2016 trends and predications in p&c insurance industry
2016 Industry Trends and Predictions
January 2016 | By Phil Cook
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, It was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.”
When Charles Dickens wrote these words in 1859 (for his “Tale of Two Cities”), he encapsulated the mood of that time, which was one of uncertainty and concern about the future. Obviously he could not have anticipated those sentiments being replicated in the early part of the 21st Century, but the fact is that our current social, political, economic and business environments are rife with uncertainty, and accompanied by an undercurrent of concern about what the future may hold.
By contrast, at the very time Dickens was writing his prophetic words, there was a small but growing group of individuals meeting within a few blocks of Dickens’ home in London, who would soon incorporate a new company under a special act of Parliament (the Lloyds Act of 1871). Interestingly the newly created Lloyds of London chose as their motto the word Fidentia (from the Latin “Confidence”).
At the risk of over simplification, until 1975 insurers and reinsurers were successful by providing their clients with what they wanted. That all changed in 1975, when most insurers and reinsurers began shifting to providing their clients with what they needed. I choose 1975 for this delineation because it is the date that is generally accepted to be the beginning of the “Information Age”. Prior to that, most computer technology was directed to communications, or the mechanization of functions and processes, which were previously performed manually.
The advent of the Information Age meant not only new and improved communication options, but a completely different way of accessing data and sharing information, and a more discerning consumer base. Insurers and reinsurers were among several industries who have had to deal with that new knowledge-based society, and by the turn of the Century (who can forget Y2K?) most companies were at least cognizant, if not fully committed, to the new reality.
If we have any doubt about the pace of change we are dealing with, consider the simple fact that many of the new licensed drivers our industry will insure this year were born in the 21st Century (i.e. post Y2K). They will also become our direct consumers in a few short years and we better be prepared to meet their needs, and even more importantly as an industry, to begin the process of defining those needs for them.
For our industry to be relevant in the 21st Century we will need to address the trend toward the “internet of everything”. It is currently estimated that by 2020 there will be more than 50 billion connected objects. The interconnection of multitudes of embedded devices and smart objects is mind boggling. Almost every aspect of our lives will be either controlled or impacted by smart technology.
With this emerging trend (soon to be a reality), we need to start considering the impact it will have on our industry, as “missing the wave” could easily render us irrelevant. Consider the impact of just a few of these possibilities in terms of our traditional product lines:
- How will we underwrite the 95 year old who buys a driverless car after not having driven for some 15 years?
- How will we underwrite the 20 year old driver with several convictions or licence suspensions who decides to buy a driverless car?
- How will we underwrite the parents of young children who decide to send those children to school in their driverless car?
These simple examples have potentially dramatic consequences as we see exposure move from driver liability to potential product liability. Also consider the fact that a significant change in the way automobile insurance is handled could have a significant impact on the Canadian insurance industry, which currently derives approximately 45% of its gross written premium from that line of business.
- Will we be ready for the potential product liability exposure arising from the multitude of smart objects?
- Are we prepared for the fact that under our “occurrence” general liability policies there are probably several high-tech parts which have already been manufactured, and will find themselves incorporated in some of the future smart objects?
- Are we ready for the E&O or D&O exposures that will arise in the future from representations and promises already made and memorialized (in perpetuity) in electronic media?
- Can we handle the expanding demand to address catastrophic exposures of all types, and will we have the ability as an industry to create articulate new products to address the continued impact of climate change?
- Will we find a way to provide coverage for the substantial uninsured catastrophic losses that take place every year around the world? (Estimates for 2015 indicate that out of $85 billion in catastrophic loss, only $32 billion was insured)
- Do we have, or can we develop, the political capital to work with all levels of government to create joint coverage and funding solutions to the newly emerging risks?
These are real and current examples of property-related issues requiring new and innovative solutions if we are to remain relevant. Making decisions within this new and dynamic environment will not be easy, but failing to address the issues at all would be much worse. By way of personal observation, I believe we have within one generation, gone from not having enough information to make informed decisions, to probably having too much information at our disposal. Successful individuals in this environment will be those capable of discerning what data or information should be discarded rather than included in the decision making process.
Much has been written about the required attributes of individual leaders in all areas of business and commerce. However, in this paper my emphasis is more on “corporate culture” and its ability to adapt to, and profit from, the rapidly changing environment in which we will operate. While individual leaders may set the tone and direction of each organization, actual execution still comes down to individuals on the “front line” dealing directly with consumers, intermediaries, suppliers, investors and regulators.
At its extremities, a few of our Canadian insurer/reinsurer organizations are either “too large to fail” or “too small to matter”. However the vast majority of companies fall between those two extremes, and they will be the ones most directly impacted by the need to respond appropriately to the challenges of the 21st Century. To put it bluntly, the successful ones will prosper and achieve the results necessary to survive, while the ones that fail to respond to the current environment will shrink or die.
Consolidation will take care of some of the growth issues as companies try to achieve critical mass, and some companies will take an informed decision to remain small but very “specialized”. There is certainly room for both in the insurance industry of the future. The emerging trend in this area is for companies to create an environment that attracts the type of employees who complement their corporate culture, while leaving room for innovation and alternative opinions. New successful companies will likely appear among the top group of companies in the future and it is very likely that a list of the top 20 Canadian insurance/reinsurance companies 15 years from now will look very different from today, just as the top 20 today are quite different from 15 years ago.
A study conducted a few years ago by the Harvard Business School reviewed several “established” companies operating in very mature industries (not exclusively insurance and reinsurance). The result of their study was that the organizations that prospered fell under the following four general descriptions:
- Progressive – embracing change and committed to research and action
- Creative – designing new products and creating their own markets
- Intermediating – maintaining most existing products, but using new methods of distribution
- Radical – setting very short-term “opportunistic” goals and able to change direction quickly
While this study did not look exclusively at our industry, I think the same four categories of organization would apply. Interestingly, there was no single strategy that would be considered more successful than another, and the percentage of organizations adopting each strategy was almost identical. This is very good news for our industry as it allows us to perpetuate a healthy level of diversity between competing organizations. Of course the un-spoken conclusion of the study is that those organizations who chose not to adapt, were no longer around to be part of the study!
As indicated in the preamble to this paper, our industry has a unique opportunity to provide a degree of stability and confidence in the middle of some very uncertain times. Identifying trends and incorporating solutions in the corporate cultures of our respective organizations should ensure not only survival, but ultimately operational success. Addressing the continuing trends around our Capital issues is paramount, as capital will continue to represent the lifeblood of our industry. Identifying trends and developing strategies around emerging risks will preserve that capital and make us more relevant to our investors, consumers and governments; particularly if we continue to be on the leading edge of product development. Companies with strong capital positions, products that address the evolving needs of their customers, and a corporate culture that includes a strategy to address the ever changing operational environment, will inevitably emerge as “winners”.
ADVANTAGE Monthly trends papers
This paper is part of an open online library of ADVANTAGE Monthly trends papers, published by the CIP Society for the benefit of its members and of the p&c insurance industry. The trends papers provide a detailed analysis of emerging trends and issues, include context and impact, and commentary from experts in the field.
The CIP Society represents more than 18,000 graduates of the Insurance Institute’s Fellowship (FCIP) and Chartered Insurance Professional (CIP) programs. As the professionals’ division of the Insurance Institute of Canada, the Society’s mission is to advance the education, experience, ethics and excellence of our members. The Society provides a number of programs that promote the CIP and FCIP designations, continuous professional development, professional ethics, mentoring, national leaderships awards, and research on the issues impacting the p&c insurance industry in Canada.