The Three Mega Trends in Insurance
Insurance. There is change in the air. We sense it in boardrooms, conferences and magazine articles. It screams from startup decks. Big data. AI. Blockchains. Usage based insurance.
But we believe all that is just the beginning. Insurance innovators are still operating at the fringes. 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 – at the insurance carriers, that will 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.
Mega Trend #1: Insurance capacity will become a commodity
Distribution and reinsurance are inching closer together, putting a squeeze on primary insurers from both sides. When we strip 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 that 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 API-s for semi-autonomous insurance capacity, with reinsurers and capital providers tapping to the carrier system from the other side.
Thus insures will have to start reducing the heavy burden of cost they put on the value chain, or justify it with a next level of value add.
Mega Trend #2: MGAs getting stronger
Insurance distributors have been more adept at turning 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 continuing to become cheaper and simpler, granting an advantage to small and nimble firms.
We are now seeing more and more “technology first” MGAs, using cutting edge IT solutions not only in sales but also in underwriting and customer service, from big data based risk scoring to chatbots, and more.
Small and agile MGAs have also been quicker to improve and iterate upon their product offerings and entering new markets than incumbent carriers. They learn and adapt quicker.
MGAs have turned into the hotbed of insurance innovation and business conquests, quite similarly to startups in the technology sector. They even have MGA incubators and accelerators now. With the money and brains flowing in, MGAs are expanding from their original habitat of UK and US to other markets, starting from the continental Europe.
Mega Trend #3: Challenger insurers
Rarely a week goes by that you don’t read about insurance carriers investing gazillions in IT. It’s therefore 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 big data, AI or blockchains implementation. It’s about nimbleness. Technology has brought about the era of the quick eating the slow, not the big eating the small.
Tech startups have already challenged traditional banks. It’s now the insurers’ turn. 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 on the insurance industry, with backing from the VC-s.
The long term effects of these Mega Trends:
- Capital and license is 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/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 meager 8% ROE range at the incumbent insurers will start dropping further, making capital seek a new home at some point.
There are also some signs in the air for shifts in the thinking of the regulators. 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 both at the incumbents and at the regulators. However, the wind of change has always knocked down the walls eventually. Be smart. Be like a windmill.
Risto Rossar, CEO of Insly
Mart Parve, COO of Black Insurance