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COVID-19: What Buyers Want Now

As the COVID-19 pandemic continues, we’re learning a lot more about how insurance customers are being affected. We surveyed 6,000 U.S. consumers from May 22 to June 6, 2020 to get a snapshot of their attitudes about and experiences with insurance. Our survey uncovered the potential influence of COVID-19 on service preferences, loyalty to carriers and attitudes toward auto, homeowner, life, dental and vision coverage, as well as retirement.

As carriers navigate from their initial response to a longer-term strategy, they’ll likely need to adjust their approach based on shifts in consumer behavior. The takeaway? Financial stress correlates with dissatisfaction — but insurance carriers can improve customer satisfaction by introducing alternative pricing, bundling plans and, of course, upping their digital game.

Spotlight on consumers in this survey

  • 55% do not feel financial stress right now
  • 37% fear that the pandemic may cause financial impact to their retirement plan
  • 15% anticipate they are likely to purchase life insurance due to COVID-19
  • Source: PwC’s COVID-19 Consumer Insurance and Retirement Pulse Survey, June 2020: base of 6,000.

Consumers who faced challenges with their insurer

  • 41% say they are likely or more likely to switch providers due to a lack of digital capabilities
  • 15% identify lack of digital capabilities as the topmost challenge while interacting with insurers
  • Source: PwC’s COVID-19 Consumer Insurance and Retirement Pulse Survey, June 2020: base of 657. Note: Percentage calculated as a subset of those who reported facing challenges with their insurer.

Budget strain tests customer loyalty in the insurance industry

Source: COVID-19 Consumer Insurance and Retirement Pulse Survey
June 2020: base of 2,675

As lockdowns took effect across the U.S., 45% of respondents reported financial stress. Job-security concerns — not only job loss, but also cuts in hours, pay and benefits — were the primary sources of stress. The most-cited concern (41%) was whether household income would return to previous levels.

See also: The Real Disruption of Insurance

More young households were under pressure: 73% of the 18- to 24-year-olds surveyed felt financial strain, compared with only 19% of those 65 and older. Three-quarters of respondents found federal relief helpful, at least in part. Among furloughed workers, 28% did not have a good understanding of their benefit status, including those in employer-sponsored life plans.

Tensions were running high in households with incomes of less than $50,000, where 59% felt they were under pressure. Within this group, 21% reported post-COVID-19 challenges in dealing with their insurers, half of whom were looking for more flexible billing and payment options. Four out of five (82%) in this group said they’d likely switch carriers as a result. Across insurance categories, 26% of auto and 18% of homeowner policyholders said new payment options should be standard practices as a result of COVID-19.

At all income levels, consumers indicated that they’re more willing to shop on price within the next 90 days, with levels ranging from 23% for respondents earning more than $200,000 to 34% for those in the $20,000 to $50,000 bracket. COVID-19 made price a top priority for 32% of consumers.

The top concern, among 25% of the auto policyholders, was that their decrease in driving would not be reflected in premiums. For life insurance policyholders, unsatisfactory coverage options or complex underwriting conditions were likely to prompt a potential change. Perhaps because they were mindful of the quick turn to remote staffing, consumers were less likely to drop their carrier based on the most common challenge: long call-center wait times.

Takeaways

Financial stress correlates with dissatisfaction, and it can lead customers to look for change. To avoid that, we recommend the following:

  • Provide monthly billing options to help address policyholder cash-flow concerns.
  • Explore forbearance or deferred payment options to help customers facing income disruption. Explain these accommodations and how customers can secure them. 
  • Develop alternative pricing designed to help you retain customers. For example, consumers may be more willing to consider bundling policies or usage-based auto insurance programs, such as pay-as-you-drive GPS trackers and safe-driver telematics. Early adoption of COVID-19 rebates have contributed to high satisfaction among auto insurance customers and may have set expectations for price adjustments in other categories. 
  • Consider ways to play in a bigger ecosystem — one that can meet an individual’s full financial wellness needs. Look beyond your own products and services. Consider offering more guidance and coaching to ease the worry of financial stress and help customers with the sometimes complicated trade-off decisions they need to make.

Life after COVID-19: Financial security needs grow stronger

Consumer concerns extend beyond immediate financial setbacks. COVID-19’s future impact is a top current concern: 40% of the stressed population said they’re anxious about both access to emergency funds and saving for college or other milestones, and 37% fear that the pandemic may affect their retirement plans. Many consumers worry that their workplace benefits will be cut or more coverage will be needed. Some said their experience with the pandemic has made them more open to considering life insurance (15% of respondents), supplemental health insurance (10%), disability insurance (9%) and critical-illness coverage (9%).

Takeaways

Annuities and cash-value life insurance products may be more attractive in a COVID-19 world, as older policyholders strive to preserve wealth and younger consumers seek assets to tap into in the event of a future crisis. However, the investment market volatility that makes these products attractive can also make it difficult for you to price them. We recommend you consider the following:

  • Provide more conversion features without penalties that will enable customers to easily switch between products.
  • Reexamine investment strategies to reduce risk and enhance payouts for longevity — creating options that pay out later — and retain cash value.
  • Accelerate programs to simplify and expand access to life insurance, supplemental health, disability and critical-illness coverages.

Digital gets it done: Apps gain new acceptance in the insurance industry

Our survey indicates that as customers looked for alternate ways to update accounts, renew policies or resolve issues, online options came up short. Of those who expressed difficulties in dealing with their carriers during the crisis, 41% said they would be likely to switch providers due to a lack of digital capabilities.

When traditional channels shut down because of the pandemic, 19% of customers said they anticipated more interaction with their insurer through video chats with agents or chats via a website. They also planned to make more use of email and, especially for younger users, mobile apps.

Young consumers were most vocal about expecting digital options. Among the 18- to 24-year-olds surveyed, 53% said they were likely to use digital channels to engage with their insurers within the next 90 days, 49% were likely to purchase usage-based insurance and 49% were likely to shop around to save money on insurance.

See also: Why Traditional Insurance Won’t Work

Takeaways

Having digital capabilities has emerged as a differentiator as insurance customers are increasingly expecting to conduct business digitally. We recommend that you consider:

  • Accelerating your digital development now that customers have broken old habits to embrace online and mobile channels.
  • Leveraging technology to automate claims processing.
  • Strengthening your self-service capabilities, which may enhance customer satisfaction and reduce operational load.

The pandemic’s early uncertainties have given way to both setbacks and a chance to operate differently. Insurers that examine customer pain points and life changes and accelerate their digital adoption have an opportunity to gain share and build loyalty.

We would like to acknowledge Anshu Goel and Susmitha Kakumani for their contributions to this article.

PwC Advisory Services’ Juneen Belknap

Juneen Belknap, Principal, Financial Services-Insurance for PwC Advisory Services, talks with ITL COO Paul Winston about how PwC is working to provide solutions and shape how people think about the integration of modern new technology, including insurtech, with legacy systems to drive change and innovation in insurance. Among the insurtech companies PwC is working with to reimagine insurance processes are Terrene Labs, Snapsheet and InvestCloud, among others.


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Era of Insurance Innovation Is Upon Us

It’s a remarkable time in the insurance industry. Looking around at other major industries — retail, banking, manufacturing — it’s easy to see the changes that disruptors and technology have brought about. Yet in many ways it hasn’t hit home for insurance carriers. The same established players dominate at the top, and thousands of smaller firms maintain loyal clients throughout the insurance ecosystem.

“Get ready for change,” is a message that has been ringing out in the insurance market for a decade but finally seems to be getting through. Everyone from global consultancies to insurance leaders is predicting that, in the next five years, major insurance companies could fall, existing ways of doing business will become obsolete and disruptors big and small — from insurtech startups to Silicon Valley giants — will punish those clinging to the status quo.

Here’s an illustrative example from PwC of how demand is outpacing market offerings: Among millennial small business owners, 75% would prefer purchasing commercial insurance online, yet only about 1% of policies are sold without any intermediaries. Other market segments are further ahead: 30% of personal auto policies are sold without intermediaries, for example.

See also: Are You Tapping Your Innovation Energy?  

It’s clear where carriers and the third-party administrators (TPAs) that serve them need to be moving. Now it’s just a question of how they get there, and specifically how to keep their legacy systems while operating with the efficiency and agility needed in today’s market. One way to do this is collaboration, by viewing tech-savvy innovators as potential partners in the race to gear up for the digital age.

This is true across the value chain, from sales to risk management to claims intake and distribution. Carriers and TPAs are searching for solutions. And there are clear signs that the do-it-yourself mentality is giving way to a culture of collaboration. Capgemini found in 2017 that 53% of insurance executives around the world prefer partnering with insurtech firms to leverage digital technologies, as opposed to 36% who favor in-house development.

These partners can increase agility and configurability everywhere from front-end services like applications and renewals to back-end services like claims processing. And because the technology has already been developed — and often has the support of a team of digital natives — set-up time is quick and requires minimal changes to the carrier’s infrastructure.

Projected spending on artificial intelligence solutions among insurance companies illustrates the broad application of new technology. Deloitte predicts that insurers will increase their spending on AI by 48% in the next five years, boosting automation in everything from claims processing to fraud investigation, program advising and threat prevention.

A new report by NetClaim spotlights what this shift means for claims intake and dissemination. At the moment, most insurers and TPAs continue to handle these functions in-house, but that looks likely to change soon. About a quarter of carriers and TPAs already outsource their intake and dissemination needs to vendors, and about a quarter said they are looking to shift from in-house to outsourcing.

One of the drivers of this change is cost: Vendors have the expertise and economies of scale to do the job cheaper than it could be done in-house. But the days are gone when call centers could bring in business simply by being the cheapest option.

See also: Innovation — or Just Innovative Thinking?  

According to the NetClaim survey, almost as many carriers believe innovation is being driven by need for better quality control and fraud detection (64% of respondents) as efficiency and reduced prices (68%). Also, carriers and TPAs agreed on the need for innovation in the claims intake and distribution process. About 80% of carriers and 94% of TPAs saw a need for innovation in these functions. What carriers and TPAs need most are partners that can keep their organizations moving and adapting as quickly as the rapidly changing market evolves. Nimble vendors specializing in intake and built for change offer one way that organizations can add deeper innovation and better solutions than keeping those functions in-house.

Where Are Driverless Cars Taking Industry?

While more than half of individuals surveyed by Pew Research express worry over the trend toward autonomous vehicles, and only 11% are very enthusiastic about a future of self-driving cars, lack of positive consumer sentiment hasn’t stopped several industries from steering into the auto pilot lane. The general sentiment of proponents, such as Tesla and Volvo, is that consumers will flock toward driverless transportation once they understand the associated safety and time-saving benefits.

Because of the self-driving trend, KPMG currently predicts that the auto insurance market will shrink 60% by the year 2050 and an additional 10% over the following decade. What this means for P&C insurers is change in the years ahead. A decline in individual drivers would directly correlate to a reduction in demand for the industry’s largest segment of coverage.

How insurers survive will depend on several factors, including steps they take now to meet consumer expectations and needs.

The Rise of Autonomous Vehicles

Google’s Lexus RX450h SUV, as well as 34 other prototype vehicles, had driven more than 2.3 million autonomous miles as of November 2016, the last time the company published its once monthly report on the activity of its driverless car program. Based on this success and others from companies such as Tesla, public transportation now seems poised to jump into the autonomous lane.

Waymo — the Google self-driving car project — recently announced a partnership with Valley Metro to help residents in Phoenix, AZ, connect more efficiently to existing light rail, trains and buses by providing driverless rides to stations. This follows closely on the heels of another Waymo pilot program that put self-driving trucks on Atlanta area streets to transport goods to Google’s data centers.

In the world of personal driving, Tesla’s Auto Pilot system was one of the first to take over navigational functions, though it still required drivers to have a hand on the wheel. In 2017, Cadillac released the first truly hands-free automobile with its Super Cruise-enabled CT6, allowing drivers to drive without touching the wheel for as long as they traveled in their selected lane.

Cadillac’s level two system of semiautonomous driving is expected to be quickly upstaged by Audi’s A8. Equipped with Traffic Jam Pilot, the system allows drivers to take hands off the vehicle and eyes off the road as long as the car is on a limited-access divided highway with a vehicle directly in front of it. While in Traffic Jam mode, drivers will be free to engage with the vehicle’s entertainment system, view text messages or even look at a passenger in the seat next to them, as long as they remain in the driver’s seat with body facing forward.

While the Cadillacs were originally set to roll off the assembly line and onto dealer lots as early as spring of 2018, lack of consumer training as well as federal regulations have encouraged the auto manufacturer to delay release in the U.S.

Meanwhile, Volvo has met with similar constraints as it navigates toward releasing fully autonomous vehicles to 100 people by 2021. The manufacturer is now taking a more measured approach, one that includes training for drivers starting with level-two semi-autonomous assistance systems before eventually scaling up to fully autonomous vehicles.

“On the journey, some of the questions that we thought were really difficult to answer have been answered much faster than we expected. And in some areas, we are finding that there were more issues to dig into and solve than we expected,” said Marcus Rothoff, Volvo’s autonomous driving program director, in a statement to Automotive News Europe.

Despite the roadblocks, auto makers’ enthusiasm for the fully autonomous movement hasn’t waned. Tesla’s Elon Musk touts safer, more secure roadways when cars are in control, a vision that is being embraced by others in high positions, such as Elaine Chao, U.S. Secretary of Transportation.

“Automated or self-driving vehicles are about to change the way we travel and connect with one another,” Chao said to participants of the Detroit Auto Show in January 2018. “This technology has tremendous potential to enhance safety.”

See also: The Evolution in Self-Driving Vehicles  

We’ve already seen what sensors can do to promote safer driving. In a recent study conducted by the International Institute for Highway Safety, rear parking sensors bundled with automatic braking systems and rearview cameras were responsible for a 75% reduction in backing up crashes.

According to Tesla’s website, all of its Model S and Model X cars are equipped with 12 ultrasonic sensors capable of detecting both hard and soft objects, as well as with cameras and radar that send feedback to the car.

Caution, Autonomous Adoption Ahead

The road to fully autonomous vehicles is expected to be taken in a series of increasing steps. We have largely entered the first phase, where drivers are still in charge, aided by various safety systems that intervene in the case of driver error.

As we move closer to full autonomy, drivers will assume less control of the vehicle and begin acting as a failsafe for errant systems or by taking over under conditions where the system is not designed to navigate. We currently see this level of autonomous driving with Audi Traffic Jam Pilot, where drivers are prompted to take control if the vehicle departs from the pre-established roadway parameters.

In the final phase of autonomous driving, the driver is removed from controlling the vehicle and is absolved of roadway responsibility, putting all trust and control in the vehicle. KPMG predicts wide-scale adoption of this level of autonomous driving to begin taking place in 2025, as drivers realize the time-saving and safety benefits of self-driving vehicles. During this time frame, all new vehicles will be fully self-driving, and older cars will be retrofitted to conform to a road system of autonomous vehicles.

Past the advent of the autonomous trend in 2025, self-driving cars will become the norm, with information flowing between vehicles and across a network of related infrastructure sensors. KPMG expects full adoption of the autonomous trend by the year 2035, five years earlier than it first reported in 2015.

Despite straightforward predictions like these, it’s likely that drivers will adopt self-driving cars at varying rates, with some geographies moving faster toward driverless roadways than others. There will be points in the future where a major metropolis may have moved fully to a self-driving norm, mandating that drivers either purchase and use fully autonomous vehicles or adopt autonomous public transportation, while outlying areas will still be in a phase where traditional vehicles dominate or are in the process of being retrofitted.

“The point at which we see autonomy appear will not be the point at which there is a massive societal impact on people,” said Elon Musk, Tesla CEO, at the World Government Summit in Dubai in 2017. “Because it will take a lot of time to make enough autonomous vehicles to disrupt, so that disruption will take place over about 20 years.”

Will Self-Driving Cars Force a Decline in Traditional Auto Coverage?

At present, data from the National Highway Traffic Safety Administration indicates that 94% of automobile accidents are the result of human error. Taking humans largely out of the equation makes many autonomous vehicle proponents predict safer roadways in our future, but it also raises an interesting question. Who is at fault when a vehicle driving in autonomous mode is involved in a crash?

Many experts agree that accident liability will be taken away from the driver and put into the hands of the automobile manufacturers. In fact, precedents are already being set. In 2015, Volvo announced plans to accept fault when one of its autonomous cars is involved in an accident.

“It is really not that strange,” Anders Karrberg, vice president of government affairs at Volvo, told a House subcommittee recently. “Carmakers should take liability for any system in the car. So we have declared that if there is a malfunction to the [autonomous driving] system when operating autonomously, we would take the product liability.”

In the future, as automobile manufacturers take on liability for vehicle accidents, consumers may see a chance to save on their auto premiums by only carrying state-mandated minimums. Some states may even be inclined to repeal laws requiring drivers to carry traditional liability coverage on self-driving vehicles or substantially alter the coverage an individual must secure.

Despite the forward thinking of manufacturers such as Volvo, for the present, accident liability for autonomous cars is still a gray area. Following the death of a pedestrian hit by an Uber vehicle operating in self-driving mode in Arizona, questions were raised over liability.

Bryant Walker Smith, a law professor at the University of South Carolina with expertise in self-driving cars, indicated that most states require drivers to exercise care to avoid pedestrians on roadways, laying liability at the feet of the driver. But in the case of a car operating in self-driving mode, determining liability could hinge on whether there was a design defect in the autonomous system. In this case, both the auto and self-driving system manufacturers and even the software developers could be on the hook for damages, particularly in the event a lawsuit is filed.

Finding Opportunity in the Self-Driving Trend

Accenture, in conjunction with Stevens Institute of Technology, predicts that 23 million self-driving vehicles will be coursing across U.S. highways by 2035.

As a result, insurers could realize an $81 billion opportunity as autonomous vehicles open new areas of coverage in hardware and software liability, cybersecurity and public infrastructure insurance by 2025, the same year that KPMG predicts the autonomous trend will begin to rapidly accelerate. Simultaneously, Accenture predicts that personal auto premiums, which will begin falling in 2024, will hit a steeper decline before leveling out around 2050 at an all-time low.

Most of the personal premium decline is due to an assumption that the majority of self-driving cars will not be owned by individuals, but by original equipment manufacturers, OTT players and other service providers such as ride-sharing companies. It may seem like a logical conclusion if America’s love affair with the automobile wasn’t so well-defined.

Following falling gas prices in 2016, Americans logged a record-breaking 3.22 trillion miles behind the wheel. Even millennials, the age group once assumed to have given up on driving, are showing increased interest in piloting their own vehicles as the economy improves. According to the National Household Travel Survey conducted by the Federal Highway Administration, millennials increased their average number of miles driven 20% from 2009 to 2017.

Despite falling new car sales, the University of Michigan Transportation Research Institute shows that car ownership is actually on the rise. Eighteen percent of Americans purchase a new car every two to three years, while the majority (39%) make a new car bargain every four to six years.

Americans have many reasons for loving their vehicles. Forty percent say it’s because they enjoy driving and being in their cars, according to a survey conducted by Cars.com.

ReportLinker reveals that 83% of people drive daily and that half are passionate about the behind-the-wheel experience of taking on the open road. Another survey conducted by Gold Eagle determined that people even have dream cars, vehicles that they feel convey a sporty, luxurious or efficient image.

Ownership of autonomous vehicles would bring at least some liability back to the owner-occupant. For instance, owing to security concerns, all sensing and decision-making hardware related to the Audi Traffic Jam Pilot system is held onboard. With no over-air connections, software updates must be made manually through a dealer.

In situations like these, what happens if an autonomous vehicle crash is tied to the driver’s failure to ensure that software was promptly updated? Auto maintenance will also take on a new level of importance as sensitive self-driving systems will need to be maintained and adjusted to ensure proper performance. If an accident occurs due to improper vehicle maintenance, once again, the owner could be held liable.

As the U.S. moves toward autonomous car adoption, one thing becomes clear. Insurers will need to expand their product lines to include both commercial and personal lines of coverage if they are going to take part in the multibillion-dollar opportunity.

Preparing for the Autonomous Future of Insurance

Because the autonomous trend will be adopted at an uneven pace depending upon geography, socioeconomic conditions and even age groups, Deloitte predicts that the insurers that will thrive through the autonomous disruption are those with a “flexible business model and diverse product mix.”

To meet consumer expectations and maintain a critical focus on customer acquisition and retention, insurers will need a multitude of products designed to protect drivers across the autonomous adoption cycle, as well as new products designed to cover the shift of liability from driver to vehicle. Even traditional auto policies designed to protect car owners from liability will need to be redefined to cover autonomous parameters.

Currently, only 25% of companies have a business model that is easily adaptable to rapid change, such as the autonomous trend. In insurance, this lack of readiness is all the more crucial, considering the digital transformation already underway across the industry.

According to PwC, 85% of insurance CEOs are concerned about the speed of technological change. Worries over how to handle legacy systems in the face of digital adoption, as well as the need to accelerate automation and prepare for the next wave of transitions, such as autonomous vehicles, are behind these concerns.

As insurers look toward the complicated future of insuring a society of self-driving automobiles, we believe that focusing on four main areas will prepare them to respond to the autonomous trend with greater speed and agility.

Make better use of data

Consumers are looking for insurers to partner on risk mitigation. To meet these expectations, insurers will need to start making better use of data stores, as well as third-party sources, to help customers identify and reduce threats to life and property. Sixty-four percent want their insurer to provide real-time notifications about roadway safety, while, on the home front, 68% would like to receive mobile alerts on the potential of fire, smoke or carbon dioxide hazards.

“Technology is changing the insurer’s role to one of a partner who can address the customer’s real goals – well beyond traditional insurance,” said Cindy De Armond, managing director, Accenture P&C core platforms lead for North America, in a blog.

Armond believes that as insurers focus more on the customer’s prevention and recovery needs, they can become the everyday insurer, integrated into the lives of their customers rather than acting only as a crisis partner. This type of relationship makes insurer-insured relationships more certain and extends longevity.

For insurers and their insureds, the future is likely to be more about predicting and mitigating risk than about handling claims, so improving data capture and analytics capabilities is essential to agile operations that can easily adapt to new trends.

See also: Autonomous Vehicles: ‘The Trolley Problem’  

Focus on digital

Consumers want to engage with their insurer in the moment. Whether that means shopping online for coverage while watching a child’s soccer game or making a phone call to ask questions about a policy, they expect to be able to engage on their time and through their channel of choice. Insurers that develop fluid omni-channel engagement now are future-proofing their operations, preparing to survive the evolution to self-driving, when the reams of data gathered from autonomous vehicles can be used to enable on-demand auto coverage.

Vehicle occupants will one day purchase coverage on the fly, depending on the roadway conditions they encounter and whether they are traveling in autonomous mode. Forrester analyst Ellen Carney sees a fluid orchestration of data and digital technologies combining to deliver this type of experience, putting much of the power in the hands of the customer.

“On your way home, you’re going to get a quote for auto insurance,” she says. “And because your driving data could basically now be portable, you could do a reverse auction and say, ‘Okay, insurance companies, how much do you want to bid for my drive home?’”

To facilitate the speed and immediacy required for these transactions, insurers will need to digitally quote, bind and issue coverage.

Seek automation

In the U.K., accident liability clearly shifts from the driver to the vehicle for level four and five autonomous automobiles. As driverless vehicles become the norm, the U.S. is likely to adopt similar legislation, requiring a fundamental shift in how risk is assessed and insurance policies are underwritten. Instead of assessing a policy on the driver’s claims history and age, insurers will need to rate risk by variables related to the software that runs the vehicle and how likely owners are to maintain autonomous cars and sensitive self-driving systems.

The more complicated underwriting becomes, the more important automation in underwriting will be. Consumers who can get into a car that drives itself will have little patience for insurers that require extensive manual work to assess their risk and return bound policy documents. Even businesses will come to expect a much faster turnaround on policies related to self-driving vehicles despite the complexity of the various coverages that will be required. In addition, on-demand coverage will require automated underwriting to respond to customer requests.

According to Lexis Nexis, only 20% of commercial carriers have automated the quoting process, and less than half are investing in underwriting automation.

Invest in platform ecosystems

McKinsey defines a platform business model as one that allows multiple participants to “connect, interact and create and exchange value,” while an ecosystem is a set of connected services that fulfill multiple needs of the user in “one integrated experience.” By definition, an insurance platform ecosystem in the age of autonomous vehicles would be a place where consumers and businesses could research and purchase the coverage they need while also picking up related ancillary services, such as apps or entertainment to make the autonomous ride more enjoyable.

Consumers are in search of ecosystem values today. According to Bain’s customer behavior and loyalty study, consumers are willing to pay higher premiums to insurers that offer ancillary services, such as home security monitoring or an automotive services app, and they are even willing to switch insurers to get time-saving benefits like these.

More important to insurers is the ability to partner with other carriers on coverage. Using a commission-based system, insurers offer policies from other carriers to consumers when they don’t have an appetite for the risk or don’t offer the coverage in house. This arrangement allows an insurer to maintain a customer relationship, while providing for their needs and price points.

See also: Autonomous Vehicles: Truly Imminent?  

As the autonomous trend reaches fruition, insurers will need to have access to a wide range of coverage types to meet consumer and business needs, and not all carriers will be able or want to create the new products.

Extreme Customer Focus Prepares for the Future

Insurers can prepare for autonomous vehicle adoption by establishing an extreme customer focus, dedicated to establishing enduring loyalty as insurance needs change. Loyal customers spend 67% more over three years than new ones. As the insurance marketplace opens up to the sale of ancillary services, gaining wallet share from loyal consumers will certainly help to boost revenues as demand for traditional products decline, but to stay competitive, insurers will need a broader mix of coverage types.

While current coverages have remained largely unchanged over the decades, the coming years will see an industry in flux as insurers phase out outmoded types of coverage while phasing in new products and services. In this environment, the platform ecosystems may be the most critical aspect of bridging the gaps.

Today, they allow insurers to fulfill the needs of price-sensitive consumers while also meeting the evolving needs of their customers. Tomorrow, platform ecosystems will provide the “flexible business model and diverse product mix” that Deloitte says will be critical to success for insurers in the autonomous age of driving.

The Industry Needs an Intervention

Leaders in the insurance industry, like many other industry executives, are seeking routes to profitable growth amid unprecedented economic, financial and regulatory change. No longer can companies pursue top-line growth for its own sake without adverse consequences or rely on cost cuts alone to boost margins. Today, companies must strike a strategic balance that will sustain profit growth and shareholder returns over the long term.

This is no easy trick, as tectonic forces unsettle the insurance industry — which is accustomed to measuring the pace of change in decades, not years or quarters. A business-as-usual approach falters in the face of quickly shifting customer needs, rising capital requirements, new regulatory burdens, low interest rates, disruptive technology, and new competitors.

Many companies aren’t getting the results they need from textbook moves such as fine-tuning marketing programs, updating products, enhancing customer-service systems or beefing up information technology. That’s because traditional operating levers for executing strategy simply weren’t designed for the challenges confronting insurers today. Strategic success now requires something more: a structural response. A company can’t adapt to 21st-century conditions without modernizing its 20th-century structures.

The key is for companies to realize that strategy equals structure. Strategy — the big and important ways that a company chooses to compete — must naturally and intrinsically weave in key operating model dimensions, including legal entity, tax positioning, capital deployment, organization and governance.

Finally, once strategy and structure are wed, companies must recognize the role of culture in making new structures work, and use their cultural strengths to promote the changes and ensure that they have staying power. Here’s how:

Responding to the Pressures

Rapid evolutionary change has rendered time-honored organizational structures ineffectual or obsolete in many cases. Before attempting to execute new strategies, insurance companies need to reevaluate every dimension of their operating model.

Structural inadequacies take many forms. Some companies lack the scale needed to generate profitable growth under new capital requirements. Others with siloed, hierarchical organizations lack the flexibility to respond quickly to market shifts. Poor technological capabilities often hamstring old-line insurers facing new digitally oriented rivals. And tax reform and regulation looms as a potential threat to profitability in certain business lines.

See also: Why Is Insurance Industry So Small?

In our work with insurers, we at Strategy&, PwC’s strategy consulting business, have seen certain common responses to these pressures. Their responses divide these companies into three groups:

  • The first group of companies have anticipated the effects of marketplace trends and made appropriate structural adjustments, clearing the way to profitable growth. For example, life insurer MetLife avoided costly regulatory mandates by selling registered broker distribution to MassMutual and spinning off its Brighthouse retail operations. Others, including Manulife and Sun Life, have made substantial acquisitions to consolidate scale positions.
  • The second group of companies have recognized the need for structural change, but have yet to carry it out. With plans made, or under discussion, these companies are waiting opportunistically for the right deal to come along.
  • A third group of companies, however, have hunkered down behind existing structures, making only minor tweaks and hoping to emerge from the storm without too much damage. For some, this is a rational choice because of constraints that leave them with little or no maneuvering room. In other cases, action is impeded by a company culture that reflexively rejects certain options.

Companies in the first two groups are giving themselves a chance to win. But the response of companies in the third group smacks of self-delusion in an age when strategy equals structure.

Time for Real Change

Without a doubt, many insurers work diligently and continually to improve their businesses across dimensions. They gather insights into consumer needs and behaviors, nurture unique capabilities to differentiate themselves from competitors, modernize products, update distribution strategies and embrace digitization in all its forms. These are all sound approaches, but they’re inadequate in addressing the unknown facing insurers today. Their belief that they will persist assumes a certain stability in underlying economic and market conditions that hasn’t been seen since the financial collapse nearly a decade ago.

Forces unleashed by that crash and its aftermath undermined the pillars of many insurance business models. We’ve seen years of only modest growth, with property/casualty insurers expanding at a 3% pace, and life insurers barely exceeding 1%.

The long stretch of sluggish global growth has put pressure on revenues and forced insurers to compete harder on price. Near-0% interest rates that have prevailed since the Great Recession are squeezing profit margins, especially in life insurance. On the regulatory front, tougher accounting rules are driving up costs while heavier capital requirements weigh down balance sheets and dilute returns.

Compounding these challenges are the potentially destabilizing effects of tax reform on earnings and growth. Taxes may actually rise for some insurers, an outcome that could force them to raise prices or find other ways to protect shareholder returns. In many cases, the benefits of falling tax rates may be diminished by the loss of deductions for affiliate premiums, limits on deductibility of life reserves, accelerated earnings recognition and a slowdown of deferred acquisition cost deductions.

Competitive dynamics are shifting, too, as expanding “pure play” asset managers such as Vanguard and Fidelity block growth avenues for insurers. Established companies and some new entrants are innovating and experimenting with disruptive distribution models. Others, including private equity firms, are looking to bend the cost curve through aggressive acquisition and sourcing strategies.

To be sure, some long-term trends could benefit certain insurers, or at least improve their risk profile. Longer life spans and the shift of responsibility for retirement funding to individuals may drive demand for annuities and other retirement products.

However, many companies are as unprepared to capitalize on these opportunities as they are to meet long-term challenges. Often the problem comes down to scale. Some insurers lack the resources to build new distribution platforms and customer service capabilities in growing markets such as asset management, group insurance, ancillary benefits and retirement plans. Although offering an individual product may be relatively easy for new market entrants, the difficulty and cost of establishing such platforms creates a desire for scale and increases pressure on smaller competitors.

Sometimes, the issue isn’t scale but a failure to respond quickly enough as conditions change. Buying habits are changing as consumers — particularly the younger cohorts — make more purchases online. Yet our research indicates that people still want some personal assistance with larger and more-complex transactions.

It takes investment and experimentation to find and refine the right business model for new marketplace realities. But some companies haven’t built the necessary assets and capabilities or adjusted to evolving distribution patterns and consumer behaviors.

The proper response to each challenge and opportunity will be different for every company, depending on its unique characteristics and circumstances. In virtually every case, the right solution will involve structural change.

Joining Strategy and Structure

As companies recognize that traditional approaches to annual planning, project funding and technology architecture may be hindering innovation and real-time responses to changing market conditions, many are rethinking and redesigning their core processes to facilitate change. Recent transactions in the sector show the range of structural options for companies that want to advance strategic goals in a changing marketplace. Below are some examples.

Exiting businesses. Sometimes, the best choice is to move out of harm’s way; companies can preserve margins by exiting businesses targeted for higher capital requirements or costly new accounting standards. MetLife’s Brighthouse spin-off bolstered its case for relief from designation as a “systemically important financial institution,” and the associated capital requirements. Exiting U.S. retail life insurance markets also enabled MetLife to focus on faster-growing businesses that are less vulnerable to rock-bottom interest rates. The Hartford recently announced the sale of Talcott Resolution to a group of investors, completing its exit from the life and annuity business.

Partnerships and acquisitions. When scale is an issue, the solution may lie outside the company or in new structural approaches. Some insurers form partnerships to expand distribution, diversify product portfolios or bolster capabilities. Companies also adjust their scale and capital structures through mergers, acquisitions and divestitures. Sun Life paid $975 million in 2016 for Assurant’s employee benefits business, filling gaps in its product portfolio and gaining scale to compete with larger rivals. MassMutual’s purchase of MetLife’s broker-dealer network in 2016 enlarged the MassMutual brokerage force by 70% and freed MetLife to pursue new distribution channels.

Expanding into new lines and geographies. New product lines offer another path to faster growth or fatter profit margins. Several insurers have moved into expanding markets with lower capital requirements, such as asset management. Voya, Sun Life and MassMutual have acquired or established third-party asset management units to capitalize on investment expertise they developed managing internal portfolios. The Hartford recently agreed to acquire Aetna’s U.S. group life and disability business, deepening and enhancing its group benefits distribution capabilities and accelerating digital technology plans. We also see companies establishing technology-focused subsidiaries such as Reinsurance Group of America’s (RGA’s) RGAx and AIG’s Blackboard.

Cutting costs. Some companies have moved aggressively to improve their cost structure. Insurers seeking greater financial flexibility have divested assets that require significant capital reserves. Aegon unleashed $700 million in capital by selling blocks of run-off annuity business to Wilton Re in 2017. An insurer that offloads its defined-benefit plan to another via pension-risk transfer frees up capital and eliminates continuing pension funding requirements. Other cost-saving moves focus on workforce expenses. In addition to rightsizing staff, such measures include relocating workers to low-cost areas or jurisdictions offering significant tax incentives. Prudential and Manulife slashed expenses by establishing overseas operating centers that take advantage of labor cost arbitrage, create global economies of scale and reduce taxes.

See also: Key Findings on the Insurance Industry

Transformation and Culture

Once companies have launched ambitious structural initiatives, they don’t always recognize the role of culture in making the new structures work. But this is a mistake.

Culture is a pattern of behaviors, norms and mind-sets that have grown up around existing organizational structures; the two (culture and structure) are tightly linked, and you can’t change one without affecting the other. No culture is all good or all bad. But certain cultural traits are more relevant to structural change than others.

Cultural attributes affect a company’s ability to make necessary changes. A company that is consensus-driven and focused on preventing problems before they arise may be indecisive and slow to act. These traits may cause it to wait too long and miss the optimal moment for a structural transformation. Other companies, by contrast, have a tradition of quickly seizing opportunities. When this trait is supported by other important characteristics — more single points of accountability, strong leadership and an aligned senior management team — it can foster the rapid decision making essential to structural change.

Culture also comes into play after executives decide to initiate structural change. Most employees have strong emotional connections to the culture — this source of pride, along with a clear and inspiring vision of the future, can motivate them to line up behind the change and can inspire collaboration across organizational boundaries to drive the transformation. Leaders at all levels can generate momentum by signaling the desired cultural shifts and embodying the new behaviors needed to execute structural change.

A new structure without a corresponding evolution of culture amounts to little more than a redesigned organization chart. Culture makes or breaks the new structure, influencing factors as diverse as resource allocation, governance and the ability to follow through on a vow to “change how work gets done.” It’s not uncommon for a company to expend tremendous effort and resources on a complete structural overhaul, only to see incompatible cultural norms thwart its strategic execution. For example, a new, streamlined operating model intended to accelerate decision making and foster cross-functional collaboration won’t take root in a culture that exalts hierarchy and encourages employees to focus on narrow functional priorities.

Culture also influences a company’s willingness to make the deep structural changes in time to avert a crisis. Those who wait until market conditions have undermined their operating model put themselves at a disadvantage. Nevertheless, few companies attempt structural change in “peacetime.”

Absent a crisis, cultural expectations often limit directors to a narrow role monitoring indicators such as growth and profitability, while management concentrates on achieving specific strategic objectives. Under this traditional allocation of responsibilities, emerging structural issues may not get enough attention. Successful companies, by contrast, continually reassess their structure in light of evolving market conditions. They understand that organizational structures aren’t permanent fixtures, but strategic choices to be reconsidered as circumstances and objectives change.

Capitalizing on Changes

Amid the confusion of today’s insurance industry, one thing is clear: Business as usual won’t deliver sustained, profitable growth. As powerful forces reshape markets, conventional tools for executing strategy are losing their effectiveness. Today’s challenges are not operational, but structural. Many insurers lack the scale, capabilities or efficiency to compete effectively as competition intensifies, regulatory burdens increase and financial pressures rise.

Winning companies are meeting structural challenges with structural solutions. Approaches vary from company to company. Some add scale or enhance capabilities, whereas others streamline cost structures or exit lagging business lines. With the right cultural support, these structural responses position a company to capitalize on industry changes that are confounding competitors.

You can find the article originally published on Strategy & Business.

This article was written by Bruce Brodie, Rutger von Post and Michael Mariani.