4 Factors Creating a Perfect Storm in the Insurance Industry
With the insurance industry’s tendency toward hyperbole, it seems as if we are perpetually on the verge of revolution, disruption or upheaval. I joined the industry back in the early ’90s, when “the CRM revolution” was being discussed as a major inflection point. Nothing really ended up changing, and most of the insurers that were large and successful then are still large and successful. Today, however, four major market forces are in play — and this time, I believe we really are on the cusp of something substantial and fundamental. It will change the way the entire industry works, and may even change a lot of the players.
by Phil Ratchiff
1. New entrants
Historically, the insurance industry has remained relatively constant, with most companies having been in business for a good hundred years. Recently, however, there has been a rise in the number of new entrants marketing, selling or servicing insurance products or providing new capital.
Many of these new entrants are interesting organizations with great capabilities. Google, which entered the UK market in 2011 as an insurance aggregator, is perhaps the most formidable. The technology giant joined the emerging insurance aggregation market, disrupting competitive market conditions and, by some accounts, subsequently helping lower insurance premiums by roughly 30 percent over the past 5 years. Introducing that sort of intense price competition into an industry that is not overly profitable to begin with, has changed market dynamics substantially.
Other companies are also entering the fray, including retailers with strong brand names, and telecommunications companies boasting telematics capabilities. Even car manufacturers are starting to embed telematics capability into vehicles and, in some cases, to sell insurance directly.
2. Social and economic dynamics
We’re currently in a very low interest rate period, which is putting pressure on profitability. Insurance is an industry that, essentially, takes in money and invests it before subsequently paying claims. So, with lower investment returns, there’s less profit being generated. Over the past 30 years, many U.S.-based insurance companies have failed to return their cost of capital.
There has also been a lot of volatility in investment returns, especially since the financial crash of 2007 and 2008. This market volatility makes it harder for insurers to run their business. For example, it’s more difficult to find stable, growing assets to match against long-term liabilities.
The most obvious societal shift in developed countries is the retirement of baby boomers. As they retire, they are taking money out of their accumulation products to provide ongoing income; trillions of dollars will flow out of these products over the next 5 to 10 years.
On the other hand, baby boomers have more wealth than people who retired previously, and they’re also living longer. That means they’re generating new insurance needs, necessitating different types of insurance products — particularly around payouts and long-term care.
Of course, there’s also growth related to Generation Y — consumers who are unlikely to go to the local broker and have a discussion over a cup of coffee to buy what is, in essence, a commodity product. Instead, they want everything now, everything mobile, everything available by text.
Meanwhile, we see most of the growth in developing countries. A growing move toward urbanization is creating a much larger and more affluent middle class, and these families are creating a market for insurance products. Domestic companies are seeing growth, but global insurers such as AXA, MAPFRE and Prudential UK have also moved aggressively into the Asian and Latin American markets.
3. The data revolution
Insurers have always made use of substantial amounts of data, but how they leverage data is changing. It used to be that if an insurer had a large volume of risk data, it could find success by comparing, pooling and underwriting similar risks. Now, data is everywhere, and it’s immediately available. The whole concept of pooling risks may end up disappearing because, in effect, the data revolution will enable insurers to underwrite down to the individual level. Historically, insurance has been about pricing risk. Now the industry might be moving toward placing more value on managing risk. For example, telematics can be leveraged to give people driving scores — getting them to drive more slowly, brake more effectively and corner less aggressively. On the life side, wearable technology and analytics can create compelling wellness programs for clients. These programs are enabling insurers to manage the risks they are writing by rewarding good behavior and penalizing bad.
4. The digital mandate
The convenience and efficiency of online and mobile channels, coupled with the commoditization of the core insurance product, has led insurance customers to seek a new experience. The digital insurance trend, then, is really about the way consumers will choose to interact with an insurance company, as opposed to insurance companies trying to dictate interactions with consumers. Insurers will need to focus far more on the consumer as an individual. An effective omnichannel strategy will be key, as will an insurer’s self-service capabilities.
The case for transformation
Together, these four factors are creating a compelling case for digital insurance transformation. If traditional insurers expect to remain competitive, they must become more:
- Agile, to respond to new and increasing competitive threats
- Efficient, to address profitability challenges
- Customer-centric, to respond to social changes and increasing consumer expectations
- Advanced in terms of data and analytics, to move from merely pricing and pooling risks to truly managing individual risks
Addressing these business imperatives will require insurers to both transform their legacy operations and build out new operations. Insurers need to ask themselves: How do we reduce our “run and maintain” costs in order to build the new capabilities necessary to stay competitive? How do we evolve our legacy systems to support today’s digital imperatives? How do we accept new sources of data and analyze that data properly? And, perhaps most importantly, how do we do it all simultaneously?
At CSC, we believe the future lies in strong partnerships. Partners with deep industry expertise and knowledge of back-office systems can help insurers move to a more agile service-enabled environment, bringing new capabilities while significantly lowering costs. Insurers can then invest more heavily in creating the customized user experiences that will lead to future success.
PHIL RATCLIFF is insurance industry general manager at CSC.