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The First of our Three Megatrends concluding our #InsuranceMap Series
Over our preceding 30 instalments – taking you the length and breadth of our inaugural Insurance Nexus Global Trend Map – we have covered the broad industry sea-changes, the technological and functional developments and the regional trends active in today’s rapidly evolving insurance ecosystem. We hope that this has been a varied and interesting journey!
We now round off this #InsuranceMap Content Series with our closing thoughts, casting a particular eye on how the industry is developing and where it is headed.
In addition to undergoing paradigm shifts through time (the insurance of today is naturally very different from what went on in the Lloyd’s Coffee House 300 years ago!), insurance is of course a cyclical industry, sometimes pivoting heavily from one year to the next, regardless of the overall trends. Surviving these cyclical pressures is the bread-and-butter of the insurance business, and they have rightly been top of mind for many of the regional commentators we have spoken to across this content series.
However, they tell us less about the overall trajectory of the industry than about the current cycle, and do not therefore particularly help insurers determine where they should be placing their R&D budgets for longer-term survival and success.This is not to say that either category – paradigmatic or cyclical – is the more important one; they are not directly comparable, and insurance companies fundamentally need to distinguish between them and take a position on both.
In this four-part conclusion, we bring you our Three Megatrends synthesising what we have observed across this content series, as well as an Afterword on what we can reasonably expect from the meeting between the legacy insurance industry and the growing Insurtech sector.
- MEGATREND I: Worldwide low interest rates coupled with soft market conditions
- MEGATREND 2: The complexification of risk in today’s increasingly globalised societies
- MEGATREND 3: Distribution disruption and insurance’s customer-centric ‘turn’
- AFTERWORD: Insurtech - Reinventing the Spokes, Not the Wheel
The first megatrend, which we explore below, is a cyclical shift; megatrends 2 and 3 could justifiably be termed paradigmatic shifts.
MEGATREND 1: LOW INTEREST RATES AND SOFT MARKET CONDITIONS
Respondents in all our global regions have explained their current challenges at least in part through low interest rates. Everywhere we look, investment margins are being squeezed, forcing carriers the world over to re-evaluate their core underwriting business and find efficiencies.
When interest rates are high, insurers can tolerate lower combined ratios or even outright unprofitable underwriting, the difference being made up by the returns that accrue on the overall cashflow in the meantime.
Today’s poor investment climate is exacerbating the effects of the soft market, where excess competition is putting strong downwards pressure on premium prices. Indeed, according to a recent post by PwC, as much as a third of the London market was due to lose money on underwriting in 2017. Similarly soft conditions are being reported for our other key regions: North America and Asia-Pacific (sources are given in our full Trend Map Report, which you can download for free at any time).
With this excess supply of insurance on the market, it is becoming very hard for players to make significant amounts of money. So where do these market conditions take us?
In some ways, this is a bit like Roadrunner in the much-loved cartoon – some players have already run themselves well off the cliff but just haven’t looked down yet ... And the more highly capitalised insurers will fall more gently due to their enormous parachutes, standing to do good business in the harder market conditions to come.
In age-old fashion, geopolitical events or a natural catastrophe could well finish off the soft market, pushing smaller players out of business or otherwise constraining them due to reinsurance price hikes. These are the seasons on Planet Insurance, the ‘Insurance Cycle’ – their ins and outs have already been explored many times before, and for this reason we have not particularly focused on them in this content series.
What is of interest to us are the alternative outcomes (whole or partial) offered by today’s soft market. This is a classic supply and demand imbalance, and the solution may be to boost demand, rather than waiting for supply to be constrained by events out of our control. Demand creation and servicing doesn’t solve the underlying nature of the cycle (this fresh demand will ultimately breed even more supply) but, if insurers can keep their noses consistently just ahead of commoditisation, they can live quite nicely (and more or less indefinitely).
What we refer to subjectively as a saturated market is objectively underpenetrated ...
Saturated markets can offer plentiful sources of fresh demand – whereby what we refer to subjectively as a saturated market is objectively underpenetrated. While business-model changes are often implicit in this (and we cover this in Megatrend 2, which looks at the changing nature of risk in today’s societies), there is much that carriers can achieve simply by making their existing service more readily available and by stripping away the (perceived) red tape.
Imagine if every potential customer were to be followed around on every step of their daily life by a tireless insurance agent – a kind of Chartered Mephistopheles. That agent would find all manner of passing needs that the average customer would be more than tempted to buy insurance on.
This has obviously never been possible – or desirable – and this is why, for so many people, insurance has remained in the same category as the annual dentist’s trip. However, mobile technology – for example push notifications to a potential customer’s mobile device – now means that customers can actually be reached with all manner of propositions on a rolling basis, like in our demonic example.
This approach will always have its advocates and its detractors, with plenty of people preferring to initiate the buying process themselves, especially for complex long-term products like Life insurance. In these cases though, simply by offering slicker customer service insurers can access plentiful valid prospects hitherto outside of the market for no good reason.
Markets traditionally termed underpenetrated (especially in Asia-Pacific, Africa, Latin America and Central Asia) may be even more appealing for multinational carriers, although the exact sums will vary from case to case: there is a lot of fresh demand to serve here but at the same time, the value of assets per customer is generally less than in the developed West.
This is particularly true of microinsurance. This has long been touted as both a major opportunity and a social good for the developing world – without anyone having fully ‘cracked it’. Speculating as to the growth of this sector is beyond the scope of this content series; suffice it to say though, great strides have been made towards solving the distribution and payments parts of the jigsaw.
Outstanding issues with microinsurance include the appropriate business model to pursue and, fundamentally, carrier appetite. Often the sorts of risks that microinsurance targets want protection against are catastrophic in nature (drought and crop failure being two prominent examples). With this in mind, large amounts of capital are needed on the one hand and lots of local knowledge on the other, and the collaborative arrangements we touched on in our Africa Profile certainly appear viable options.
Compounding the issue are fairly large unknowns such as climate change, as a result of which we are likely to see catastrophic weather events become more serious over the coming decades – although to quantify and price this in is challenging.
All these demand-growing exercises – greater outreach and ease of access in saturated markets and more attention to policyholder needs in underpenetrated markets – are being pursued by insurers around the globe in response to today’s adverse market conditions, where revenue growth is so hard to come by. Another response – and one that is a more typical kneejerk – is to cut costs through technology.
There are two very broad categories into which insurance costs fall: operational or business costs, and claims pay-outs. Ongoing initiatives with robotics and AI are eliminating back-office operational costs by automating routine procedures and allowing straight-through processing of underwriting and claims.
Another area of advances – Internet of Things and ubiquitous connectivity – is allowing for the pre-emption of claim events and for timely damage limitation. Potentially straddling these two thrusts is Blockchain, although everyday adoption still remains a way off ...
For a perspective on Blockchain from Guardtime's David Piesse, see also: Insurance Nexus Global Trend Map #11 Fraud
Generally speaking, these technologies are not just pure cost plays, although lowering costs is a happy side effect for insurers. More so than cost, their real significance lies in the greater customer-centricity they enable, whether this relates specifically to distribution, to policy pricing or to claims experience.
The need to cut costs is a systemic pressure and has recurred periodically throughout the industry’s existence. At some point in the future, with the eventual termination of the soft market or rise in interest rates, we can safely assume that this need will be felt less strongly than it is today. What is new with the current round of technological investment is its customer-centric bent. This is the biggest paradigmatic change affecting the industry (and one we explore as Megatrend 3) – often aligned with the need to weather a soft market and low interest rates but fundamentally distinct from it.
In Part 2 of our conclusion later this week, we will be exploring Megatrend 2: The complexification of risk in today’s increasingly globalised societies. If you'd like to access all Three Megatrends + our Afterword straight away, as well as much more, then simply download the full Insurance Nexus Global Trend Map here (it's free!).
For any inquiries relating to the Insurance Nexus Global Trend Map, this on-going content series or next year's edition, please contact:
Alexander Cherry, Head of Research & Content at Insurance Nexus (firstname.lastname@example.org)