Pavel Kaplunou
, Going into the new decade, the insurance industry finds itself in an intricate maze of barriers and opportunities. To ensure growth the space is in need of urgent, but gradual change in the form of new strategies and tactics. Yet it must first address the myriad of factors that are holding it back. Drawing information from the Ernst and Young analytics report, “2020 Global Insurance Outlook”, we navigate the insurance landscape to outline the pain points and how they might be addressed.
Currently, insurance companies find themselves amidst a sea of uncertainty, especially when it comes to globalization, climate change, demographic shifts, disruptive technologies and changing economic conditions. The industry is faced with a long-standing lack of trust, accumulating risks and a lack of digitization. Regarding the last point, Gartner’s 2018 survey reveals that only 5% of insurers rate themselves effective in making use of digitization.
Let’s explore the current status quo and the reasons behind it.
Key barriers to growth in the insurance space
The outlook report cites low interest rates among the fundamentals and forces currently shaping the insurance market. As most insurance companies (90%) rely on investment to generate profits, while the expectations of a global economic recession are holding back interest rates. Meanwhile, not all insurers wish to dive into high-risk investment assets.
Statistics show that insurance policy sales have fallen over the last 10 years. Many new digital-first businesses are penetrating the space by introducing subscription-fee based models, as opposed to yearly plans offered by traditional insurance.
Demographics have shifted in the sense that the middle class has gained financial stability and prominence in many globa, which is conducive to business. At the same time, aging populations, coupled with low birth rates and postponed large-scale expenses among a younger generation pose risks, as people delay the purchase of insurance coverage. The US, Europe, China and Japan will all experience an average 27.15% growth in the 65+ years of age demographic segment.
At the same time when it comes to business, small and medium enterprises are finding the need to seek protection in complex value chains.
The demand for digital insurance products and services is putting stress on insurers in terms of rising customer expectations. Many insurers are still catching up to accommodate for these non-traditional consumers. This new breed of consumers is also asking for more localized services, the absence of which stifles geographic market expansion. Customer journeys and customer engagement remain top priorities for insurers. Hence, to address the problem, players have turned to InsurTechs.
Top priorities for insurance companies
Based on a survey of insurance professionals, international and local market leaders, EY makes note of the top concerns among industry players. Insurers believe these are the top priorities that insurance companies must address:
Operational excellence and cost efficiency
With low interest rates, a decline in investments, and a significant proportion of the pressure from coming from stagnant markets, insurers are striving to reduce overall expenses. The goal is diversify the investment portfolio to reduce loss and manage risk. Curbed loss will generate more free investment resources, which most plan to invest into transformation and product innovation programs.
Near-term change involves automating processes and migrating to a cloud environment. Such a change also necessitates the development of clear and measurable goals and metrics to effectively measure ROI.
To transform and digitize core systems for greater efficiency and better risk management, insurers view outsource providers as a viable alternative. Business process outsourcing and value chain distribution, will see a large suite of business processes and claims administration systems become shared services spread among or concentrated in centers of excellence.
AI, the cloud and automation are seen as tools and technologies that will aid the shift to a variable cost base and expedite key functions and operations.
Takeaways: Insurers are resolving to implement new operating models, making long-term investments factored into overall cost reductions.
War for talent
Skilled talent is seen as a secret ingredient for maximizing returns on all types of large-scale investments. As the data skill gap grows, insurance, just like so many other industries is seeking a ‘digital thinking’ workforce to fill existing positions as well as be the source for new, innovative and data-driven roles.
Takeaways: Talent sourcing and closing the skill gap will be crucial, in times of an exodus of institutional knowledge and a low digital-first population.
Regulatory pressures
Global standards are influencing governments around the world to adopt new risk-based capital regimes, which directly impacts insurers, who have to meet these global standards. The looming enactment of the IFRS 17 standard for insurers will have far-reaching ramifications, especially in terms of reporting and key performance indicators.
Conduct-related risks and compliance control lead to rising regulatory expenses. Regulation from state bodies has produced new guidelines in and around value for customers, promotion of good customer outcomes and collection and use of customer data.
Because GDPR and CCPA restrict access to customer data, insurance companies will need to find new ways to gain insights for capital efficiency and competitive advantage.
Takeaways: Distribution, product development and service strategies will need to adapt to new frameworks and regulatory requirements, while reducing compliance-related costs.
Digitize distribution
Underwriting, distribution, claims — the entire value chain is experiencing a high rate of digitization. Not only digital channels require reinforcement, but new technological tools need to be created for agents across the entire value chain to increase efficiency and productivity.
Digital transformation is seen as a means of overcoming high customer acquisition and increasing personalization, which is crucial for acquiring a younger generation of insurance consumers. A consistent human approach that is homogenous across all channels is the kind of experience that customers are looking for. By adopting this approach, companies can expect to generate higher engagement and efficiency of their investments.
To back up the claim, China’s Banking and Insurance Regulatory Commission reports an above 2.5x growth in non-life insurance market share in the online-only space from 2016-2018.
Takeaway: Digitizing sales, talent acquisition, asset tracking are all a high priority. Long-term innovation is achievable through partnerships with InsurTechs and technologically savvy companies.
Master emerging and disruptive technology
Volumes of data can be directed at generating real-time insights into potential risks and uncovering customer needs. Among disruptive technologies is blockchain, which promises to make better use of data-sharing and increase transparency that, in turn, will give consumers more confidence in the industry and drive loyalty.
While IoT remains in the early stages of adoption, with few players boasting success stories thus far, and telematics being used broadly in some regions, such as Europe, Artificial Intelligence (AI) has already been broadly helping transform the sector through robotic process automation. Namely, sales, fraud prevention, customer claims and customer journeys have all been shaped by bots and cognitive technologies.
Takeaways: IoT and connected devices, telematics, AI and blockchain are the leading emerging and disruptive technologies in the insurance space.
Navigate risks and opportunities of climate change
The downside of climatic changes for insurers are the arising issues of risk management, while on the flipside, are the opportunities for premium growth. By risk management insurers understand the need for portfolio management, insurance and reinsurance in terms of “second-order” implications of climactic events, closing the protection gap. New models to address these concerns could be risk prevention as a service, for example.
Using modern technologies, such as satellites, sensors and drones, insurers can better perform damage assessments and process claims faster, compared to current rates. The technological tools can also explore markets that were deemed to be uninsurable previously, owing to the emergence of new data and computing capabilities.
Many European insurers have taken the lead in reinforcing their image by upholding UN Sustainable Principles, thus addressing the climate change strategy that many companies still need to navigate.
Apparently, catastrophe loss insurance penetration has not changed, despite growing climate change awareness. Given the insurance ‘climate’, new risk models and policies frameworks will need to be developed to address the growing protection gap, which, as of 2018 stood at $221 million.
According to a 2019 Shared Services report IT outsourcing and centers of excellence make up 39% of all shared services across global customers, of which insurance companies are a part.
Takeaways: Upholding environmental protection values and developing strategies around climate change is recognized as a key step for improving public perception, driving positive change for business.
Moving ahead
Paving a future in a highly competitive insurance markets means taking the following steps to stay afloat:
- Experimenting with digital to scale: establish the foundation for digital transformation and empirically determine new paths to business growth.
- Cover new risks with insurance services and new business models: on-demand, subscription models, preventive and recovery services.
- Stronger fundamentals: culture, talent, storytelling, communication, digital first cultures, and an approach that embraces risk as an opportunity.
Conclusion
There are yet many challenges that the insurance business domain has yet to resolve. However, the many opportunities that are available today are ripe for the taking. In order to move towards positive change and accommodate for new demands, insurers need to employ a gradual and collaborative approach.
As an industry that has been slow to change Insurance can benefit from non-traditional players and agents, and the challenges and opportunities that come with them. While change will require significant investment in a time that is already made difficult by economic and global circumstances, it will never the less be crucial for companies to start their transformation journeys to remain a relevant part of the insurance ecosystem.
06 March 2020
WRITTEN BY
Pavel is Smart IT's Marketing Communication Manager. He oversees content creation and is in charge of the official Smart IT blog. Contact Pavel to learn about potential media and content collaborations. [email protected]
