Insurance
Overview
One Minute Read
Insurance is one of the largest sectors of the Financial Services industry focused on the financial protection needs of individuals and businesses. Technological innovation, regulatory reforms and the increasing digitalisation of people’s daily lives are reshaping the financial services landscape and bringing new competitors. The COVID-19 pandemic has accelerated this with a cross-generational shift to digital. Insurers are being squeezed by declining economic conditions, rising climate change risks and volatile markets, however they may benefit from rising interest rates. In response, the sector is transforming towards to a digital financial ecosystem, driven by five challenges and the widespread adoption of digital technology. However a major customer survey recently stated "Banking and even utilities and other industries are just moving faster than insurance.”
Sector Description
Insurance is a $5.9 trillion sector of the $25.6 trillion global financial services industry [1]. The global insurance market is expected to grow from $5.94 trillion in 2022 at a compound annual growth rate (CAGR) of 9.1% to reach $8.4 trillion in 2026 [2].
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. A policy’s premium is its price, which is determined based on the risk profile.
There are typically three segments in the insurance market:
- Insurance Brokers - distribute insurance products either through physical or digital channels.
- Insurance Carriers - Insurance companies base their business models around assuming and diversifying risk. The insurers pools clients’ risks to make payments more affordable for the insured. Most insurers companies generate revenue in two ways: underwriting and asset management.
- Reinsurance - is insurance for insurance companies. It’s a way of transferring some of the financial risk insurance companies assume to another insurance company, the reinsurer.
The insurance process is complex and open to disruption, digitisation and automation.
Segments
Drivers
Shaped by the global megatrends, the pandemic and now the declining economy, the sector is being transformed by five major drivers:
Customer Experience – The growing influence of BigTechs has raised the bar for customer service and awareness of digital. The willingness of policyholders to purchase an insurance from one of the BigTechs has risen from 17% in 2016 to 44% in 2020 [1].
Risk – Risk is at the core of the insurance business. Risks related to climate change are growing. Insured losses from natural catastrophes have increased 250% in the last 30 years [2].
Innovation – Digital attackers (including aggregators) are reshaping the competitive landscape and altering the cost curve by commoditizing product lines and driving down prices through increased transparency. Traditional insurers are investing in digital to respond.
Efficiency – Insurance hasn’t increased its overall productivity in the past ten years. Cost ratios have increased 10% from 2014 to 2019 [3]. The primary culprits are complexity caused by M&A or duplicative products
Profitability – Insurance industry profits are “practically at a standstill” due to longstanding economic challenges. Profits for insurance companies fell by about 15% from 2019 levels [4] and even before COVID-19 the majority of insurers were not making their cost of capital. Rising interest rates may help increase incomes but lower returns from capital markets may reduce profitability.
Transformation
The industry is transforming towards to a digital financial ecosystem, where today’s informed consumers enjoy a seamless, digitally enhanced experience, allowing them to switch across multiple access points and channels throughout the lifecycle, where rigid products are transformed into personalised and timely digital offerings on digital platforms, using artificial intelligence & automation to complement human interactions and where finance is embedded seamlessly into everyday life.
Insurers understand that the new normal is digital:
- The COVID-19 pandemic means that digital adoption is no longer a function of age but is mainstream across generations, this has forced a rapid adoption of digital interactions.
- 70% of financial service workers were forced to work remotely during the pandemic [1].
- Almost three quarters (72%) of UK financial services companies are embracing digital technology to make their business operations greener [2].
In addition, the crisis has driven a rapid increase in cyber-attacks and fraud, a 20% increase in actual attacks and a 500% increase in attempted attacks [3].
Transformation will require a shift to the design & development of:
Multi-access Engagement
Personalised Products
Intelligent Operations
Digital Platforms
and ultimately shifting business models to participate in the Open Finance Ecosystem.
Digital Technology
Fundamentally insurers need to adopt three key technology approaches:
Digital-first for the new normal digital experience to complement other channels
Cloud-first for operational efficiency and time-to-market gains, especially the automation of processes end-to-end.
API-first for effective ecosystems collaboration, especially with brokers and intermediaries.
This will be supported by significant investment in Data, Analytics, AI & Automation to deliver better customer experiences at a lower cost, a Digital Workplace to enable a remotely located workforce, whether in-branch, at home or in offices.
Security, Compliance & Data Privacy is also critical as customers will expect an insurer to operate at a very high level of security and privacy to protect customer confidential information and money.