The Insurance Industry Needs to Change the Business Model and Take Risks
The pressures the insurance industry is facing seem to keep coming like an unending stream of tsunamis, beginning with changing customer expectations with millennials and Gen Z and gathering momentum with blurring industry boundaries and the wave of InsurTech startups. The ability of the industry to invest large sums of money into creating opposing forces to fight these tsunamis is withering due to a triple whammy … the triad:
- Increased claims costs
- Soft market
- Operational costs that challenge the existing business models
The year 2017, turned out to be a record-breaking year of major catastrophes including wildfires, hailstorms, flooding, snowstorms, and hurricanes, to name a few. It has been reported that in the US alone, there was $306 billion in total damage in 2017, with 16 events that caused more than $1 billion in damage each. Much of this would be reinsured by the London Market or reinsurers. The financial impact is being felt in profitability and the potential for increased risk that needs to be addressed.
The soft market is continuing, with no change soon, given the excess capacity in the market. The excess capital is fueling many new startups in InsurTech. In addition, the low interest rate environment continues to challenge returns and is intensifying insurers’ focus on underwriting and claims fundamentals. And finally, the pressures to optimize the organization and subsequently, operational costs, do not necessarily move the organization forward innovatively to compete effectively in a fast-changing market.
How are insurers responding? Our Strategic Priorities – Knowing vs. Doing research highlights a growing gap between insurers that know about the changes and insurers that are doing something about them. There is an awareness of the pace of change that is signaling unheralded challenges and opportunities. Unfortunately, turning awareness into doing, with actionable initiatives, is elusive, creating an ever-widening gap between leaders who are taking action and those who are not.
If you look at parallels with other industries, it is clear that inaction or traditional approaches will not be enough.
Consider the media, taxi or music industries. The traditional models were significantly disrupted by new entrants or existing companies entering their industry. Just putting the business online or making it accessible via an app is not necessarily enough. Why? Because the fundamental business model did not change to adapt to the broader market change. You just “paved the cow path”.
While these steps may optimize your existing business, and buy time for the organization, they do not fundamentally change the business model to enable growth and to capture a new generation of buyers with different needs and expectations.
We are seeing new models underway with recent entrants like Lemonade, Tapoly and Meet Mia from InsurTech, embedded insurance by Tesla, and the potential for Amazon and Apple to enter the insurance market. All of these new products will be constructed on unique customer experiences that are compelling, consistent, engaging, and seamless. The new “definition” of insurer may mean that you reach far outside of tradition to launch supplemental services you may never have considered. But, no matter how you grow, you’ll need to first shift into Digital Insurance 2.0 — a step that will make flexibility and growth viable.
With today’s pace of change, the path of least risk will include taking some risks. The risk to invest in new business models, new products, and new channels can, at minimum, keep insurers competitive. Even better, taking these risks could allow insurers to leapfrog the competition. Because the new competition does not play by the traditional rules of the past, insurers need to be a part of rewriting the rules for the future. There is less risk in a game where you write the rules.
Majesco regularly researches these tectonic industry trends and invests significant R & D dollars into Digital Insurance 2.0. We invite you to explore these trends and consider the possibilities for the future of your Digital Insurance 2.0.