Reaffirming the purpose of insurance
Insurers can meet the moment by focusing on their vital societal purpose.
The pandemic represents an opportunity to reaffirm the purpose of insurance: protecting people, communities and businesses from unexpected risk, while embracing rising societal concerns around sustainability and fairness.
Thus far, the insurance industry has had a mixed experience. On the one hand, many insurers have strived to go the extra mile for their customers and employees since the pandemic struck. On the other hand, there is significant sensitivity and potential negative sentiment around COVID-19 coverage; in the public eye, a focus on contractual terms masks a broader failure of the industry to provide protection.
As the situation plays out, insurers can be proactive relative to their important societal role. For one, they can seek to accelerate claims processing and streamline their customer service functions. They can also engage with elected officials and regulators to demonstrate leadership in the restoration of the global economy, and to develop public-private solutions for recovery and for protections against future events. Product innovation will be essential, too; the sector must find ways to identify and cover insurable risk in the realms of cyber, climate change and future pandemics.
More broadly, insurers need to reflect on the broader societal trends and how to adapt. A number of insurers have embraced environmental, social and governance (ESG) investing, and are extending that to their underwriting. Sustainability and the impact of climate change have a direct impact on property and casualty (P&C) insurance, and insurers are at the cutting edge of data-driven modelling to evaluate those risks.
As unsettling and challenging as these times are, they present a unique opportunity for insurers to live their purpose and, in so doing, elevate their relevance to younger generations of buyers who don’t necessarily see or understand the industry’s value.
Adapting to structural change and strategic realignments
Deglobalization and the privatization of capital are forcing changes in the insurance value chain.
After years of thinking globally, insurers are considering the significant implications of deglobalization. Brexit, changes to the US tax code and global trade tensions and political frictions – all of these issues present insurers with unique and complex challenges. Specifically, they have raised questions about how to pool risk and structure businesses and entities. Higher costs and lower balance sheet efficiency are among the potential impacts.
The growth of alternative capital and the increasing privatization of capital markets will also drive major changes in the insurance value chain. The impact of alternative capital has already been seen in P&C reinsurance. Its impacts are increasingly being felt in life insurance, as life and pensions back books are consolidated by entities financed by alternative capital. Compared to publicly listed insurers, these entities tend to have different risk appetites, particularly in respect of short-term earnings volatility, capital structure and credit risk.
As low interest rates continue to fall, insurers are diversifying their portfolios and moving into new asset classes, mainly illiquid high-grade credit, such as infrastructure and mortgages. Sourcing and managing these assets requires different skills, in which alternative capital tends to excel.
More consolidation is to be expected. Via merger and acquisition, insurers will seek scale in certain lines of business or to buy the capabilities they need. Other firms may seek to divest of underperforming businesses. Certainly, the strong will survive, but the agile and cost-efficient give themselves a better chance to thrive.
The bottom line is that most carriers simply can’t afford to invest in all parts of the business, or in all the technology or talent they need. Insurers need to consider where best to source the capital they need to execute their various growth strategies. And they also need to recognize how capital management and cost optimization strategies go hand in hand (see chapter 5).
Engaging customers with simple products and integrated channels
Simpler products and streamlined experiences hold the key to success in the digital age.
In the forced shift to digital distribution channels, it became clear that some products were too complex for customers to understand or purchase without the help of traditional agents. In response, insurers have had to either support their agents with enhanced tools for online selling or simplify the products. Insurers may need to do both in the future. Simpler products are also necessary to support digital business models built on high degrees of straight-through processing.
Ideally, basic protections will be clear and easily understood, and applicants need only provide a few pieces of information to receive a quote. The successful experience of one US auto insurer in offering a simple product through mobile channels and to a targeted segment (e.g., millennials) provides a template. So does the effort of a large Italian insurer to retool its distribution network with better tools for digital selling. Customers win when they can easily find, research and purchase insurance products. So do insurers. Substantial work remains to make that vision a reality across all lines of business.
Such frictionless and intuitive experiences are increasingly the baseline for customer expectations. They require a strong digital architecture, which means insurers either need to work around the constraints of legacy systems or replace them outright. While some lines of business were slow to adopt digital channels pre- the COVID-19 pandemic, the uptake is accelerating. Consider the experience of the London insurance market placement platform for large commercial and reinsurance. Five years after launching, it was receiving 20% of submissions digitally. Within five weeks of the COVID-19 lockdowns, that number spiked to 80%.
Simpler products, integrated channels, and rich – even elegant – customer experiences have been a common vision for the insurance industry’s future for some time. The COVID-19 pandemic has brought that future forward.
Driving operational and workforce agility
The pandemic has opened eyes about remote working and cloud-based operations.
Executives who were skeptical about remote working are likely to have been pleasantly surprised by the productivity gains that accrued for many carriers and brokers. Organizations demonstrated their ability to operate in different structures. Risk management and customer service teams proved especially agile, shifting resources to support lines of business and lines of defense that needed help. Workers collaborated on the fly and quickly adopted new tools. Of course, there are valid questions about whether or for how long such gains can be sustained.
Workforce agility, capacity and scalability will be necessary to adjust to shifts in claims volumes and customer service inquiries, for instance, or sudden spikes in demand for new products. Managers must be ready to reallocate resources quickly. The implications are both strategic (e.g., changes in company culture) and tactical (e.g., employee training and retention programs).
Many insurers may choose to significantly increase their investments in cloud-based infrastructure. Previously, questions about security had limited full commitment to the cloud. Now, however, it’s clear that cloud-based environments offer the flexibility, scalability and cost-efficiency insurers need to sustain remote working at scale. Plus, the cloud’s clear advantages in enabling operational resilience have supplanted those security concerns.
The bottom line is that the operational agility and efficiency boards and leaders had long hoped for pre-COVID-19 materialized in their organizations just after. The question now is how to sustain the gains.
Seeking cost optimization and capital efficiency
Flexible, low-cost operating models pay off in good times and – especially – in uncertain times.
The hard economic facts and lingering uncertainties have intensified perennial cost pressures. Indeed, low interest rates, cash flow strains, and lower equity values represent something of a financial “perfect storm” for insurers. Protecting liquidity and solvency remains the first priority. Instilling operational cost efficiency should be the second.
A lean and flexible cost structure is necessary for many reasons. It is especially important in highly competitive lines of business and direct markets. In this sense, cost efficiency is increasingly correlated with competitive advantage. From customer-facing processes to deep back-office functions, straight-through processing and more extensive automation are the means by which insurers can take out manual tasks and streamline transaction cycles.
Cost optimization programs help insurers play both offense (e.g., freeing funds to invest in digital capabilities) and defense (e.g., protecting precious capital reserves and the bottom line). Similarly, they enable organizations to scale up or down quickly in response to market opportunities and changing conditions.
Capital management has also come to the forefront for insurers. Expected losses and market volatility have strained the capital base of many insurers, while a number of regulators have banned dividends and share buybacks. At the same time, insurers require cash and capital to accelerate growth, whether by organic or inorganic means, and finance large transformation programs, even as income is strained. More have turned to alternative capital to fund their growth strategies (as highlighted in chapter 2).
Market volatility has fed into capital volatility, and financial and capital planning has become increasingly difficult given overall uncertainties. We have seen insurers adopt a more dynamic, scenario-based approach to planning and, increasingly, to capital allocation and business decision making as well.
Agility and efficiency aren’t just for operational and cost models. To adapt during these uncertain and changing times, insurers need to prioritize agility and efficiency to optimize their capital allocation.
As much as the COVID-19 pandemic continues to dominate daily life and media headlines, insurers, like their peers in other industries, are being forced to live with that dominance. They must figure out what business as usual looks like under these very unusual circumstances. Yet for all the turbulence such a profound shift presents, there is clear upside in that the pandemic has forced insurers to enact some long-needed transformational changes and address some longstanding strategic challenges.