Ripe for disruption, insurance has an opportunity to profit from digitalisation
Almost every day in London's Square Mile, brokers clutching bulky folders stuffed with paper documents and files criss-cross the busy streets en route to one of the city's insurance markets to discuss policies for their commercial clients.
As technology-fuelled disruption has swept through the rest of the global financial sector, it has so far largely bypassed commercial insurance, leaving many of the biggest companies in London, Singapore, Bermuda and other global insurance centres conducting aspects of their business in much the same way as they have done for decades.
Yet all that could soon change: according to Strategy&, PwC’s strategy consulting house, insurance is ripe for disruption – in line with areas such as retail banking, small business lending, and savings and investments for mass affluent customers.
For commercial lines insurance, which covers everything from buildings to satellites and even kidnap and ransom for company executives and their families, many clients struggle with inefficient insurance distribution and servicing. They are also underserved: Strategy& found that only 16% of European small- and medium-sized companies (SMEs) were covered for cyber threats, while 18% did not have liability cover.
"Insurance is at a different point on the disruption curve compared with banking or other financial services," says Christine Korwin-Szymanowska, Strategy& partner. "But it is next on the list."
Strategy& estimates that in the UK, commercial lines insurance alone could account for almost a third of the total annual value of disruption taking place in financial services, which it estimates will be worth about £100bn a year by 2030.
Commercial lines insurance has long enjoyed high margins and strong barriers to entry thanks in large part to its inherently complex nature.
This has reduced the need for reform, allowing insurers to continue operating even as they put off becoming more efficient. Today, transferring a risk reportedly can eat up to 40 per cent of the premium paid at Lloyd's.
Inefficiencies abound. In the UK use of digital is low, with for instance only about 43 per cent of SMEs using online channels to buy insurance.
But the once-healthy margins have started to erode. According to Willis Re, a reinsurance broker, the annual return on equity at a sample of big reinsurers fell from 6.7 per cent in 2013 to 2.7 per cent last year – even after stripping out the impact of natural disasters. It is a similar story industry-wide.
The resulting pressure, together with heightened demand from clients for improvements to customer experience, increased functionality and better pricing, is starting to create change.
One clear example came this month when John Neal, chief executive of Lloyd's unveiled his plan to overhaul the market, whose roots go back to 1686. Among other things, he wants to divide it in two, with more standard contracts such as maritime cargo coverage for small companies migrating to a new, quicker and cheaper online system.
Another is the move by Stephen Catlin, an industry leader, to set up Convex, a Bermuda-based company that he says will outsource functions most incumbents still perform in-house, such as finance, reporting, investments and claims processing.
In the face of the oncoming shake-up, Korwin-Szymanowska says that incumbents must focus on several challenges. The first is how they can maintain and nurture start-up acquisitions and partnerships.
Like other players in industries facing disruption, insurers are now working with start-ups. Yet many big companies are also adopting a start-up mentality of their own with the aim of becoming disruptors themselves.
"The habit of investing in ‘insuretech’ is evolving," says Korwin-Szymanowska. "In the past, insurers did it because they wanted to have a toe in the disruption sector but a lot of companies now say they need to instil disruption as an internal ethos."
A second challenge centres on how insurers maintain, or indeed improve, customer relationships as new companies enter the market and new propositions are developed. For example, companies could get greater value from the huge amounts of data they possess, using them to improve client experience via underwriting optimisation and lower premiums.
Matthew Blake, Head of Future of Financial & Monetary Systems at the World Economic Forum, says that data are set to play a pivotal role in the industry – as they will across financial services. "Data is the new oil," he says. "Financial services are wedded to the data they have and their ability to analyse that data."
Finally, companies face the challenge of how best to leverage their capabilities and scale, which helps to maintain the funding barriers and potential efficiency advantages that prevents many start-ups from taking market share.
PwC’s Leader of Industry for Financial Services, Andrew Kail, summarises that incumbents' ability to adapt will hinge on how they confront these challenges. As he puts it: "They are well placed for now but the best chance of making it in the future will hinge on how successfully they become disruptors themselves."