Perspectives

Insurance outlook revisited

Insurers embracing disruption to reinvent themselves

It’s rare for forecasters to be called to account for their predictions, but my day of reckoning came when I was invited to address the recent Casualty Actuarial Society spring conference to discuss our insurance industry outlook from two years ago, "Insurers on the brink: Disrupt or be disrupted".

June 6, 2018

A blog post by Sam Friedman, insurance research leader, Deloitte Services LP

The report was meant to be a wake-up call for those who believed the insurance industry’s treasure trove of data, complex products, strong capitalization, and brand recognition would insulate it from existential threats, whether posed by InsurTech startups or competition from other industries altogether. Our hypothesis was that leadership at many insurance companies harbored a false sense of security, with C-suites feeling largely immune to widespread disruption by more tech-savvy newcomers because of what our research identified as four “orthodoxies,” namely that:

  1. Insurers dominate the market on loss data for underwriting, pricing, and claims.
  2. Insurance is generally too complicated for the vast majority of buyers to navigate without established agents and brokers to guide them.
  3. Insurer risk pooling cannot be easily replicated by upstarts with relatively little capital.
  4. Familiarity with established insurers on the part of consumers and regulators will trump any competitive advantages touted by untested disruptors.

My hosts wanted to know whether our stern warnings had fallen on deaf ears, or had our clarion call inspired the industry to overcome its inertia and abandon presumptions of immunity? On the flip side, were we sure in hindsight that our concerns were valid? Or had we perhaps overestimated the threat to carriers holding fast to traditional business models and standard operating systems?

Looking back at our predictions, we hit pretty close to the mark. Insurers were generally moving way too cautiously to respond to changing consumer expectations established by their online and especially mobile experiences with more technologically advanced industries. Carriers were relatively slow to adapt product designs and underwriting models to ongoing societal shifts, such as the rise of the gig and sharing economies as well as the expanding Internet of Things. And they had yet to get a firm grip on the proliferation of emerging exposures, from self-driving cars to drones, cyber risks to robotic surgeons, nanotechnology to 3D printing. It seemed pretty obvious that insurers would need to fundamentally change how they do business, and fast, to keep up with such dramatic shifts in technology, the evolving economy, and the culture of consumer empowerment.

Insurance Industry Outlook 2016: Insurers on the brink

Read the report

Reality checks for the insurance industry

While the orthodoxies we identified haven’t yet fallen by the wayside, they are under siege by a variety of countervailing forces. Consider the following reality checks:

Insurers no longer have a monopoly on data

Alternative data is flooding the market, from telematics in auto insurance to accelerated underwriting from public databases for life applications. Insurers don’t have exclusive access to such data—sensor-equipped vehicles, for example, could put manufacturers in the driver’s seat. This turn of events places incumbent insurers in direct competition on a level playing field with newcomers in the race to develop advanced analytics and predictive models to make sense of all the new data, particularly for emerging exposures. In such an environment, actuaries accustomed to analyzing five to 10 years of loss history before they are comfortable pricing a particular line may be hard-pressed to keep pace. An inability to adapt on the fly could be a recipe for irrelevance if traditional underwriters aren’t careful.

Policy complexity and inflexibility are curses, not blessings

Insurance policies, applications, and claims handling are being simplified and customized by InsurTechs selling directly to consumers, often via mobile apps and for much shorter coverage periods than the standard annual policy. Personal lines is the initial battleground, but it’s likely only a matter of time before the trend expands into commercial markets—think of the impact sensors, wearables, and telemedicine could have on workers’ compensation. In any case, depending on customers not understanding your products as a competitive edge against disruption is probably not a sustainable (or even desirable) business model in an increasingly transparent, self-service economy.

Alternative risk-transfer options are expanding

Industry-wide, insurers have a huge amount of capital to back them up, but that doesn’t mean significant pockets of risk won’t be transferred elsewhere if the traditional insurance market is slow to respond to evolving alternatives. For example, property-catastrophe risks have already been significantly securitized, with catastrophe bonds thriving despite rising disaster losses and interest rates. It likely won’t be long before insurer dominance of other lines could be threatened, starting perhaps with catastrophic cyber exposures.

Brand recognition is giving way to experimentation

Financial services regulators and consumers alike appear generally open to fintechs offering greater convenience and more customized products and services, as exemplified by the growth in marketplace lending, crowdfunding, mobile payment options, and online real-time insurance policies. Counting on customer loyalty to name brands when more intriguing options are emerging is likely not realistic in a world where some of the most valuable tech-driven companies have come on the scene and dominated their respective industries virtually overnight.

Reality checks for the Insurance Industry:

  • Insurers no longer have a monopoly on data
  • Policy complexity and inflexibility are curses, not blessings
  • Alternative risk-transfer options are expanding
  • Brand recognition is giving way to experimentation

However, the industry has been responding more proactively than expected to disruptive threats.

On the other hand…

With all that said, it turns out we may have underestimated the ability and willingness of the industry to respond to disruptive threats. Insurers have been more proactive than expected in fortifying their systems and product lines against external disruption by incumbent and nontraditional competitors. What’s more, rather than remain complacent, many appear to be taking the fight to would-be disruptors—whether relegating InsurTechs to the fringes of the market with innovative initiatives of their own, or co-opting them to enhance the industry’s operations, capabilities, and customer experience via strategic investments, co-development partnerships, or acquisitions.

I don’t mean to suggest insurers have this all figured out and can rest on their laurels, or that disruption from inside and outside the industry does not remain a serious threat. Change is still more incremental than transformative, and there are far more questions than answers about how insurer roles in the new ecosystem will play out. Fundamental changes in mind-set are still in order.

Yet overall it appears many insurers are at least on the right track, reorganizing from top to bottom to be more aggressive innovators and competitors. Most seem to have taken our warnings to heart, moving to disrupt their own operations by developing new technologies, platforms, skill sets, and business models, often with the help of the very InsurTechs they once feared might displace them.

If you’d like to read more about this challenge, check out our original report, Insurers on the brink: Disrupt or be disrupted. Let me know what you think by tweeting @SamOnInsurance or @DeloitteFinSvcs, or find me on LinkedIn.

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.

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