Insurance businesses normally operate with a 30-year outlook, so a change to this industry is rarely spectacular or sudden. But there is no doubt that important shifts are underway.
Disruptive trends are reshaping the industry, with these three as the strongest drivers:
- Customer expectations. Insurers are challenged to provide instant answers, ever-more personalized service and convenient access from anywhere. The widespread use of new customer technologies has created greater demands for insurance solutions and distribution/interaction channels.
- Pace of innovation. Growing adoption of internet of things — e.g., fitness technology products, usage-based models and autonomous cars — is an imperative to radically innovate and experiment with new business models.
- Start-ups/new entrants. With easy access to cloud computing and on-demand development, technology barriers have been lowered. New players can innovate quickly and fill the gaps that incumbents have not.
Disruption is leading to significant opportunities to:
- Meet customer needs and demands with new offerings and solutions
- Enhance interactions and build relationships including partnerships of incumbents and start-ups
- Leverage existing data and analytics to generate meaningful risk insights
- Utilize new approaches and modeling to underwrite, price risks and predict losses
- Increase scalability and flexibility through cloud-based solutions
Take note — all of these opportunities are against a backdrop of tougher regulation, a requirement to invest heavily in IT and a broader downturn in profitability.
Meet the challenges, seize the opportunities
Responding to industry challenges and trends requires strategic approaches — thinking like a disruptor, acting like a start-up; actively monitoring trends and innovations; establishing a presence in innovation hot spots such as Silicon Valley; developing new products and services; and enhancing and personalizing customer experiences.
As you develop your strategy, be sure to address the following vital points.
Global insurance industry hot topics
• Capital and scale
• Customer interface and distribution
• IT infrastructure and cost
Devote attention to changing regulation
Regulators worldwide continue to impose increasingly stringent requirements on insurers. The regulators’ aim is twofold: first, to ensure that insurers’ conduct in relation to customers is fair and transparent; and second, to ensure governance structures and adequate capital are in place to underpin an appropriate solvency approach.
Continuous regulatory changes are creating significant costs, particularly heavy burdens for smaller businesses. But ensuring compliance is by far the most cost-efficient approach. The alternative is to risk regulatory intervention, which makes substantial demands on senior management’s time and could require restructuring.
Keep track of where regulations are heading by identifying emerging risks (e.g., cyber, climate, social media), analyzing observable trends, gathering insights from structured and unstructured data, monitoring increasingly complex and prescriptive regulations and standards, and participating in industry discussions about global developments.
Globalize, consider M&A for capital and scale
Insurers have begun to expand the scale of their operations; a bigger portfolio reduces risk and can be a more efficient and profitable way to serve the market. There is another factor at play — as the sector feels the impact of globalization, insurers have no option but to globalize their portfolios. International coverage is now assumed.
For most insurers, the fastest route to expansion is via M&A. As a result, the scale and number of deals in the sector are rising. Insurers are capitalizing on higher investment yields stemming from slowly rising interest rates and a strong dollar in order to make acquisitions that will support their growth objectives.
But take caution. As the supply cycle enters a new phase, insurance is becoming less profitable, and many global insurers are now moving into a period of low or nonexistent profits. In addition, U.S. and group capital requirements are increasing. Guard against overstretching on high-value deals, and be confident of sufficient capital to support an expansion of your portfolios.
Go online for customer interface and distribution
In the wake of increased regulatory oversight, insurers are becoming more wary of risk. As a result, pricing no longer offers a compelling or practical option for differentiation. Turn instead to innovative customer interfaces and new distribution channels.
An online presence offers enormous potential. This is despite the limitation of online distribution due to the fact that insurance policies must often be tailored to match specific risks. Nevertheless, smaller and specialist insurers are making headway in this arena.
The value to the customer of online distribution is convenience in fact finding, comparisons and purchasing. The value to insurers is a more accurate risk assessment because of the data generated. Some insurers are pushing capabilities further, innovating in mobile and sensor technology to create new products, such as car insurance with premiums adjusted to reflect safe driving as monitored by in-car sensors.
The challenge for the bigger insurers is not to fall behind. M&A represents an opportunity to buy into new distribution channels and capture business flows. Nevertheless, organizations choosing this route face the challenge of integrating new and legacy systems — an imperative if they are serious about capitalizing on the opportunities presented by online data.
The drive to reduce costs, improve competitiveness and increase profitability is a constant. But insurers must now reckon on entering an era of “cost-shaving” rather than full cost-saving. Where outsourcing deals once offered the potential for dramatic cost reductions, streamlining IT infrastructure now offers insurers the greatest scope. But savings will be on a far more modest scale.
Avoid lagging in IT
An up-to-date and integrated IT infrastructure is a must for data privacy and security, and protection is more complete and less expensive than just five years ago. Beyond defense against loss, a streamlined and rational infrastructure eliminates the duplication and incompatibilities typically found within a mix of legacy systems. It opens the way for insurers to capitalize more effectively on big data and its power to bring new insight to complex business challenges and decisions.
As you look to the future, consider the host of factors from portfolio size and costs to globalization to increased rules or if a merger is a financially sound idea. Specifics will vary according to your organization’s size and the markets in which it operates. Talking to a professional could be the best first step.
Leader, National Insurance Industry
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National Managing Principal
Financial Services Advisory
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