The US Market

The market

As over 70% of TDI subscribers are based outside the US, we’ll kick off with a primer.

The US insurance market is by far the largest in the world, representing a quarter of total global premiums. The P/C (nonlife) sector consists primarily of auto, home, and commercial coverages, and the L/H sector consists primarily of life insurance and annuities.

Of note, with almost 1.4 billion people and double-digit insurance growth rates forecast over the next five years (compared to 2% for the US) China may assume the number two spot on the global list as soon as 2019, possibly overtaking the US within ten years. Interested in following market developments in China? See our China in Focus Newsletter here

The players

The US insurance market is top-heavy, with over 50% of premiums in both P/C and L/H written by the top twenty carriers, and about 90% of premiums written by the top hundred carriers (of about 5,800 total). The market is also mature, with larger incumbents, a.k.a. Big Insurance, dominating the action for the better part of a century:

The Disruptors

The US insurance market will almost certainly look different in ten years due to three major disruptive forces:

1. The Digitization of Risk Itself

Level 5 autonomously driving cars (i.e. no steering wheel, no pedals)—hitting California streets later this year and expected in at least Ford and BMW showrooms in 2021—will, by some forecasts, reduce aggregate US auto insurance premiums as much as $40 billion over the next ten years. OEMs (e.g. Ford, Waymo) will assume product liability, displacing traditional liability coverages, and accident frequencies and severities are forecast to decline overall.

And then there’s the looming threat from the digital natives, namely Amazon, Google, and Apple, all taking steps to digitize the home and everyone and everything in it. Big Insurance owns the vast majority of homeowners insurance customers, but digital natives own more and better data about those customers and how and when they’ll attempt to monetize that data with insurance or quasi-insurance products is anyone’s guess.

Given that the m.o. of digital natives is to create value by reducing cost, it’s hard to imagine a scenario in which traditional US insurance premium pools grow over the next decade. Entirely new pools, in areas such as cyber, will (hopefully) deliver offsetting premium growth.

2. InsurTech

Big Insurance owns three substantial advantages, 1) a large installed customer base, 2) heavy regulation (at the state rather than national level, complicating things for outsiders), and 3) high capital requirements.

Yes, InsurTech poses a threat, but to what? According to McKinsey, of the $4.4 billion that’s been invested in InsurTech over the last three years, 91% is aimed at helping Big Insurance, and only 9% at beating Big Insurance. Successful startups such as Metromile (auto insurance) and Lemonade (renters insurance) sure have the look and feel of long-term revenue disruptors, but the fact is InsurTech premiums as a percentage of total US premiums will be microscopic this year, less than one percent.

InsurTech, in our view, will in the near- and mid-term positively impact Big Insurance operating models and operational processes, driving improvements in productivity and, possibly, customer experience. Will such innovations also shrink premiums?  Time will tell.  InsurTech innovations bring the Innovator’s Dilemma to Big Insurance. 

3. Elastic (Cloud) and Cognitive Computing

We’ll go ahead and lump Cloud and Cognitive together as within a year or two they’ll be inseparable anyway. Consider:

• Technology innovation, as a rule, moves way faster than the enterprise amortization table. In the Cloud, there is no amortization table. There is no ‘legacy curse.’ Firms always run on the latest and greatest.

• All three Cloud market leaders (AWS, Microsoft, and Google) are developing Cognitive offerings in Machine Learning, transcoding, and speech and image recognition, enabling customers to leverage these advanced technologies without having to master them. Think of it as RSaaS – Rocket Science as a Service.

• Whereas choice assets – such as real estate – grow in value over time, choice technology gets cheaper. Regulatory considerations notwithstanding, Big Insurance CxOs are waking up to the fact that their data centers aren’t assets, they’re liabilities.

An often-overlooked advantage InsurTech holds over Big Insurance is 99% of InsurTech is Cloud native on AWS and, to a lesser extent, Google. In 2017, AWS, for example, released over 1,300 new features and products, so InsurTech works with superior digital tools that get better by the day. Enterprise migration to the Cloud is an imperative for Big Insurance, especially in the context of Cognitive, for reasons going well beyond eliminating datacenter capital expenditure.

Add it all up and after a hundred years of relative stability, the $1.3 trillion US insurance market seems headed for a decade of upheaval.

Big Insurance, historically well-capitalized with $704 billion in surplus as of Q3 2017 (Deloitte), is investing in massive transformation, as InsurTech attempts to modularize and digitize every link in the insurance value chain. Meanwhile, the big digital platforms (Amazon, Google, Apple, even Alibaba), with zero insurance experience and troves of customer data, lurk on the sidelines, poised to enter the game as instant contenders.

Who wins? US insurance customers, to be sure. Beyond that? Again, welcome to U$D. We look forward to covering the action as it unfolds.

Feedback? Questions? Please reach me at [email protected]