The general insurance sector is evolving, driven by regulatory change, open insurance and the rise of InsurTech. Stuart Riddell looks at the general insurance landscape and key opportunities for growth.
In the current economic environment, identifying new opportunities is essential to maintain and grow market share in the general insurance sector. Digital services have become the norm for innovative businesses, and firms making use of InsurTech, open insurance and data analytics can gain a competitive edge. Meanwhile, business transformation programmes can support cost-cutting activity, streamline operations and improve the customer experience.
What are the hot topics the sector is looking at and what do they mean for you?
1 Open insurance
Open banking uses application programming interfaces (APIs) to let people integrate their financial information with services from approved providers. This improves user experience, offers greater freedom, promotes competition and paves the way for innovation.
It also grants financial institutions further insight into customer needs and helps identify opportunities to add value. As open banking becomes the norm, the insurance sector is following suit and a changed landscape is emerging, supported by new distribution channels.
In the banking sector, open APIs are mandatory, which is not currently the case in insurance. That said, it’s reasonable to expect new regulation, as more data becomes available for use in cross-sector offerings. APIs allow data to be shared easily, and third-party algorithms to be leveraged for new products, services and business models.
Key opportunities for insurers include:
Enhanced product suitability due to increased insight over client need
Avoiding accidental double insurance through better aggregation of data
Refining underwriting accuracy through streamlined processes and greater use of data
Providing fairer premiums more precise data
As with any innovation, early adopters will gain a competitive edge and the sector is moving quickly. Recent appointments to roles such as 'head of open insurance' demonstrates the changing landscape.
In the next few years, this may consist of three types of business in general insurance:
1 Core insurer - those focusing on core products to create a strong customer experience
2 Beyond insurer - those offering additional services as a value-add proposition
3 Exponential insurer - those leveraging external partnerships to create a wider ecosystem
This new insurance landscape will rely on connectivity and interoperability, made possible by open insurance.
As the insurance sector moves further into the digital space, it’s increasingly important to make use of digital tools to create new products and go-to-market routes.
For example, insurers can draw on data from the Internet of Things (IoT) to develop personalised products, guidance and advice for consumers. By 2025, there will be an estimated 50 billion connected devices, including cars, homes and healthcare. Advanced algorithms can create on-demand and pay-as-you-go insurance products, for example for car insurance.
This kind of technology is not only changing the type of general insurance products available, but also how they are accessed. New digital services also make it easier for consumers to switch providers, effectively increasing competition and driving down premiums. The quickest way for insurers to tap into these markets is through the use of effective strategic partnerships.
Building on the concept of pay-as-you go insurance, more-granular data can be used to develop bespoke products for individuals. Traditional loss-based insurance can be too expensive for small amounts of cover, but more data can power complex algorithms to calculate small amounts of risk, and convert them into commercially viable products.
This kind of micro- or component insurance will probably become an industry staple over the next 10 years, with 47% of the sector expecting it to happen in the next two. Consumers will benefit from the greater flexibility and reduced premiums.
InsurTech aims to maximise the use of technology to create efficiencies, improve customer services and create new business opportunities. While the booming fintech sector has grown organically in response to changing customer and organisational need, much of the initial InsurTech investment stemmed from a fear of being left behind.
Despite disillusionment around InsurTech, it's starting to gain more-select investment, with the need for greater use of data and innovative technology becoming increasingly apparent.
The InsurTech sector is beginning to see a degree of consolidation, with firms merging to offer more-complete offerings. Other carrier organisations and blue chips may seek to acquire InsurTech firms outright, taking a more strategic approach to:
develop greater technological capabilities
create an entrepreneurial culture, allowing them to attract new talent
establish proprietary products, rather than leverage those from competitors.
Every firm will approach InsurTech differently. For some, this will mean embracing the technology to support day-to-day operations; for others, it will mean creating new collaborative relationships or finding new ways of working.
Whichever approach firms choose, it’s important to recognise that InsurTech is a key driver of change and could precipitate a significant industry transformation. Firms that do not actively identify and action opportunities for growth risk being left behind.
5 Big Tech
One of the hallmarks of scaled tech firms is their ability to leverage data to diversify into new sectors, including general insurance.
Firms such as Alibaba, Amazon and Facebook continue to expand into new markets, providing new opportunities for producers and consumers to exchange.
Recent research found that 90% of industry respondents believe the most-successful insurers of the future will offer a wider range of services. In five years’ time, the sector expects a significant portion of general insurance lines to be sold via non-financial platforms, including 57% of travel insurance and 42% of car insurance.
These trends are already being seen in China, where insurer Ping An has bought an online car dealership and a healthcare portal to diversify insurance products and leverage the customer data. Amazon isn’t far behind, and has invested in InsurTech firm Acko, and made inroads into HealthTech
6 Regulatory pressure
Regulators are also increasing the pressure to improve value for customers.
Last October the Financial Conduct Authority (FCA) published its home and motor insurance report, which found providers were letting customers down in terms of pricing. Around six million policyholders were paying unfairly high premiums and gaining no additional value.
At the average premium, the FCA estimate overpricing to the tune of £1.2 billion across the sector. Measures to reduce overpricing could include banning or limiting price hikes for renewals, placing restrictions on auto-renewals, or encouraging automatic transferal to the cheapest deal.
Taking a broader look at the regulatory landscape, firms are currently managing IFRS 17 implementation, part VII transfers, data protection, and actioning results of the FCA thematic market study, to name a few. On the medium-term horizon, key challenges include regulatory responses to COVID-19, Brexit and changes to the Road Traffic Act for driverless cars.
Looking further ahead, there are five key regulatory challenges to look out for:
1 New technology
Fintech could pose significant operational and underwriting risks.
2 Cyber resilience
Insurers actively taking on cyber risks through cyber underwriting activities.
3 Climate risk
Insurers will be exposed to physical risk from natural disasters through their underwriting, and transition risk as investors.
4 Conduct and culture
Technological changes to the insurance business model introduce new conduct challenges.
5 Financial inclusion and sustainable economic development
The insurance sector is playing a key role in closing the protection gap, protecting policyholders and promoting financial stability.
Keeping up to date with emerging hot topics is essential to identify new opportunities and continue to build market share. Making use of new technology and embracing digital practices can help modernise the sector and reduce operational costs. Early adopters are well placed to become market leaders as the new insurance landscape unfolds.
For support with staying current on developments and opportunities in the general insurance sector, get in touch with Stuart Riddell.
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