Our Global Insurance Managing Partner, Eric Veron, discusses the impact of the current crisis on existing trends within the insurance industry, implications for insurers, and explains why we remain optimistic. This is the first piece in an ongoing series that will examine how changing technology and insurtech is pushing insurers to react, innovate, and do business differently.
Organisations worldwide are dealing with the implications of the pandemic; insurers too are not exempt from this introspection. Nevertheless, we believe that this crisis offers significant opportunities for insurers to engage in a renewed relationship with their customers, accelerating existing transformations that have been ongoing for years, as new ‘technology enabled’ insurance players also push the boundaries in this transformation.
We remain very optimistic about the future of insurance.
A Major Event with Contrasted Market Outlooks
Since the creation of the first insurance marine contracts in Italy in the 14th century or following the Great Fire of London in the 17th century, the insurance industry has been able to cope with large catastrophes thanks to mutualisation mechanisms and innovation in new insurance coverage. COVID-19 related losses will definitely range towards the high end, some analysts estimate the total cost to be one to two ‘Katrina’ events ($90bn in 2005), but we could argue that a major loss in a cyber-attack event in the future could surpass this too. Of course, the uniqueness of this crisis is that it is affecting all continents and all human activities at the same time.
How is the market outlook for insurance globally? In the latest SRI Sigma edition, Swiss Re estimates that life premium will shrink by 6% in 2020 while P&C remains relatively flat, resulting in an overall market contraction of 3%. Recovery is expected in 2021, mainly driven by P&C. In addition to these global figures, Asia is expected to drive most of this recovery, while mature markets may struggle more.
Naturally, the pandemic has provided evidence of the necessity for individuals or enterprises to better protect themselves against various risks, with an expected growth especially in health, life protection, business interruption, corporate liability and cyber risk segments, creating opportunities for insurers. However, the insurance intensity (the portion of income allocated to insurance coverage) may be limited by the duration of the overall economic recovery, as individuals and enterprises will have to prioritize against other spending to fund these protection schemes.
Acceleration of Existing Trends
Insurance will continue its growth, but the way to engage with clients, underwrite risks and deliver service and experience will change significantly in the coming years, pushed by new entrants and other industry comparisons.
We can summarize these trends as follows:
- insurance differentiation will be mainly driven by the ability to better integrate through Core Technology – some of this technology being increasingly commoditized – with value added expertise of insurance employees and intermediaries
- simplicity, transparency and cost efficiency will drive the way to ‘digitize’ insurance processes; too often we see just digitalization of existing insurance processes, pushing the internal complexity towards customers and intermediaries; again, this is not a new trend, but just an acceleration
- reputation, image, purpose and ESG will continuously influence the choices of customers in the future; we see some insurance companies (like MAIF in France) realigning their strategy, workforce, operating model and offerings towards those objectives
- insurance is by essence an ecosystem based business with many outside players (loss adjusters, experts, agents, brokers, medical networks, repairing networks, etc…) contributing to the insurance value chain; we expect that the ecosystem based business will continue to capture a larger share of GWP through a variety of platforms, requiring insurers to accelerate investments in open architecture technology, leveraging the API world to offer more value added services and better time-to-market.
Suggested Implications for Insurers
To integrate these trends, we believe that there are several key implications for insurers to cope with competition and accelerated behavioural changes:
- Technology will become more readily available at marginal cost, whether offered ‘on the shelf’ by data and cloud providers like GCP, AWS and Azure or by players like Ping An Connect or insurtechs; therefore, to differentiate, insurers must invest (or continue investing) at scale and speed to create impact in:
- real value added ‘advice-based’ sales to justify, in front of the customer, double-digit intermediary commissions that are being challenged more frequently by regulators, those sales being delivered virtually through collaborative technology or face to face
- ability to offer much more flexible insurance products that can adjust with life events (for example, short term coverage, consumption-based insurance, premium collection adjustment, real loyalty rewards), with clarity on what is covered and what is not
- efficient claims experience as it will be, more than ever, the critical moment of truth to deliver the promise, therefore requiring deep attention in the decision-making process, whether fully or partially digitally enabled
- manage differentiated portfolios of in force business; for example, the customer experience and service segmentation may vary depending on whether the portfolio is niche/specialty insurance vs. large scale retail
- The insurance industry processes large volumes of data and business events; to allow the right delivery of customer and brand experience, insurance operations can be significantly improved by proper usage of automation, reinforcing the advisory role of the insurance workforce, whether in service centres or in the field force
- Even with ‘advice-based’ sales, pressure in costs will continue to grow in P&C and become more stringent in Life because customers will be less willing in the future to pay for an opaque and non-flexible service; therefore, variable, industrial and ‘virtual’ workforce sourcing models might help reduce the fixed cost base, without compromising on quality and delivery of promise; this could include for example the creation of market utilities (or systems) between insurers as we see in other financial services segments or industries
- Security and data privacy will be embedded in the insurance franchise in the future; again, nothing new but certainly an incredible acceleration expected in this space.
Will Insurtechs ‘Disrupt’ the Industry?
From a gross written premium (GWP) share perspective, the current insurtech players share (ZA in Asia, Lemonade or Alan, amongst many others) remains modest even if the growth rates are impressive.
In contrast to the payments industry, where the value chain has been largely impacted by technology players, insurance, as a long-haul business, may take more time to be significantly impacted (i.e. for example more than 20% of GWP share), but new entrants may catch up with a different ‘eye’ and different set of skills compared to incumbents.
Nevertheless, we believe insurtechs are responding to the trends we have described and are pushing insurers to react in a timely manner.
In the next pieces of this series, we will provide our viewpoint on the following questions:
- Which personal insurance segments is innovation pressuring?
- Which business insurance segments is innovation pressuring?
- What technologies are at the forefront of insurance innovation?
- Where do insurtechs fit into the insurance value chain?
- Do insurtechs have enough differentiation to sustain a competitive advantage?
- What should insurers do to respond?