This article is part of a series on key forces shaping the insurance industry. Parts One, Two and Three can be found here
Trend #4 and #5: Innovation in commercial lines
Solutions will continue to evolve from protection to behavioral change, then to prevention — even across complex commercial insurance. Although proliferation of data and increasing transparency of both the buyer and seller will cause disintermediation for simple covers, it will also create opportunities for brokers and intermediaries to innovate solutions and channels for their B2C (non-standard risk pools, retirees/older generation, healthcare gaps) and B2B (emerging and unknown risks, cyber, global supply chains, cross-border liability, terrorism).
We believe the potential for innovation in commercial lines is actually larger than personal lines. Because of the complexity of the commercial insurance ecosystem and new emerging risks, however, the level of innovation seen so far has been relatively modest.
See also: 3 Ways to Leverage Digital Innovation
Demand and supply of commercial insurance solutions is evolving, driven by:
- developing markets looking for new solutions
- the digital economy driving a move away from property risks (which are decreasing as a proportion of the overall economy) to casualty
- increasing demand for catastrophe insurance (driven, in part, by increasing concentration)
- macro trends creating emerging and “uninsurable” risk classes
- new sources of structured and unstructured external data that are changing how commercial insurance is sourced, bought, underwritten/priced and serviced
The competitive landscape is also changing with large global conglomerates setting up captives to self-insure emerging market champions and the continued involvement of alternative sources of capital. Excess underwriting capacity is placing strain on profitability.
In addition, new entrants and primary distributors are seeking to take greater control of the value chain, including pricing and risk selection. This impact is further enhanced by primary carriers retaining more risk as a result of global scale and balance sheet strength providing diversification and increased understanding of their own risk from solvency modeling.
Many incumbents are already starting to respond.
In the London market, a key component of the modernization program being driven by Lloyds is PPL, a new platform where face-to-face negotiation is supported and facilitated by electronic risk capture, placing, signing and closing. Brokers are also aggressively evolving their risk analytics capabilities through the creation of open architecture platforms that deliver a two-way information flow while leveraging knowledge to shape future risk transfer solutions for evolving needs.
Many carriers are piloting monitoring technology in property (partnerships with security, pest control and energy companies) as well as casualty (sensors and wearables) to drive improvements in risk selection and risk mitigation.
How innovation will drive value creation
Risk monitoring, mitigation and prevention
One of the key trends driving change is the move from risk transfer to risk monitoring, mitigation and prevention.
Organizations are looking for risk prevention and mitigation solutions as they move away from traditional risk transfer mechanisms.
We see three main areas:
Insurance sourcing, buying and selling
- Telematics for commercial lines (for example in property and marine);
- Real-time, contextual data capture and AI for risk selection, risk mitigation and monitoring, client on-boarding as well as re-underwriting; and
- Use of preventive technologies (health tech, slip and fall, work place safety) to mitigate lost time injury and workers' compensation losses.
As businesses gain greater transparency into their risks, they will continue to optimize their risk management solutions. While direct SME cover, self-insurance and use of captives will continue to grow, emerging risks will provide opportunities for intermediaries and brokers to carve out and source new solutions for their customers. Examples of these will include global supply chains, cross border liability, cyber, catastrophe and terrorism.
Operating model improvements
The commercial market has always been very strong around product innovation, but the operating model has largely stagnated. In some parts of the market, the underlying process hasn’t really changed for more than a hundred years. System limitations further reduce the ability to leverage the data that is captured. There are significant opportunities to enhance operational efficiency in many of the basic functions, including payments and regulation and also in automating underwriting and claims.
Application of technology and data to enable digitalization
There are a number of risk classes where there is significant potential to harness technology and data to improve underwriting, risk selection and pricing, as well as to help businesses understand and then manage their exposure. These include cyber, flood and SME.
Platform-based solutions (rather than point solutions) have the greatest potential to create value, and incumbents will need to assess how to incorporate innovative solutions based on a build, buy or partner strategy.
See also: Q&A With Google on Innovation, Risk
We hope you enjoy these insights, and we look forward to collaborating with you as we create a new insurance future.
Next article in the series will be about Trend #6. The ability to dynamically innovate (new risk pools, new segments, new channels) and deliver on the customer promise will become the most important competitive advantage (as known risks continue to get commoditized and moved to the direct channels).