As insurance executives look out for the industry’s next wave, they will see a paradox of great risk and opportunity. The most serious threats — societal megatrends, disruptive technology advancements and intensifying competition from both new and traditional players — also hold the greatest potential for growth and transformation.
As the strategic evolution of the industry accelerates, the most effective response for insurers is to harness the power of change and thoughtfully design their futures. They must develop their vision for the future and adjust their strategic and tactical plans to realize that vision.
Certainly, these recommendations apply to three of the top issues the industry faces — climate change, the rise of new ecosystems and operating models and more inclusive insurance. These are just a few of the trends and scenarios we explore in our recently released report titled, NextWave Insurance: personal lines and small commercial.
Climate change: Climate change is arguably the biggest challenge facing humanity today. For insurers, it also presents an array of new uncertainties that make pricing risk harder than ever. The potential impact of climate change on the insurance sector is staggeringly large. Just consider these numbers:
- $219 billion: combined global insurance losses from natural disasters, 2017–18 (Swiss Re)
- 90%: proportion of natural disaster costs that can be attributed to weather-related events in an average year (Munich Re)
- Five times: total economic losses caused by hurricanes in 2017, relative to the average of the previous 16 years (Aon Benfield)
As storms grow more severe, insurers have a clear opportunity to offer increased protection to families, businesses and communities. Only 30% of catastrophic losses were covered by insurance between 2009 and 2018, according to Aon Benfield. It also estimates that there is a $180 billion global protection gap for weather-related risks.
Of course, insurers must be able to accurately model and price the risk of climate change if they are to collect more premium dollars. They must also understand the potentially detrimental impact of pricing customers out of the market and increasing the underserved community.
As societies around the world come to terms with the implications of global climate change, it’s clear that the insurance industry has a leading role to play in managing risk and offering protection. The earlier that firms grapple with and understand these complex climate-related risks, the more likely they are to derive value from them. Instead of waiting for perfect information, firms should take a flexible approach to this fast-moving topic and embed climate-related considerations into their decision-making.
The rise of ecosystems: Today’s insurance marketplace is hypercompetitive, with extremely tight margins, slow (if any) growth and high operating costs. The industry’s current economics are unsustainable, which means insurers need to rethink their business models.
See also: The Insurance Lead Ecosystem
Ecosystems, which entail multiple companies partnering to offer specialized, but complementary, services in mutually beneficial ways, are one way for them to enhance the value of their offerings. Ecosystems can take many forms — strategic partnerships, alliances, mergers and acquisitions and joint ventures. The cloud, artificial intelligence and new data sources are key to enabling the development of ecosystems and other new business models.
Early adopters and forward-looking insurers can capture market share by defining their role in the ecosystem relative to other types of entities (e.g., sharing platforms, social media, insurtechs, data providers, customer associations and business services). By connecting with insurtechs, leaders can rapidly add innovative technologies and enhance business processes and customer experiences. Ecosystems and other new operating models will spark innovation and change multiple parts of the business.
Direct, digital and embedded sales will become dominant channels for growth, and ecosystems can help position insurers to capture their fair share of revenue. Subscription models will make insurance more deeply woven into consumers’ everyday lives, clarifying the value insurers deliver.
Ecosystems are one example of how insurers will change both what they deliver and how they deliver it. And the industry appears ready to adopt these models; a full 76% of insurance executives view partnerships and ecosystems as determinants of a future competitive advantage, according to Swiss Re. Small and mid-tier carriers that lack focus and differentiation may find it hard to make the required investments in people and technology, while achieving their financial targets.
More inclusive insurance: Insurers are well-positioned to help protect the many underinsured consumers and businesses around the world. They must find ways to engage younger consumers — so-called “generation rent” — sooner. As these consumers wait longer to purchase vehicles (which they may never do), buy homes, get married and have children, their first interactions with insurers happen later in life.
See also: Opportunities and Risks in the IoT
Insurers must innovate with technology to engage and support the underinsured and other underserved markets. It’s worth noting how insurers in emerging markets exhibited great creativity in using mobile phones to provide microinsurance, asset-based coverages and embedded insurance purchases in their efforts to connect to the underinsured. These approaches are likely to succeed with the underserved and underinsured segments in mature markets, too. As carriers use greater amounts of information and advanced analytics, they need to be sensitive to pricing customers out of the market.
Seizing opportunity while navigating risk The fundamental question to ask is: Will growth opportunities outweigh the threats in the next wave of insurance? Insurers’ actions and investments in the next five to 10 years will determine if they maximize the upside of these opportunities or struggle with the downside.
The views expressed by the presenters are their own and not necessarily those of Ernst & Young LLP or other members of the global EY organization.