As P&C insurers continue to make significant investments in customer-facing transformation and back-office optimization, it's worth evaluating their progress to date and the overall outlook for 2019 and beyond. The insights and recommendations that follow are excerpted from EY's 2019 U.S. & Americas insurance outlooks. In the Americas region, non-life insurance businesses have grown at low, single-digit rates. Of greater concern is falling profitability caused by higher underwriting losses and a weak pricing environment in commercial lines. Here's a closer look at the issues insurers must navigate in this tough business environment.

No. 1: Driving cost efficiencies to fund digital transformation.

Cost efficiency is a perpetual goal of insurers. Past efforts — operational fine-tuning and digital initiatives — have produced incremental benefits at best. Stagnant revenue streams, legacy systems and rigid operating models have left expense ratios largely unchanged in the last decade. Thus, insurers should look to technologies to deliver cost and performance improvements. Connecting systems across the value chain — particularly claims and policy administration — will be critical to eliminating redundancies and developing sustainable operating models. The top technologies for transformation programs include: |

• IoT for accurately underwriting policies using real-time data and reducing claims (e.g., sensors providing early detection of loss in homes or business facilities)
• AI for enhancing the customer experience and streamlining management of simple claims
• Blockchain for authentication, underwriting and claims attribution and to connect with external collaborators

These technologies — when integrated to enable seamless data transfer — will generate real-time insights and help control operational costs.

No. 2: Strengthening direct channels to reduce dependency on agents and brokers.

As the first touch point with customers, distribution is critically important. It's also the value chain link most likely to be disrupted. Direct channels have already increased transparency and produced differentiated customer experiences. But, despite the buzz about disruption, agents and brokers still dominate. A gradual shift toward direct sales can be seen in personal and small commercial lines. In large commercial lines, agents and brokers will be forced to adjust to cater to large clients with increasingly digitized operations. Similar adjustments will be necessary to satisfy different customer segments. For example, millennials prefer using insurance comparison and quoting websites, while baby boomers have a relatively lower inclination to use the Internet for insurance purposes. Though all trend lines point to direct channels, insurers must master the balance between human and digital because their diverse customer base wants access to both.

No. 3: Preparing for the market entry of tech giants.

Over decades, insurers have amassed a huge pool of historical customer data. Today's technology giants have just as much customer data, including information beyond basic risk profiles and financial status, giving them a strong foundation for entering a variety of financial services markets, from payments to insurance. Advanced analytical capabilities also give tech leaders a potentially huge edge in underwriting, pricing and targeting new policies. Beyond massive data troves, these companies also have huge customer bases and highly trusted brands — despite recent privacy scandals. The trust differential with financial services brands suggests consumers would turn to technology leaders for financial transactions. The entry of tech giants into insurance is a matter of when, not if. Thus, insurers must actively consider their options, which include: |

• Embracing their role as providers of capital and actuarial know-how.
• Leveraging existing and developing new capabilities to aggressively compete.
• Defining a niche role in future ecosystems centered on specific customer needs.

It is somewhat ironic that partnerships with InsurTechs (who were feared as the most likely disruptive new competitors not long ago) are likely to be essential competitive weapons for incumbents seeking to fend off tech giants.

No 4: Accelerating time to market to take advantage of new opportunities.

Insurers have historically reacted to macroeconomic trends, demographic shifts, market demands, technological developments and regulatory changes, rather than seeking to get ahead of them. This reactive stance has hurt customer trust. Today, greater consumer trust is necessary to increase organizational velocity, which is vital in everything from launching products to navigating competitive threats. As more automotive, technology and consumer brands — many of them highly trusted by consumers — consider offering insurance products, insurers must increase trust to retain relevance. Insurers also need new capabilities if they are to move faster. Specifically, they need to: |

• Precisely track shifting customer and market variables
• Identify demand before it materializes
• Launch products before competitors

A strong and flexible operational backbone, modernized processes and systems, and increased organizational agility underlie these capabilities. This is what it will take to shrink product development and launch timelines from years to months.

No. 5: Exploring InsurTech partnerships and acquisitions to leverage relevant capabilities.

Many large insurers have invested in InsurTechs during the last several years. Results to date have been marginal, with only nominal contribution to volume and profitability, relative to the overall business. Innovative carriers will scale up their partnerships with InsurTechs in pursuit of breakthrough innovations. The first step is to clarify strategic objectives and then select the best approach or combination of approaches. Insurers must identify and pursue the right number of opportunities and clarify exactly what they want — including specific capabilities, ROI targets and monetization plans — from each investment. Otherwise, great opportunities may be wasted if insurers fail or struggle to integrate InsurTech innovations with the rest of the business. |

What P&C insurers should do next

To seize near-term growth opportunities, P&C carriers must launch multiple change initiatives to establish sustainable operating models. Specifically, they must: |

1. Transform their direct channel and distribution strategies by exploring digital enablers, as well as relevant InsurTech opportunities.
2. Identify a new value proposition to test a faster product development approach with clear deadlines and well-defined metrics for success.
3. Identify areas for further cost efficiencies to transform the business and free up capital for targeted innovation investments.
4. Identify areas of historical under-investment and prioritize areas for investments in modernization and digitization.
5. Evaluate internal capabilities relative to existing strategy and identify critical development areas, particularly around experience design, analytics and digital architecture.

Dave Hollander ([email protected]) is EY's global insurance leader. He has more than 30 years of experience working in and advising the insurance industry, with broad business and IT strategy as well as hands-on leadership and implementation of major operational change programs. Ed Majkowski is EY's Insurance Sector Leader for the Americas and is responsible for EY's advisory businesses, markets and clients in this region. He has more than 26 years of experience focused on diversified financial services organizations, with particular emphasis on global and national insurance enterprises. See also: |

• Only the beginning: A look ahead to 2019 for our readers
• Four trends shaping insurance in 2019