This is a guest post from one of our mentors, Petri Ekman. Petri is an experienced executive with a broad and in-depth experience in financing, financial and insurance products and risk management strategies for corporate clients.
Change Started Later than in Many Other Industries
During my 12 years in insurance, I used to hear numerous times the claims “there have not been any new products in this industry for 100 years” or “this is how we have conducted our business for 120 years, and so far things have been rolling rather nicely.” These arrogant-sounding statements were used to blunt ideas to get some change in, well, most anything.
In reality, a major shift had already taken place then. Many companies had started to drive down their expense ratios to improve the profitability of their insurance operation.
What Is Driving Change in Insurance?
Now that the no-brainer measures, streamlining and downsizing, have to a large extent been done, what will come next? What are the external factors that will force change upon insurance? My list would include:
- change in regulation
- blurring of industry boundaries
- ..and connecting to everything, advancement in information technology and the changes in consumer behavior and needs it has generated.
Change in Regulation
Legislation based on the IDD (EU Insurance Distribution Directive) will require much more transparency on selling insurances and structuring them to meet the customer’s needs. It carries a strong resemblance to the MiFID2-directive in banking and asset management. And it will bring about a change in the way insurances are sold and how the sales force is incentivized.
Another major change driver will be GDPR, the EU directive protecting a customer’s personal data. It requires insurance companies to keep track of, and if the customer requests it, erase all data they have on him. Also, Solvency II, the capital adequacy directive, increases regulatory reporting substantially and requires the companies to compile much more detailed information than before on their operations to their regulators.
All of these are “must-dos” and put a strain on insurance companies’ and their IT suppliers’ resources.
Blurring of Industry Boundaries
Other industries have made their inroads to insurance: throughout Europe, big companies in for example retail and automotive industries have started their own insurance companies, typically serving the needs of their most profitable customer group, consumers, and households. Bancassurance is another example of crossing traditional industry borders.
Insurance is an increasingly sought-after component in ancillary services to strengthen the supplier-customer bond and to gain “ownership” of the customer on top of the value chain. There will be more non-insurance industries crossing the borderline with time.
The insurance industry was an early adopter of ICT, hence its systems tend to be old, big, and rigid. Thus in turn, the most obvious game changers, are newly established, fully digital insurance companies – which have not yet won a major share of the market. In many countries, cyberspace has plenty of comparison websites for the more standard products, like for example motor TPL and motor hull insurances. This reduces the parameters of competition to premium only.
Some incumbents and niche players have introduced completely new concepts relying on mobile distribution, automated processes, also with some kind of sensor technology. Consumers do no longer want to fill paper or papery-looking forms in digital. They require customer-friendly apps, preferably in a mobile format. New cybersecurity risks and needs have arisen. Not only to companies but also to the average internet- or credit card-using consumers.
Internet of things will have a major impact on insurance over time. I see the biggest and most immediate impact in motor LoB’s, as car manufacturers will have a big information advantage in the data their cars collect. Insurtech is on a rapid rise, only a few years behind fintech. Perhaps the reason for the delay in insurance is caused by the absence of obvious growth drivers like PSD2 or blockchain technology. Companies actively learning to use insurtech startups will put enormous pressure on their competitors. I am following Munich Re’s Digital Partners, for example.
Change Is Here
So, where are these factors leading the incumbents? Change in regulation is pressing companies to put a lot of effort and money in modifying their systems and working models to comply with the new requirements.
The other two major drivers are pushing them towards a commodity and balance sheet provider position. That means in the wrong direction, away from “owning the customer.” On the other hand, ICT enables incumbents to disintermediate their distribution by bypassing tied agents and brokers. They will have the opportunity to gain a tighter hold of their customers. This, too, will require new thinking and new ICT applications. Especially in countries in which distribution has traditionally been outsourced to third parties.
Companies with modernized systems will be able to challenge incumbents with new innovations and short times-to-market. New entrants will probably approach their business potential from a customer need angle (as opposed to processes first). With the support from an ecosystem of startups and other agile partners, they are able to test and launch new services much faster than incumbents resorting to the industry’s traditional approach to development. The latter would be well advised to quickly start looking at insurtech.
And, for the record, there is now “the first new product in 100 years”. And a very important and growing one: cyber insurance. As for the need of it, just read the papers about the Equifax hack or the new botnet Reaper.
What do you think? What is the need for urgency in insurance?
P.S. In my next blog I will drill deeper into what I think is holding the industry back from changing faster.