The April 2017 issue of Business Insurance Magazine features a cover story on the retail industry, and how the move to e-commerce is changing the risks faced by the insurance industry. The articles include “Retail caught flat footed by e-commerce,” and “Web revolution creates new era for retail risk management.” It is remarkable that both the retail industry and the insurance industry seem to be taken by surprise at the advance of online shopping. This is especially puzzling because the handwriting has been on the wall for so long that it is beginning to fade away. What are the lessons for the insurance industry today in a world where digital change is affecting every industry?
Before answering that, it’s a good idea to brush up on the history of e-commerce. The ability to shop and purchase items online began to appear in the mid- to late 1990s with the initial internet boom. In the early days, anyone who could put up a website thought they could reach the whole world and become rich and famous overnight. Thousands of those early web businesses achieved rapid valuations based on inflated expectations and then crashed and burned in spectacular fashion during the Internet bust of the early 2000s. But others were very successful and began to eat away at the business of the traditional “brick and mortar” retailers. Of course, Amazon.com is the most famous, starting in 1994 and selling its first book online in 1995. Although the company did not have a yearly profit until 2004, its growth in those early years was phenomenal, and there was little doubt that it would become a major force in retail.
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I could enumerate many examples of e-commerce successes and failures, but the point is that the move to e-commerce has been gaining steam for more than 20 years, putting a number of household names out of business along the way (think Borders, Circuit City). Many others filed for bankruptcy or were acquired at bargain basement prices. Many retailers have been closing stores and trying to revamp their business models for a decade or more (Sears, J.C Penney, Macy’s). And a wave of local retailers have found it difficult to compete with big online retailers.
The Business Insurance articles do a nice job of describing the implications for the insurance industry and retail risk managers of this transition to e-commerce, identifying how the movement changes the risk landscape. The main question is, what took everyone so long to realize that online shopping would have a transformative effect on the retail industry? It did not happen overnight, and the implications could have been foreseen and planned for long ago. To be sure, some retailers and some insurers were forward-thinking and adjusted for the transformation, but far too many were blindsided, as indicated in the articles. What does this mean for insurers today?
Besides the changing nature of retail and the companies populating the space, commercial lines insurers should focus a critical eye on every industry segment they serve. Today, the pace has quickened, and a wide range of emerging technologies, societal trends and demographics are causing upheaval in every industry. For example, the transportation sector faces issues such as autonomous vehicles, ride sharing, vehicle electrification and new transportation technologies – developments that are sure to completely reshape that industry sector. Similar cases can be made for change in manufacturing, energy, entertainment, travel and other industries. This time around, those industries and their insurer partners will not have 20 years to monitor developments. Many of these industries are likely to see substantial changes within the next three to five years. The changes to products, business models, companies and industry structure will, in some cases, dramatically change risks. For some, new technologies and solutions will enable very significant reductions in risk, and for others, new risks will emerge.
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The main messages for insurers are these: Don’t be complacent. Don’t assume this is all hype and will never happen. And don’t assume that you will be retired before any of these transformations take hold. Plan and prepare now, seizing the opportunities to succeed in the digital age.