The last couple of years, marred by the COVID-19 pandemic, have been chaotic for the insurance industry. But even before the pandemic irrevocably changed the market landscape, insurance carriers were dealing with stagnation. High cost ratios, increasing competition, and pricing pressures continue to plague insurers across the globe. To stay relevant in a fast-changing business landscape, insurers must address five key shifts in the industry.
#1 – The battle for customer ownership
Who owns the customer? That has become a significant question in the insurance space. Carriers face tough competition from brokers and InsureTech players and are losing their relevance in the value chain.
In the past decade, global brokers contributed to just 22% of annualized total shareholder returns (TSR), which more than doubled, reaching 53% of TSR, in a short span of 2020-21. Consolidation in the insurance broking space is cementing the value-add brokers bring to the table, namely terms that favor the consumer and hard negotiations regarding pricing. A market that favors the brokerage model also impacts insurers’ cost ratios from a commission perspective.
On the other end of the spectrum, InsureTech players are gaining ground with razor-sharp experiences. InsurTech startups raised USD 2.2 billion in 2021 and are innovating rapidly to enter new markets and deliver on new-age consumer needs. Several non-insurance players are also entering the market, and embedded insurance is set to be the fastest-growing space in the coming decade. In a survey, 55% of consumers said they would buy a hypothetical insurance product from Amazon over a traditional carrier.
Failing to act to reclaim their position in the value chain could relegate carriers to mere record keepers who price risk. Only when the carriers own the customer can they access the valuable consumer data that will open possibilities for personalization, cross-sell, up-sell, and innovation. As a carrier, you need to up the efforts in going direct to the consumer and delivering experiences that create consumer stickiness, such as policy issuance in minutes, quick claim settlements without human intervention, conversational-AI interfaces to support self-service, etc.
#2 – Reimagining the insurance value chain
To add value to the customer, insurers need to rethink their role in the insurance value chain.
They must move beyond the passive approach of selling policies to an active advisory role. At the same time, they need to think of innovative ways of structuring their products and services. For example, significant revenue is expected to shift to the insurance-as-a-service model to cater to consumer demand for digital delivery. Emerging markets like the gig economy, service groups, and social media groups provide new opportunities for developing and distributing insurance solutions. Moreover, innovative insurers will be able to tap into the booming frontier technologies market, which is expected to be $3,200 billion by 2025.
Insurers must leverage the data at their disposal to personalize offerings. For example, usage-based insurance uses sensor data to analyze your driving behavior or health and prices the policies accordingly.
Today the connected economy and API-driven ecosystem have created unprecedented opportunities for innovation, and insurers need to leverage them proactively. It is expected that ecosystems may add revenues to the tune of $60 trillion by 2030.
#3 – Post pandemic workforce transformation
After working remotely for over two years, every organization finds returning to the workplace challenging. Several companies have also instituted hybrid, work from anywhere models. However, for insurers, the challenge is much more complex when it comes to insuring this new-age workforce. For instance, how would you cover an accident liability at the workplace when someone is working from home? How would workplace health hazards be defined?
The challenge is compounded by the fact that by 2030, nearly half of the adult population will be digital natives , but only 8% of full-time employees in insurance have digital roles. Insurers will need to invest in upskilling the employees and creating a digital infrastructure to deliver successfully in the new work models.
There is a need to rethink group benefits, employment-benefits, and employment-related insurance and tailor them to the expectations of the millennial and Gen Z workforce.
#4 – Environmental, social, and corporate governance
ESG has taken center stage in insurance. Insurers are faced with finding solutions that align with a greener economy and net-zero goals. How can insurers move from paying the claim to preventing the loss itself in the first place? How do you come out with better insurance products which are more environmentally sustainable? Moreover, by considering environmental metrics in their underwriting, insurers are in a unique position to incentivize sustainable practices by other businesses.
Sustainability is the new mantra, and it is incomplete without a focus on social goals. How can you support diversity and equity through inclusive products? What steps can you take to ensure human rights in the entire value chain? Continued innovation is needed to assess, design, and deliver for the social cause.
Governance encompasses the policies and frameworks in place to monitor, track and report ESG steps and outcomes. For example, how do you do your business in an ethical way? Are you covering risks for organizations that are supporting terrorism or other unlawful activities? How do you ensure compliance with ESG? Incorporating ESG in the way business is conducted will open many doors for early movers.
#5 – Reducing operating costs and business risk
The insurance industry is facing challenges in revenue growth driven by high base operational costs, low-interest rates, and pricing pressure from aggregators and digital players. These and other cost drivers have resulted in nearly halting the economic profitability of the insurance industry. There is a need to relook at business operating models to reduce the business risk.
Reducing business complexity and streamlining operations is vital to cutting down costs. This can lead to lower time to market and reduced costs of policy and claims management. There are many technologies available in the market that can improve efficiency for insurers and reduce the need for workforce. For example, by 2030, technological advances may lead to a 46% reduction in the requirement of claim handlers and a 75% reduction in processing personnel.
The CIOS are using maturing technologies like AI, ML, deep learning, computer vision, etc., to address their pain points surrounding this priority area.
Technology: Bringing in a new insurance era
Till now, technology in insurance has been all about increasing efficiency – how do you make processes faster, cheaper, and save manual effort? The focus was on automation and accuracy and not on process reimagination. Carriers were lifting the manual process (whether suitable or not) as is to digital platforms. While this approach did show some uptick in efficiency, it wasn’t really “transformative”. Today, carriers need to think digital-first and design their processes for a digital world. The focus is on bringing higher-order human cognition functions into play.
For instance, the shift from data extraction to insights leading to personalization. Instead of using OCR, computer vision, and AI/ML just to extract data like policy number, expiration date etc. now, technology can bring all that data together to paint a holistic picture of the customer and the type of coverage that can be offered to them while minimizing business risk. Sophisticated AI-based models can quickly parse information that is difficult to assess manually. For instance, what is the likelihood of new business submission getting converted into a policy, what combination of limit, exclusion and pricing would result in optimum profitability or, based on past data, what would be the likelihood of a litigation on a certain claim. These insights can help underwriters arrive at the right pricing and help them decide on the exclusion clauses, limits etc.
Similarly, technology is simplifying claim settlement. In agriculture insurance, for example, earlier government surveyors manually assessed yield every year based on random sampling. Based on these assessments, insurers would compensate farmers if the area was declared to be affected by weather conditions. However, this was a very long-drawn process affecting the farmers’ income and livelihood. Today, IoT devices, computer vision technology, and drones can send real-time alerts to insurers about weather conditions like storms or floods, accelerating claim settlement to a matter of days.
Strategizing for value
The insurance sector is faced with new challenges, but exciting opportunities abound. Innovations in products, service delivery, and operations will change how risk is managed and utilized. Technology will play a major role in creating a differentiator but comes with its own considerations. The impacts of climate change and greater social accountability will require incorporating ESG principles in underwriting. Consumers’ expectations in the new normal will set the bar high, and new integrated ecosystems will evolve to deliver agile and flexible solutions.