Insurance. There is change in the air. We sense it in boardrooms, conferences and magazine articles. It screams from start-up decks. Big data, AI, blockchains. Usage- based insurance.
We believe all that is just the beginning. Insurance innovators are still operating on the fringes. They are making insurance easier to buy online and on smart devices, helping underwriters with data analytics.
There is an even larger shift underway, one that will strike insurance at its core. It will shock insurance carriers and challenge how insurance is made, not how it’s sold. Here are the three mega trends of the new chapter in the history of insurance.
#1 Mega Trend in Insurance: Capacity Will Become a Commodity
Distribution and reinsurance are inching closer together, putting a squeeze on primary insurers from both sides. When we remove the veil of mysticism, insurers have only one job: matching risk with capital. And they’ve managed to turn it into a costly, cumbersome affair.
There are competent, capable institutions next to insurers on both sides of the value chain. Brokers and MGAs on one side and reinsurers on the other. All major reinsurers have floated ideas around disintermediating insurance, with several having taken the first concrete steps.
We are confident in this trend in insurance: insurance capacity will become a commodity; it will be accessible for MGAs and brokers the same way as Google Cloud or Amazon AWS. MGAs capable of profitable underwriting will connect their IT systems to insurance carrier APIs for semi-autonomous insurance capacity, with reinsurers and capital providers tapping into the carrier system from the other side.
Thus, insurers will have to start reducing the heavy burden of cost they put on the value chain, or justify it with a next level of added value.
#2 Mega Trend in Insurance: MGAs Getting Stronger
Insurance distributors have been more adept at turning the internet age technology into an advantage. They have been leading the shift to online sales every step of the way. Incorporating technology in business is becoming cheaper and simpler, granting an advantage to small and nimble firms.
We are seeing a clear trend in insurance as more and more “technology first” MGAs emerge. They are using cutting-edge IT solutions not only in sales, but also in underwriting and customer service from risk scoring based on big data to chatbots, and more.
Thanks to the ability to learn and adapt fast, small and agile MGAs have beaten incumbent carriers in improving product offerings and entering new markets.
MGAs have turned into the hotbed of insurance innovation and business conquests, quite similarly to start-ups in the technology sector. A new trend in insurance is MGA incubators and accelerators. With the money and expertise flowing in, MGAs are expanding from their original habitat of the UK and US to other markets starting with Continental Europe.
#3 Mega Trend in Insurance: Challenger Insurers
Rarely a week goes by when you don’t read about insurance carriers investing gazillions in IT. It’s only natural to assume that the industry has become much, much more efficient. Wrong. The expense ratios are stagnant or even increasing.
Translating existing processes to IT in a piecemeal way while dragging along an ever-larger pile of legacy systems has effectively moved the costs and inefficiencies from one budget row to another.
Size has become a serious disadvantage in technology adoption. You don’t need billions for successful implementation of big data, AI, or blockchains. It’s about nimbleness. Technology has brought about a totally new trend in insurance: the era of the quick eating the slow, not the big eating the small.
Tech start-ups have already challenged traditional banks. Now, it’s the turn of insurers. We will see an entire wave of challenger insurers setting a new benchmark on what you can achieve when setting a pack of fierce business and software hackers loose in the insurance industry, with backing from the VCs.
Long-Term Effects of Mega Trends in Insurance
- Capital and licenses are becoming more of a commodity (like AWS or Google Cloud in IT).
- MGAs and brokers will gain more leverage.
- Retail insurers will be under pressure to cut costs or be disintermediated by MGAs or reinsurers.
Slow Motion Explosion
The pace of these shifts will be slower than in some other disrupted industries, mainly due to the extent of the regulatory barriers. The capital requirements have been taken to almost absurd levels, insurmountable for the majority of prospective newcomers. The general burden of compliance is heavy too, with the regulators exercising discretion and making carriers jump through often arbitrary hoops.
This continues to grant an upper hand for large insurance incumbents, having amassed large books of business and insane amounts of capital, with economies of scale that give them a comparative advantage in terms of regulation and compliance. Moreover, there have been cases of regulators specifically punishing smaller carriers with relatively higher capital requirements, “just to be on the safe side”.
However, the meagre 8% ROE range at the incumbent insurers will start dropping further, making capital seek a new home at some point.
There are also slight trends in insurance in the air, marking shifts in the way regulators think. Regulatory competition is starting to be treated seriously, with several high-profile regulators creating sandboxes and accommodating new business models. But this transformation won’t be quick either.
“When the winds of change blow, some people build walls and others build windmills,” says a Chinese proverb. There is still quite a bit of wall-building going on at both incumbents and regulators. However, the wind of change has always knocked down the walls. Be smart. Be like a windmill.
Risto Rossar, CEO at Insly
Mart Parve, former COO at Black Insurance
