Sign Posts and Stop Signs
Thoughts about the future of the p&c insurance industry
January 2017 | By Philip H. Cook MBA, FCIP | CEO, Omega Insurance Holdings Inc.
We live in a time of incremental change in almost every aspect of our lives. The pace of change is mind boggling and there is no indication that it will slow down any time soon.
This reality requires new thinking on our part, first for the survival of our industry and then to reimagine what it will look like a few years from today and start planning for the new reality.
Long term “operational” planning for most of our companies has traditionally focused on a one to three year horizon, but there are now so many fundamental issues that could disrupt our traditional thinking we need to step back and create a vision of what our industry will look like in 5 to 10 years, and how our organizations will remain relevant.
This trends paper will deal with some of the key issues that will shape the future of our industry, or if not addressed, may in some cases prove to be a catalyst for the demise of some organizations. Some of these issues will represent “sign posts” pointing us toward a solution, while others may be “stop signs” which we ignore at our peril.
In this 150th anniversary year for Canada, we would do well to recognize that the insurance industry was alive and well for at least 150 years before confederation. In such a mature and, in large part successful, industry there can be some complacency, but there are also significant opportunities available.
Personal relationships have been the bedrock of our industry since its inception. Insurers need policyholders, brokers need clients, reinsurers need cedants, adjusters need claims to adjudicate, and the list goes on. However, it is in this area of relationships that we may be most at risk in the future, not because we have handled things particularly badly, but because consumer expectations of how they want to be dealt with have undergone a paradigm shift.
Competing for customers has traditionally been a very granular exercise, where companies have tried to differentiate themselves from their own peer group on the basis of price, service, special products etc. This has worked reasonably well in the past but with each new generation of consumers it is becoming more obvious that real competitive edge comes from how companies interact with consumers rather than just what is on offer.
The medium really has become the message, and for most of our younger consumers (and probably all of the next generation of consumers) our industry will be viewed through the lens of how they obtain other non-insurance products and services. It is no longer enough for us to design products and services to address consumer needs and wants, rather we need to create (or embrace) delivery systems that meet their expectations.
The fastest growing segment of our industry (and incidentally the one generating the most amount of investor interest) is InsurTech, which saw more than 150 new start-ups in 2016 with significant amounts of new investment support.
Our industry has been quite innovative in terms of delivering new products through traditional distribution channels, or traditional products through new distribution channels. However, we need to turn our attention to the prospect of delivering new product through new distribution channels.
Most of the InsurTech activity to date has concentrated on design and testing, but I believe our industry is facing the beginning of an unprecedented period of intense change where we will either become our own disruptors, or face the very real risk of becoming the victim of disruptors from outside the industry.
Most other industries have already felt the impact of disruptors, and companies within those industries have been forced to modify or completely change the way they do business in order to survive and prosper. The ones that chose to view change as a temporary trend are no longer around to tell their story.
In 2012 Encyclopedia Britannica announced that it would no longer publish its print edition, having been in the same business for 245 years. The final edition consisted of 32 volumes (30 devoted to information and 2 containing the index and cross reference material). It was said to have been the most comprehensive publication of its type in history, accurate to the 99th percentile, printed immaculately, containing the most stunning photography, and by far the most appealing and skilfully bound edition ever produced.
A perfect product that no one wanted, except for a few a few bibliophiles and rare book dealers. Why? – Because the same product content was available faster, cheaper and potentially more current, at the click of a keystroke. The lesson here is that however good our products may be, and however well they may address the needs and wants of the consumer, if they are not delivered through a modern medium they will probably be considered inferior.
Reputation and relevancy
Added to the personal relationship challenges faced by our industry, is the current global movement against status quo, big government, and big business. While this trend might be considered to be quite fickle, it is probably going to be around for the next several years and is a reality we must contend with. The growth in Peer-to-Peer insurance alternatives is a good example of this shift away from traditional methods of product design and distribution. Placing coverage online, at any time of the day or night directly and instantaneously, and having claims adjudicated in real-time is extremely compelling to consumers who are increasingly choosing that type of electronic medium for their other non-insurance purchases.
Interestingly, the concept of Peer-to Peer insurance exchanges with claims being adjudicated by other members is not a new one, having been the basis of most Mutual Companies or Reciprocals, and utilizes the sharing concept inherent in our industry’s origin. It is just packaged differently and has the look and feel of a new concept.
In a similar vein, affinity group sales and member only buying groups are a growing part of the retail world, giving people of like mind, circumstances, or backgrounds, the comfort of knowing they part of a special group experience, and that others have already accepted the value proposition offered by the seller.
Whether we like it or not, our industry is not high on the likeability scale, although many companies are doing interesting things to overcome this bias. We will need to improve in this area not only to retain customers, but to build political capital to withstand what is likely to be increased consumer pressure on governments to control both our behaviour and pricing. Demonstrating fairness in our customer claims relationships will be an essential ingredient, and finding ways to communicate the unique services we provide following catastrophic events will all serve to enhance our general reputation.
Governments continue to be the largest insurers in almost all countries, picking up most of the uninsured cost of natural and man-made disasters. During 2016 it is estimated that the damage caused around the world by natural catastrophic events was approximately $160 billion, of which only about 30% was insured by our industry.
For us to remain relevant in the future we need to be seen as providing protection for a larger share of these Nat/Cat losses. At only 30% we run the risk of not only being marginalized by our clients, but being seen as less than relevant by our politicians and government officials. Independent adjusters have been used effectively by governments to distribute emergency funds and assist with quantification of both insured and uninsured damage, but we also need to become more directly engaged in providing actual coverage for these exposures.
Thinking outside the box
Underwriting results, customer retention, maintaining access to capital, managing change, harnessing social media, corporate governance, hiring and developing good staff, regulatory compliance, and creating a culture of innovation, are just a few of the issues our companies will need to manage effectively over the next few years if they are to remain viable.
This is going to require a wide range of skills, some of which can be developed organically from within our current companies, but some will need to be imported from other organizations or disciplines.
Add to that the significant changes that are about to impact our industry from the advent of driverless cars, more disruptors from outside the industry, new forms of consolidation at the insurer, reinsurer and intermediary level, increased cyber exposure, continued climate change and a period of prolonged economic uncertainty, and the future might seem quite daunting.
However, as has always been the case historically for our industry, people will emerge to navigate through the problems, creating solutions, products and delivery systems that have the potential to keep the industry vibrant and relevant.
The real issue is whether it is possible to think outside the box, if you are part of the box. It can be done, but it may require some additional assistance from outside the box. One thing is certain, if the scope of our vision is limited to thinking inside the box, there is not much hope for a bright future.
Information and data
Good decision-making in any area requires access to reliable information and dependable data. Over the last 25 to 30 year period, we have gone from having insufficient data on which to make informed decisions, to perhaps having so much data and access to information that it is difficult to isolate the key information we need to reach a conclusion.
People with the ability to sift through information and select what is most important will be at a premium in the future, and a valuable asset within any organization.
Add to this the recent increase in false news and other forms of unsupported information, and the need for people who can differentiate between good and bad data is intensified.
Finally, we should guard against thinking that tweets, retweets, “likes” and other forms of mass messaging are actually trend indicators. They might represent trends, but they are just as likely to represent inherent bias on behalf of the participants.
There is no substitute for good research and intelligent valuation of available data, statistics and modeling as our industry moves forward and continues to meet or exceed customer expectations.