All around us, the world is embracing new operating models powered by technology, but traditional insurance has so far struggled to keep up.
Rather than moving from one older, legacy model to a single new model, we now live in the world of ‘And not Or’. New models are being incorporated along-side traditional models, increasing both choice and complexity.
Technology does not just enable change - it is the catalyst for it. We may have already reached a tipping point at which technology is necessary for the survival of our business models and we are in an arms race against our competitors, clients and suppliers; all looking for advantage. One thing is certain - technology is here to stay.
Covid-19 has demonstrated how, thanks to technology, the insurance market has pivoted to new ways of working quicker and more effectively than many of us would have believed. However, offering the right protection at the right price while satisfying the rapidly evolving needs of customers remains an ongoing challenge.
Individual policyholders are becoming more demanding, increasingly seeking flexible, agile and personalised solutions to fit their dynamic lifestyles. Commercial customers are retaining more risk and selectively seeking value purchases and value-add services such as risk management, risk structuring and risk placement.
Meanwhile, risks and losses are getting bigger - there were 119 billion-dollar weather-related losses in the US alone for the years 2010 to 2019, according to the National Oceanic and Atmospheric Administration - while corporate assets are increasingly intangible.
The industry has begun to innovate its products in response, particularly in the retail market. Flexible products allow greater client self-service and increasingly include services as coverage, such as recovery from cyber attacks, for example.
Powerful new datasets are improving the detection and prevention of risk and enabling insurers to alter pricing to match changing risk profiles. Brokers now employ data scientists to help them price and place business, with the most innovative brokers seeking portfolio underwriting deals.
The data revolution also poses a threat in the form of disruption and competition from data-rich corporations like Tesla, for example, which now offers car insurance backed by its own dataset.
New distribution models and products enabled by technology start-ups are shortening intermediation chains, often focusing on single opportunities and interacting directly with customers.
However, intermediaries continue to control the flow of business, and most new technology start-ups are intermediaries (such as MGAs and coverholders).
Meanwhile, capital markets are keen to increase their foothold in the insurance space, from investigating new lines of business that can be modelled for ILS, to investing in auto-follow models and start-ups like McGill and Partners or Convex.
Innovations in underwriting
Whilst there is greater channel and participant fragmentation there is a realisation that standards are needed to avoid technology meltdown.
Insurtechs and incumbents have entered a phase of greater collaboration rather than direct competition, while the rise and evolution of networks, ecosystems and distribution hubs is fuelling cross-industry connection, revolutionising business models and product delivery.
Against this backdrop, underwriters are increasingly being forced to assess where they add value. Many are considering the extent to which they can automate or are developing multiple approaches to underwriting, whether as expertise-focused ‘stock-pickers’, capacity-driven ‘market trackers’, or a combination.
Underwriting talent is therefore at a premium, with capabilities also being augmented, amplified and institutionalised with algorithms and AI.
Incumbents remain burdened by legacy business, systems and infrastructure due to a historic lack of investment and - for now at least - a lack of standards across the industry.
However, many insurers now recognise the need to move beyond ‘necessity innovation’ and are considering a range of possible infrastructure investments, including: cloud implementation capability; triage and routing functionality; PAS [policy administration and servicing] solutions that reconcile multiple approaches to underwriting; and building data analysis capability where they lead and access to capacity where they follow.
What the future might look like
The impact of technological change will be profound for traditional insurers and intermediaries, who must respond to keep pace with trends such as:
atomisation of process and product, leading to bundling, unbundling and personalisation;
self-service policies, and ‘service-led, product-backed’ insurance;
product simplification, from wider coverages at one end of the spectrum to granular, flexible coverages at the other;
greater data sharing, with insurers demanding and accessing more information;
the growing role of automation and AI in underwriting and claims;
lead-only models with commoditised capital filling the slip;
a possible reduction in product portfolios for carriers as they pursue ‘stock-picker or market tracker models’;
greater coverage for non-tangible and smaller asset classes and/or risk periods, and;
the need to respond with speed and agility to anticipate, stimulate and respond to evolving demands.
Sequel Rulebook Hub gives us a glimpse at what the future may hold. Carriers provide their underwriting algorithms to the centralised hub, which is accessed by multiple brokers via standardised forms and messages.
The Hub rates using the multiple algorithms provided by the underwriters, then (if within appetite and authority) binds the risk and produces documentation for the chosen option. Downstream processing is facilitated via messages sent to the carrier and the flow of monies is expedited.
This model, when properly integrated, offers significant benefits over siloed and monolithic solutions. Clients enjoy faster responses from a wider choice of carriers, brokers benefit from standardised submission and greater speed and certainty of response, and carriers can access a wider spread of risks with reduced admin and automatic data capture.
Longer-term, the market should adopt standards for distribution - first process standards, then product-specific datasets as the payload - and Sequel is working with leading MGAs and ACORD right now to develop globally accessible data and API [application programming interface] standards for London.
Which horses should you be backing?
It seems the only way to respond to this raft of technology-driven changes is to employ even more technology to manage the fragmentation of process occurring further up and down the value chain.
Businesses need to rationalise disparate, digital interactions with clients and suppliers into their structure, processes and systems, which means keeping control within your domains and establishing standards for external interactions.
This requires taking a component-based approach to every aspect of the value chain (people, process, technology and data), orchestrated with a clear business and underwriting strategy and underpinned with effective enterprise infrastructure including automation, analytics and collaboration tools.
In a world where everything is delivered digitally, trading technology, collaboration technology, analytical tools, enhanced datasets, AI and algorithms - all sitting on a responsive and efficient admin platform - is the baseline for the future. Without these, you may not be in business for long.
Insurers and intermediaries must therefore each assess where they are in the value chain and where they add value. Where they add little, they could consider scaling back.
Brokers who only offer connections and placement can easily be disintermediated, and carriers who only offer capacity rather than unique pricing or underwriting capability will see competition from capital markets.
There is no doubt the world is undergoing another cycle of great change. As an industry we cannot take our relevance for granted; customers and competition are evolving fast and we need to ensure our solutions are relevant, accessible and affordable.
We arguably have the greatest set of capabilities and potential that we’ve ever had, and that looks like it will only increase. We have the technological potential to not just enable strategy but to really stimulate new ways of protecting and enhancing consumer and business environments.
As we race to digital it is worth remembering the difference that really makes the difference is the way we embrace this change from a cultural, people, process, technological and data perspective. In a world of ‘Ands’ we need to see beyond the ‘Ors’.
Tim Page and Mark Simpson are process and operations consultants at Resilient Changing
