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Future shock

In a rapidly consolidating (re)insurance market, how are companies are preparing for disruption – and future-proofing their business models in the process?

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The past two years have seen increasing consolidation in the P&C (re)insurance space. Major transactions this year include Axa’s $15bn takeover of XL Group and Marsh & McLennan Companies’ (MMC’s) $5.6bn purchase of JLT.

The prevailing sentiment is that this phase of consolidation is far from over. In fact, some players believe the market is heading for a second age of global composite insurers offering personal, commercial, specialty and reinsurance products. As cost pressures increase on carriers and brokers worldwide, the benefits of scale begin to look more attractive.

In the ongoing consolidation ball, it stands to reason that the less attractive organisations which fail to attract a dance partner will not survive alone. With the continuing over-supply of capital maintaining soft market conditions, many companies are looking for an edge to keep them relevant and profitable. And that edge, many contend, is better use of technology and data.

“The winners and losers will be decided by who can adopt data and tech,” claims Barnaby Rugge-Price, CEO of Hyperion’s newly created in-house InsurTech operation, Hyperion X. “If you can’t, you will just fall away.”

Hyperion X was launched in October, with the stated intent of transforming the wider organisation’s use of data and technology. It will also manage Hyperion’s third-party InsurTech investments and incubate start-up ventures.

Rugge-Price says the fundamental driver of change in the industry, and the foundation of Hyperion X, is the “cost problem in the industry”.

“We need to bring that down. If we aren’t part of the solution, we won’t survive,” he admits.

Feel the benefit

Technology and data, used to their full advantage, could confer significant benefits on the industry.

Adam Szakmary, director of underwriting for Bermuda at Hiscox, says the first priority must be to use tech to “solve the mundane tasks that lead to operational overhead issues”.

In his view, these include handling claims, constructing risk portfolios and standardising contracts where appropriate. Technology could even be used for the “commoditisation of the underwriting process”.

Szakmary adds that taking costs like these out of the process could make coverages that are currently expensive – and where the risks are large and poorly understood, such as cyber – more affordable for insureds.

Nigel Brook, partner at Clyde & Co and head of the law firm’s reinsurance practice, also highlights the ability to improve user experience, particularly in personal lines, as a major benefit of technology. He argues this will help with customer acquisition and retention if done correctly.

As for benefits to the carriers themselves, technology has the power to make business “radically more efficient” – not least in using data from sources such as the Internet of Things to “get a better handle on risk”, Brook says.

Additional data could also allow insurers to offer more comprehensive risk management or mitigation services to customers as a standalone service, separate to risk transfer itself, according to Brook. This would add another revenue stream at a time when many carriers are struggling to pull in underwriting profits.

Brook adds that better use of front-end technology can allow insurers to “take part in ecosystems” by “embedding themselves in a broader range of services” – through one-stop online platforms offering more than insurance, for instance.

Data points mean prizes

Jonathan Prinn, group head of broking at Ed, says capturing and analysing data from new sources would be key, as underwriters look to take on profitable risks and avoid writing bad business.

He cites the example of a home property insurer that used the length of homeowners’ driveways as an element in pricing their cover against burglary. Those with shorter driveways provided easy access to thieves, while those with long driveways gave burglars the opportunity to enter premises undetected. Mid-length driveways were the least risky.

This more detailed picture of a risk is just as possible in commercial and specialty insurance as in personal cover, and this is what will give carriers an edge when it comes to pricing, he says.

Prinn adds that greater use of data to help price risk does not necessarily translate into lower pricing for clients.

For example, while an oil refinery may throw off 30,000 data points, carriers may typically only use five to price a refinery’s risk. Using more of these data points may well mean higher premiums for the client. It also means, however, that insurers can help clients to mitigate more risks and do so more effectively.

And there are prizes on offer for brokers as well.

Ed Broking is currently moving towards a more automated model that takes frictional cost out of the process. Speaking at a lecture at Lloyd’s in early November, CEO Steve Hearn explained that the broker introduced its online platform, TradEd, in order to bring down commissions.

“Every single one of our customers’ policies is on that. Brokers have it on their iPhones. With six insurers we can take the information off our system and put it on theirs and get a quote.”

This frees brokers from administrative work in order to spend more time on tasks “where brokers add value”, such as price negotiation and claims handling, Hearn added.

Bob Finch, CEO of AFL Insurance Brokers, says brokers have so far focused mainly on using tech to better promote their services and present risks to insurers. However, he emphasises that using tech to slash back-office costs is key to achieving a competitive advantage.

“I don’t see anybody doing this well in the market. Brokers who get it right can get margins 30-40 percent ahead of other London brokers.”

Disrupting the model

Apart from improving processing in a piecemeal fashion, technology and data could be the key to transforming the way the industry works – in particular, tackling its long, obtuse and costly value chain.

According to Hyperion X’s Rugge-Price: “Data and tech will shine a light on who is adding value in the process and who is not. It doesn’t mean you necessarily shorten the chain, but make it clearer and cleaner.”

AFL’s Finch adds that while he doesn’t see tech and data as a force that will fully disintermediate insurance brokers – allowing carriers to supply complex cover directly to customers – it would force all players in the chain to demonstrate what they bring to the table in a transaction.

Finch says brokers themselves are already using data to benefit carriers and insureds. Wholesalers are “sitting between the producing broker and the carrier, giving both sides access to better information on the risks”, he explains, which in turn leads to better value for the customer and improved pricing accuracy for the carrier.

Ed’s Prinn, meanwhile, claims the growth of electronic trading within insurance could in time create a more unified system of buying and selling cover focusing on a handful of major exchanges, or potentially “a number of over-the-counter systems”, similar to the financial markets.

“It’s likely that the underwriters of the future will go down one of two routes,” says Prinn. “Either every carrier will have a market tracker, or the underwriters will pick and choose risks to beat the tracker.”

Early adopters

No broker or insurer would publicly declare that it is not digitally enabled and tech-savvy. However, as Rugge-Price notes, it is hard to spot genuine innovation “because there is a lot of noise” as companies scramble to maintain their relevance.

Chris Sandilands, a partner at management consultancy Oxbow Partners and specialist in insurance strategy, says harnessing digital technology and data is not a question of buying or developing a single gadget that will cure all ills. The key, in his view, is pivoting an organisation towards a modern mind-set and using technology to do it.

“The broader question is what you need to achieve,” Sandilands explains. “What’s the corporate strategy and what tech do you need to achieve that?”

There are a number of examples of carriers adopting a more holistic approach to digital transformation, as well as some players who are dipping their toes in the water. The differences in pace here will be a decisive factor in which companies survive.

Clyde & Co’s Brook says Chinese carriers Ping An and Zhong An have taken “enormous strides” in using InsurTech to transform the insurance business model.

Ping An Technology, the Chinese carrier’s tech company, is responsible for a number of breakthroughs in personal auto cover, including an app that allows customers to take and upload a photo of a damaged car with their phone, and receive an immediate damage estimate through a system that uses artificial intelligence to compare the image to millions of others.

Ping An Technology is also responsible for the technology behind Ping An’s peer-to-peer lender Lufax and online car-buying app Autohome.

Zhong An, meanwhile, bills itself as the world’s first online-only property insurer, and is currently working on a reinsurance platform based on blockchain.

As a caveat, however, Brook adds that in the Chinese market, “800 million people are active online and personal data is only lightly regulated”, making use of big data much cheaper and easier than in the UK and Europe.

Brook also cites Munich Re’s Digital Partners division as a trailblazer. The unit supports tech start-ups that it believes have the digital knowhow to transform the industry but lack the insurance expertise to break into the sector.

Insurwave, the marine insurance blockchain platform launched by EY and software company Guardtime and used by Axa XL, MS Amlin and Willis Towers Watson, is another good example of the potential of digital technology, Brooks says.

This transforms the way in which cover is provided, allowing for ‘live’ insurance products that can be switched on and off as ships move through riskier waters, either on-demand or automatically.

The keys to the kingdom

The imperative is clear for the (re)insurance industry to make better use of technology and data to streamline processing and offer more intelligent products to the market. The question remains, however, over who will develop the tech and own the data that could ultimately lead to the owners’ and developers’ dominance in the market.

Oxbow Partners’ Sandilands doubts there will be a single “game-changer” tech product in insurance due to the sector’s inherent complexity.

“Some people talk about blockchain [as a game-changer] but it is not clear that will give you that edge,” he says.

Similarly, according to Hiscox’s Szakmary: “I don’t think there will be a dominant product like a Google in our industry.”

Fears that a band of nimble InsurTech companies would disrupt the market and wipe out traditional carriers also seem to be unfounded. The consensus now appears to be that InsurTech firms, carriers and brokers need each other and must work together on reforming the industry.

As Rugge-Price says: “With our convoluted value chain, the time would appear ripe for InsurTechs to take us out, but that has proved incredibly difficult.

“InsurTechs are coming back to incumbents because they have the one thing the InsurTechs don’t have, and that is the clients.”

Sandilands agrees with Rugge-Price’s theory, adding: “One feature of specialty is only a small number of investors have an appetite for niche risk or have an understanding of it. Specialty won’t be disrupted by a new Uber; it will be more subtle.”

Partners or competitors?

AFL’s Finch predicts 2019 will be the year in which partnerships come to the fore, where carriers and InsurTech companies own technology on a 50:50 basis.

“InsurTechs working on their own would spend two to three years banging their heads against the wall, but with the right partner, they can disrupt together [with carriers].”

Szakmary agrees: “There is a lot of syndicated ownership of InsurTech now. They have the tech; they need the expertise. We have an active strategy in investing in companies that are transitioning the model.”

Hiscox has invested in two tech start-ups through its business accelerator. Wrisk allows customers to combine their different insurance policies into one mobile app. It also offers pay-as-you-go cover that customers can top-up or change as and when they need it, and produces a risk score to help them understand and minimise their insurance costs. Hiscox has also invested in Yoti, a start-up which helps customers to protect their identities online.

Clyde & Co’s Brook also believes partnerships are the way forward, with one notable exception.

“We will see tech start-ups bought by carriers. There is still an incumbent advantage; most start-ups don’t have the capital backing to become a ‘full stack’ insurer. Lemonade is one of the few to go down that path to date,” he says.

Lemonade’s business model is based on behavioural economics and technology, using artificial intelligence and chatbots to deliver insurance policies and handle claims for users, without employing or using brokers.

However, Brook notes: “Companies with the ambition to be a full-stack insurer are few.”

Goodbye to silos

Technology aside, ownership of data is another crucial element for an insurer that wants to survive in the long term. Carriers and brokers have always gathered vast amounts of data, but the insurer with the most and best information will win the day, Szakmary says.

“If I’m competing with a reinsurer down the street, I want a different mousetrap,” he says. “Data is the competitive advantage in a knowledge-based industry.”

However, Ed’s Prinn takes a very different approach. Carriers which hoard data for competitive advantage may one day find themselves unable to compete if a player with the dominance of, say, Facebook in terms of data, comes along.

Prinn says that although carriers currently rely on data they hold themselves as well as data from external sources, they will increasingly aim for a greater degree of self-reliance.

“Brokers gathering information about a risk and submitting it to carriers will reduce.”

Prinn warns that for brokers and carriers to more effectively serve clients by accurately assessing risk, a siloed approach must become a thing of the past.

“Brokers must begin sharing data with carriers for free, rather than charging for it. We need to share data appropriately and safely, or someone else will.”

This article was first published in the Winter 2018 issue of Insider Quarterly