse may be also be a more effective approach to reaching younger generations, many of whom are drawn to the game-like aspects of metaverse platforms.
Secondly, ‘immersive experiences’ in the metaverse may provide an opportunity for customers to gain a deeper understanding of the value of insurance products. Until now, insurance salespeople have simply explained to potential customers the significance of insurance as a contingency plan, by using statistical data and their own professional experience. In a virtual space, however, insurance companies could make it possible for people to experience situations where insurance would be used, allowing them to better understand the value of insurance. By allowing people to experience the simulated impacts of certain events that could occur to them, such as car accidents and fires (non-life insurance) or illnesses (life insurance), insurance companies can provide their potential customers with the opportunity to realise and recognise risks that they were previously unaware of. In order to put this into practice, however, insurance companies will also need to resolve practical issues from the perspective of customer protection—for example, taking measures to ensure that these simulations do not cause the customer emotional harm.
Finally, all customer behaviour in the metaverse is recorded as data. If insurance companies were able to analyse an avatar’s activity history, purchase history and relationships with other avatars, this may enable them to offer products to protect the user against risks in a more natural way. However, this type of corporate behaviour may not be appropriate from a personal data protection perspective. In an ideal metaverse state, individuals, rather than a particular platform provider, would have discretion and control over their own data. Therefore, insurance companies will need to closely monitor developments in legislation and platform provider policies related to personal data protection.
b. Contract binding, billing and collection, contract management and claims payment
Insurance industry players have been working to digitalise their administrative procedures for some time. As they start selling insurance products to cover risks that users face in virtual spaces, however, they will also need to digitise their processes from contracting to claims payment, as well as their sales activities. For example, in a world where insurance policies cover digital assets, contracts are issued by using NFT technology, and premiums and payouts are paid by using cryptoassets, all matters related to such insurance products will need to be converted to data, and tasks that can only be performed in a physical space may almost cease to exist. And with some insurance companies constructing digital twins of physical spaces in the metaverse to train their employees in damage investigation, we believe that an increasing number of operations that used to be carried out in physical spaces will be able to be handled in virtual spaces. In other words, the emergence of the metaverse and related technologies will further accelerate the digitisation of insurance companies.
C. Cryptoassets as a means of asset management
With the evolution of the metaverse, the ownership and transaction of assets are also developing to increasingly make use of cryptoassets and NFTs. Overseas insurance companies are already beginning to view cryptoassets as an investment vehicle. For life insurance companies focusing on alternative assets abroad, crypto investment may be worth considering.
In Japan, however, it is currently very difficult for Japanese insurance companies to invest in cryptoassets, due to the Financial Services Agency’s Comprehensive Guidelines for Supervision for Insurance Companies, which state that ‘the acquisition of crypto-assets by an insurance company group must be within the minimum necessary range.’ Insurance companies will therefore need to pay close attention to legislative developments and establish a strategy to get off to a fast start once crypto investment becomes possible.
3. Essential capabilities for providing value
As discussed in the previous sections, the more omnipresent the metaverse becomes in our society, the more touch-points insurance companies will have in the metaverse. These touch-points include sales activities that can now be performed without the physical constraints of the real world, an increasing number of investment opportunities, and markets for insurance products and services that cover risks faced by users in the metaverse.
However, in order to work with the metaverse and provide value in this new space, insurance companies must first acquire the right capabilities.
Importantly, insurance companies must be capable of integrating their own management strategies with trends in metaverse-related technologies to define what they need to achieve. Similarly, they must also possess the capability to utilise metaverse-related technologies and knowledge in their own value chains based on a defined strategy centred on improving customer value. These new value chains will necessitate transformation within the following corporate functions:
A. IT (development and cybersecurity)
At this stage of the game, it is unlikely that any insurance company will build a metaverse platform of its own. Therefore, in order to take advantage of the metaverse, insurance companies will need to work with the platform providers that operate such virtual spaces. However, insurance companies will still need to have a minimal necessary understanding of the resources, processes and costs that they will need, for example, to open metaverse branches, and to use both internal and external resources to achieve their own requirements and securely utilise the metaverse for their businesses. To achieve this, they will need at least to set up IT divisions and other related divisions with the necessary capabilities.
B. Finance, risk management and compliance
For insurance companies to engage in transactions in the new economic sphere of the metaverse, they need the capability to properly account for cryptoassets, NFTs and metaverse data. As cryptoassets and NFTs are subject to high price volatility, insurance companies will also need to set up an appropriate risk management framework to ensure that such volatility does not undermine key performance indicators such as their solvency margin ratio. Legal divisions may also need to actively collect information and be responsible for providing information across the company in order to keep a close eye on the state of legal developments and secure business opportunities.
C. HR (remote work and training via the metaverse)
The metaverse has the potential to benefit not only the customers of insurance companies but also their employees, by supporting flexible working styles and skill acquisition. The metaverse is attracting attention as a new venue for remote work, and various platform providers are hoping to be able to provide virtual offices. A survey conducted by PwC Consulting also shows that employees who undergo immersive training within the metaverse learn more than those who experience more traditional-style training. HR divisions should, therefore, consider introducing such new ways of working and training in the future.
For an insurance company to understand the changes and business opportunities brought about by the metaverse, it is essential for them to have a broad understanding of their company-wide capabilities, and to link these capabilities to increased customer value. This knowledge can then feed transformation activities that are not bound to individual divisions, but that are broad in reach and innovative in approach (Figure 4).
The PwC Japan Group's metaverse-related initiatives
The PwC Japan Group has already begun to establish a strong track record in both internal utilisation of the metaverse, and in using the metaverse to support our clients’ business development using the metaverse.
- A metaverse entrance ceremony with approximately 400 new recruits participating as avatars
- Specialised consulting services to help businesses leverage the metaverse
- Joint business development project using the metaverse with a major non-life insurance company
- Joint business development project using the metaverse with a leading staffing company
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