The year 2018 promises to be full of exciting opportunities for the insurance industry. Or maybe it’s going to be a year of profound threats. The way you will experience the coming months depends a lot on how you feel about change—and how prepared you are for what’s in store.
After decades during which the operating model in the property/casualty business has been surprisingly stable, it feels like we’re suddenly surrounded by new players, new models and new business realities. That feeling is partly an illusion, as the new features and players of today’s market have been in the making for at least a decade. But they’ve reached a level of maturity that means they can no longer be ignored.
Consider this: A cohort of tech-based startups is starting to have real impact. The digitization of the industry, though far from complete, has proceeded far enough at a handful of large firms to enable the creation of radically new approaches to distribution. These approaches, such as broker facilities, quota shares and exclusive broker-carrier agreements, have achieved enough critical mass that some traditional players, especially in the UK, are crying foul. New capital is flowing into the industry from deep pockets and can make focused bets, for example, on specific regions and perils. These factors combine to mean that the P/C industry’s traditional post-hurricane comeback will be muted this year or perhaps will vanish altogether.
Confusing? Absolutely, and it’s likely to get even more chaotic before a new consensus emerges in a few years. That means it’s time to be thinking about both offense and defense, opportunities and risks. It’s time to take a step back and think about where insurance industry change is coming from, what forces are driving it and what tools insurers have—or need to obtain—to respond to it successfully.
For decades, if not longer, the industry has had a strikingly old-fashioned approach to business. Let the rest of the world arm up with databases and analytics; insurance was all about bespoke experience and personal relationships.
As a result, the industry got used to having limited visibility into its own market. No individual underwriter, no matter how experienced, could possibly know every broker. No one had complete information on the flow of protection needs across clients. Even insurers dominant in a specific line of business saw only a small portion of submissions being placed through an intermediary—10 or 15 percent, even when the insurer and the broker had a strong, established relationship. And even for the business they were seeing, the opaqueness in the internal accounting meant that it was hard to know where they were making money.
For many years, this model was the only alternative. But it was inefficient and, therefore, unsustainable. The market was difficult to navigate, and insurers had no practical way to deploy a strategic framework for growing their business and deploying their capital. It’s no surprise that when circumstances changed, the model began to crumble.
- The workflow of the insurance industry is increasingly digital. Digitization, of course, is useful in reducing costs and enabling complex transactions. But the real impact comes from the way that digital workflow lets companies create valuable historical information sets.
- Retail and wholesale brokers have learned the value of their placement data, including exposures and company details. They are increasingly seeking to monetize it.
- A wave of capital looking for diversification and a rise in financial engineering has significantly increased the competitive pressure in the market.
Virtually all the emerging trends in today’s market can be seen in the light of digitization, data and increased market transparency. And the industry has a long way to go in digitizing and using data to streamline processes and shorten the path from seller to buyer. The companies that were first to fully exploit the data they had acquired—the big brokers—are challenging the very structure of the industry. And there will be more challenges to come as more players realize their data potential.
Transparency, Data and the Map
What’s the best way to respond to the coming period of confusion and reconfiguration? We’d suggest keeping three ideas top of mind:
- Increase internal transparency. If we’ve learned one thing from the convulsive change that has gripped multiple industries over the past 20 years, it is that transparency about customers, pricing, products and markets is a near inevitability. Transparency has both advantages and disadvantages for individual companies, and it will advance at an uneven pace across the industry. But it will be the driving force behind the changes we can anticipate—and those we currently can’t. In addition to outward facing transparency, insurers need to create greater visibility internally, so that they have a clear and granular view of profitable accounts within their book. To do this, they need to break silos between departments that prevent a holistic profitability picture from emerging; in some cases, they might need to re-underwrite their books to maintain overall profitability.
- Focus on the value of data. In today’s environment, data is a key asset. It is imperative to understand what kinds of data you use and what kinds you generate. As numerous companies across industries have learned, there are numerous opportunities for companies that can leverage their operations to become data businesses—and numerous threats for those that allow others to take the upper hand in data aggregation.
- Map (and re-map and re-map) the path to your customers. The limited transparency of yesterday’s insurance business means that many companies have never fully explored who their most desirable customers are and how to identify and reach them. That needs to change, and quickly. The process is demanding; you will need to stitch together various datasets: broker pipelines, historical submissions, historical loss runs, internal claims data, risk engineering reports, and third-party data sources such as risk manager surveys, regulatory filings and state bureaus. While some of this data is already available in digital formats, a large portion of the data needs to be extracted from paper applications, Excel files and emails. The ideal map will account for every single insurable risk, highlight profit pools and refresh dynamically as new information flows in.
Clearly, these three ideas all assume one reality: a dynamic, changing marketplace in which the key to success is the ability to analyze on the fly, respond nimbly, then go back and do it again. Does that describe your team? If it does—or when it does—2018 should be a time of exceptional opportunity in building the long-term success of your company.