Insurers on the Brink: Disrupt or Disrupted – Deloitte Report

Article Synopsis :

The insurance industry is facing significant disruption – or is it? Traditional business models may be in jeopardy – or not? Are insurers ready to rise to the occasion in the event of the affirmative?

Four forces protect incumbents from digital distruption. This report suggests these ‘forces’ may actually be myths . . .

“Insurers on the Brink: Disrupt or Disrupted” from Deloitte serves as a call to arms for insurers lagging on emerging digital trends. Per the report, insurers need to be far more proactive and creative in responding to disruptive threats emanating not just from within the insurance market but the economy and society at large.

With digitalisation, a lot has changed in the insurance industry. Back in early 2015 the following issues were paramount:

1. Increased capital inflows were resulting in declining profitability and pricing power.
2. Products and distribution were evolving with innovative niche solutions.
3. Shifting regulatory paradigms were driving uncertainty.
4. Talent shortages to drive related industry transformations were problematic.
5. Changing technology dynamics were creating uncertainty regarding selection and strategy.
6. Rising costs and fraud were squeezing profitability

While the same basic conditions exist here a year and a half later they’ve become even more pressing. Incumbents are faced with new customer expectations and demands, fuelled by changing technology and culture, creating growth opportunities fraught with inherent risks. And the pace is unlikely to slow.

To the contrary, acceleration is more likely. Insurers, especially incumbents, comfort themselves with these four industry myths:

1. Consumer familiarity with established insurers prevents wide-scale disruption by newcomers.
2. Insurance is a complex, opaque, often misunderstood product, giving the industry’s seasoned agent and broker sales force a considerable edge over would-be alternative distribution challengers.
3. Insurers have effectively cornered the market on the data, models, and analytical talent necessary to properly underwrite and price exposures as well as facilitate risk management.
4. Since the premise of risk pooling is fundamental to the business of insurance, the massive capital reserves assembled by insurers cannot be easily replicated by new players.

Myth-busting forces include:

1. Enhanced connectivity creating new types, sources and owners of data.
2. Evolving risk-transfer options drawing new sources of capital and competition.
3. Emerging financial technology (fintech) alternatives upending insurer operating systems and capabilities.
4. Challenges to traditional ways of living and doing business raised by the sharing economy.

For the unconvinced, the report takes a deeper dive into the myths in the context of how the industry will look in five years:

Myth #1: Consumer trust in insurers will prevent disruption from newcomers.

Insurers will lose customers if they do not engage them well. Customer experience is key, especially with Gen C and Millennials. Emerging P2P companies with mobile apps and online crowd-funding disruptors have the potential to take advantage of this customer experience gap hitting traditional incumbents where it hurts. Even regulators have stepped up support for new types of insurance, capable of operating at reduced costs with increased convenience to customers.

Incumbents can improve customer experience by investing in Big Data, Analytics, Wearable Tech, Mobile apps, and Gamification capabilities.

Myth #2: Insurance is a complex, opaque, and even misunderstood product, which gives the industry’s seasoned agent and broker sales force a considerable edge over would-be alternative distribution challengers.

Really? Insurance products are commoditized and consumers will find products available via  sophisticated online systems simplifying the process. Knowledge democratization is key, with consumers empowered to get the product themselves without an intermediary. Distribution has always been a prime target of technology disruption. The recent disruptors have been aggregator websites who most definitely pose a growing threat of disintermediation and disruption over time. Consumers are into online shopping and insurance is not far behind. Robo-advisory based insurance models will be the next trend after the emergence of automated investment management services.

Myth #3: Insurers have effectively cornered the market on the data, models, and analytical talent necessary to properly underwrite and price exposures as well as facilitate risk management.

Google knows more about your customer interests and desires than you do. Automaker OEMs have more data on your policyholder driving behaviors than you do. It’s only a matter of time before these data streams converge upending auto  an other forms of insurance as we know them.

New disruptors accessing more precise experiential data could eliminate a lot of time and inconvenience from insurance processes with improved accuracy and better pricing decisions.

Incumbents, the report suggests, can minimize disruption by:

1. Harnessing IoT by operationalizing new sources of data and embracing analytics.
2. Shifting capital and personnel toward becoming an agile insurer.
3. Keeping a keen eye on the market, both obvious and not-so-obvious potential distruptors.

Myth #4:  Since the premise of risk pooling is fundamental to the business of insurance, the massive capital reserves assembled by insurers cannot be easily replicated by new players.

Every insurance executive knows more customers are moving towards capital market bonds such as catastrophe bonds as opposed to buying traditional policies. Aon Benfield reports the total alternative capital market increased by 8% for the nine months ending September 30, 2015 to $68.8 billion, representing about 12% of global reinsurance funds.

Securitization threatens many basic insurance segments. P2P models also threaten superior products with better risk profiles. Look for insurers to tap M&A as a hedge against these rising trends.

The bottom line is: Disrupt or be Disrupted. Insurers can start by reinventing their business models by thinking like a potential disruptor. As a new challenger what are the disruptive options? Here’s a helpful framework:

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