Future of general insurance
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Changes to society, technology and the economic environment are changing how firms do business. This is driving a transformation of the general insurance landscape, with a significant impact on distribution models.
Customers want an experience that aligns with other products they buy and traditional insurance firms continue to move in that direction. New entrants to the market, such as community groups, insurtech firms, retailers and tech giants recognise this trend and are focusing on customer convenience and experience to gain market share.
The changing ecosystem is outlined below, demonstrating the shift in value from traditional players to new competitors. As the ecosystem shifts, firms offering personal and commercial insurance must recognise the risks and establish robust strategies to seize new opportunities.
The aggregator market continues to mature and is now responsible for 50% of new general insurance sales, compared to 25% 10 years ago, with around 2.4% market growth predicted by 2025. Across these services, general insurance revenue in 2019-20 was £69.7 billion, with profit levels at an estimated £7.6 billion.
A key advantage of aggregator sites is the choice available to consumers, but price is generally the deciding factor . If the market can collectively shift towards improved customer experience as a differentiator, there may be an increase in direct channel market share.
Different firms also vary in their underwriting criteria, which can make direct comparisons difficult. A simpler underwriting process can help firm s succeed on aggregator sites. Similarly, unbundling product packages could help differentiate services and bring business back to direct channels .
Growth in the commercial insurance industry is expected to remain positive, but gross written premiums will probably grow at a stable rate. By 2023, the expected growth will likely diminish to around 2.1%, partly due to low economic growth over the next few years as result of COVID-19 and the Brexit.
Cost-cutting programmes will feature heavily over the next few years and low interest rates will continue to affect underwriting profits for insurers. This can have a greater-than-usual impact, as insurers are currently relying more on underwriting profits more than investments due to soft market conditions.
Commercial property premiums are the largest contributor, accounting for around 30% of commercial insurance lines by 2023. Commercial liability insurance is expected to be the largest growth area, rising to £5.7 billion.
Lloyds of London hopes for its market to double over the next ten years, as a result of cost cutting and its new digital strategy. This strategy will initially focus on high-volume, non-complex risks, such as comprehensive business insurance.
While this currently makes up about half of Lloyd’s premiums, about 40% of that premium is cost. The new digital strategy will also reduce cost, while making services more accessible for customers.
Broad changes to the business environment will affect growth in the sector, bringing new opportunities and emerging risks. Strategic planning must consider changes across the consumer base and the wider economy, to understand the type of products customers want and how they want to access them.
This will have a long-term impact on both commercial and personal insurance lines, with a knock-on effect on distribution models.
The customer base is changing due to an aging population, increased migration, urbanisation and global mobility. These introduce both new challenges and opportunities for growth.
For example, greater urbanisation may lead to a drop in car ownership and motor insurance, while an aging population may lead to gradual growth in travel insurance. Coronavirus will impact population distribution and behaviour, due to the rise of home working and impact on suburbs. We'll have to wait and see, but some trends here are clear.
These behavioural changes will drive new markets and general insurance strategies. For example, younger customers may prefer to access goods, including personal insurance services, on a shared economy or pay-per-use basis.
Greater variation in client needs will lead to more micro-segmented strategies, giving greater scope for specialist products and services. For firms, increased specialism often leads to a greater competition for talent.
Over the next few years, technology will be a key driver of change in the general insurance sector. The use of big data, the internet of things (IoT), driverless cars and telematics insurance will all affect underwriting and product pricing.
These changes may lead to new product lines, but smart contracts, combined with the use of intermediaries, could reduce transparency, and negatively impact consumer engagement.
In the back office, new technology such as blockchain, machine learning, cloud computing and robotic process automation can replace legacy systems. This can streamline processes, making firms more agile and responsive to customer needs.
The rise of open insurance and insurtech firms may also affect distribution models, introducing 'big tech' players to market, supporting insurance-as-a-service, and improving customer experience.
The ongoing low-yield investment environment has led to greater focus on underwriting profit. This is exacerbated by foreign exchange volatility impacting the claims supply chain and low growth in advanced economies .
Adverse economic conditions, including the impact of coronavirus and austerity programmes, have changed the shape of insured risk. There may be greater market consolidation, and competition due to new peer - to - peer insurers and other emerging non-traditional market participants.
Greater focus on underwriting profits could be problematic in the long term. Effective use of technology, including data from IoTs and telematics, will give a more-accurate picture of individual risk. This will drive down premiums, improving trust in the market and value for money, but it will reduce profit margins for insurers.
Changes in the political and regulatory landscape will also affect the future of general insurance. Geopolitical instability and terrorism risks may increase the volume , concentration risk and value of claims.
There will also be greater pressure for insurers to large corporates, who are increasingly under political scrutiny, and the private sector, where risk is shifting from the public sector. This will affect the value of claims for commercial insurers, increase concentrations and negatively affect profits.
Keeping pace with regulatory change can also be expensive and resource-heavy, with current challenges including IFRS 17 and ongoing activity to mitigate the risks of financial crime. Adopting regtech solutions for insurance can reduce some of this strain, and reduce the cost of implementation.
Similarly, regulatory compliance can improve customer experience. For example, through efforts to improve financial inclusion and promote sustainable economic development.
Recognising how the sector is changing is essential for building and maintaining market share. As competition increases, general insurers are under pressure to deliver an excellent customer experience, while juggling poor economic returns and ongoing regulatory demands.
Navigating this successful will largely depend on a firm’s ability to listen to customer needs and their use of technology to respond quickly.
For support with keeping pace with the changing general insurance landscape, get in touch with Stuart Riddell.
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