Innovation and Insurtech are two words that leaders in the insurance industry can’t help but see almost every day. Change isn’t new to the insurance industry—the industry has dealt with change continually over time, addressing new risks such as those stemming from the Industrial Revolution, to the invention of the automobile, the advent of cat modeling and the internet, along with many changes to the business process of insurance through e-commerce, where even further change is likely. However, the historical pace of change and the ability to manage through it is no indication of the future.
Several important differences make managing change over the next 10 to 15 years much different and more important than in the past. First, the speed of change—in areas such as driverless cars, the internet and connectivity, and risk from climate change—is accelerating and will require change in insurance coverages at a much faster pace.
What’s more, changes in the insurance process and the emergence of new competitors will further pressure current insurance market participants. Past new entrants to the market typically came from an insurance background and perspective, with new capital. The new entrants of the future will come with a strong technology focus or huge customer bases from outside the insurance industry.
The huge increase in the amount of data from the Internet of Things has been a big benefit to the insurance industry with regard to predictive analytics. But that same information is also available to new competitors, who are in a very strong position to put it to use in new technology platforms to strengthen their analytics, shorten the insurance delivery process, and change products to fit the demands of a dynamic economy.
Taken a step further, those large potential competitors from outside the insurance industry are already accumulating the data and customer connections that will have a major impact on the business of risk management. The accumulation of data and connectivity position these firms to shift risk management from risk transfer through insurance, to risk avoidance through monitoring services. Yes, there will still be the need for an insurance product to handle the residual risk, but that risk can be greatly diminished through risk monitoring and notification services. Even if those organizations don’t assume the residual risk and opt to provide insurance themselves, the reduction in risk will have an impact on the demand for insurance coverage in traditional lines of business.
A final driver of the need for innovation in the insurance industry is the shift in society. For the generation now coming of age, personal and commercial transactions are conducted via the press of a button on a phone. Everything they need is in their pocket, and they are looking for solutions on the go. This direct connection will also affect the way insurance is transacted. Insurers must recognize and address the shift in how consumers of the future will choose to transact business for both personal and small commercial insurance.
"An important benefit of the availability of information and greater connectivity is the potential to eliminate some of the costs from the business process of insurance"
An important benefit of the availability of information and greater connectivity is the potential to eliminate some of the costs from the business process of insurance. Regardless of an insurance company’s business model, the business process still requires a significant amount of background data. The ability to gather that data through automated sources and eliminate much of the manual labor in that step should help reduce costs in insurance transactions, including any ensuing claims activity—another important reason for insurance companies to stay focused on technology-based solutions.
The insurance industry has always been highly regulated which makes it a challenging landscape to navigate for innovators. The question of the impact of insurance regulation and privacy standards remains large. Such regulation will slow innovation from time to time but will not stave off sensible solutions that meet market needs. Insurance regulators are keenly aware of the critical need for innovation and are working to ensure that regulation is not an impediment to sensible innovation that improves the efficiency of the insurance market. However, this is a hurdle that could benefit the fast follower position.
A market leader today that doesn’t pay attention to the changes in insurance needs, the types of competitors entering the insurance market, and in the demands of insurance buyers, will quickly become a market laggard tomorrow. The challenges may seem overwhelming, but a good way to start is to not get stuck in the past and to be cognizant of the external changes around you. Build a culture that encourages employees to embrace change and to look for ways to improve your business products, services, and processes. The need for speed places a greater importance on your ability to be decisive, manage projects, and implement change. Patience in this regard is not the greatest virtue, but focus is. Start the process today, but don’t expect to address everything at once. A strong culture that embraces new ideas is the most important aspect of innovation.
Given our expectation for change in the insurance industry, we at A.M. Best believe that it is imperative that all insurance companies remain observant of the challenges and opportunities that could impact their business and develop a culture that empowers employees to move the business forward. We have begun to monitor a company’s activities in—as well as its level of—innovation in our rating process. We believe that innovation will play an increasingly critical role in a company’s ability to maintain its competitive market position and, ultimately, its long-term financial strength.
A.M. Best expects to capture the growing importance of a company’s ability to innovate in its rating methodology in the near future. We recognize that such a criterion is difficult to capture, but adding this component reflects how important a company’s ability to innovate and adapt to the changing risk management needs of society, as well as to new technology and new ways to deliver risk management service, is to their long-term financial strength.