For insurers, it’s adapt or die in a changing environment
Insurers are coping with broad environmental shifts in the economy and society that threaten to undermine their entire value proposition.
When people ask me about the outlook for insurance, I tell them it depends on whether they want to talk about the weather or climate change.
Weather reports are short-term; you have sunny or rainy days, as well as expected seasonal changes, depending on where you live. Except in extreme circumstances, the impact is relatively minor and entirely predictable from an actuarial and reserving standpoint. To survive as an insurer, you merely need to endure, as this, too, shall pass.
Climate change, on the other hand, is longer term and likely to trigger more fundamental, less predictable changes in the underlying environment that sustains insurers and policyholders. The disruptive impact will be transformative, and for those dependent on the status quo, not always in a good way. To survive, one must adapt — disrupt yourselves or risk being disrupted and perhaps displaced by those who are more adaptable.
It’s understandable for an industry that bears the brunt of rising catastrophe losses to focus on the latest weather report, yet insurers are coping with much broader environmental shifts in the economy and society threatening to undermine the entire insurance value proposition.
Too few insurers appear to have accepted, let alone acted to mitigate against these existential challenges. There’s still too much dependence on a set of orthodoxies that have historically discouraged widescale disruption — whether it’s the amount of capital or data insurers have at their disposal, the complicated nature of their products, or the significant regulatory hurdles interlopers face. These wide and deep “moats” have insulated the insurance castle from most external invaders looking to breach their markets. As a result, many insurers have been satisfied making relatively minor changes in their current operations, products, systems, and talent pool.
However, in an increasingly digital world, where people work, shop and socialize virtually; where alternative sources of data and tools to monetize them are proliferating; and where capital appears plentiful — such traditional barriers are likely to dry up sooner rather than later.
There are multiple forces transforming the underlying business climate for insurers, which will require more than nominal adaptation efforts. Among them:
A shift in focus from siloed products to experience-based customization.
Insurers will need to knock down traditional internal line of business barriers and rethink how their products are designed to meet the needs of a more fluid, flexible economy, such as on-demand insurance, customer-centric policies, and hybrid coverages combining elements of different lines.
The proliferation of sensor technology fueling the Internet of Things offers the opportunity for insurers to evolve from merely compensating for losses that have already occurred, to becoming reliability engineers that help clients reduce frequency and severity of losses, as well as improve bottom line performance. A client would rather get a red flag from an insurer’s sensor, preventing an assembly line from crashing or a property from being destroyed, than have the carrier pay for repairs after damage has already been done.
(We’ll explore the product development challenges and opportunities specific to small commercial insurance in a research report later this year.)
Innovation pressure mounts with support from InsurTechs and incumbents.
Despite the rise of InsurTechs and other external disruptors, many insurers are still struggling to initiate, manage and implement innovation beyond making incremental improvements in current systems, products and business models. The focus on short-term results and lack of incentives to encourage longer-range thinking are among the internal roadblocks keeping insurers from making more transformational changes. Yet insurers cannot afford to ignore mounting pressures to better organize and execute innovation emanating from incumbent competitors, new market entrants, and rating agencies.
(In another research paper this fall, based on interviews with insurers and various accelerators, we’ll explore how to balance the need to run the insurer while changing the insurer to meet the challenges of the digital age.)
Insurers are hamstrung by looming talent gap and workforce in transition.
The insurance industry is likely to be undermined by an aging workforce, exacerbated by historic difficulties in replenishing their talent pool as new generations need to be convinced to make insurance a career. Still more problematic is the way insurers are being challenged to upgrade their capabilities by adding talent with the advanced tech and data science skills required to support a more analytics driven business environment.
Carriers will likely need to launch a two-pronged strategy, reinventing their workplaces and practices to both retrain and retain Baby Boomers (even beyond traditional retirement age), as well as become more attractive to younger recruits. (For more on this, read Deloitte’s special report, “Tapping into the aging workforce in financial services: How baby boomers can help fill the talent gap.”)
The race is on to reinvent rather than tweak the status quo.
It isn’t easy to reinvent an industry as long established as insurance. Publicly held carriers in particular are driven to show quarterly improvements in current operations, making longer-term innovation investments problematic. Yet the changing climate requires more transformational thinking and bolder action for insurers to remain relevant, competitive, and profitable in the challenging decade ahead.
Complaining about the weather (or worse, ignoring it) wouldn’t have done the dinosaurs any good when the climate suddenly turned much colder. Unable to adapt, they eventually died out, making way for the age of more resourceful mammals. To avoid a similar fate, insurers need to start making some fundamental and transformational adaptations if they expect to survive in an increasingly inhospitable environment.
Former National Underwriter Editor in Chief Sam J. Friedman (samfriedman@deloitte.com) is now the insurance research leader with Deloitte’s Center for Financial Services in New York. These opinions are his own.
Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn.
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