Despite the immediate challenges and tough trading conditions, there could be no better time for re/insurers to innovate and drive forward the next big change in the industry, which may be a technology or disrupter that now does not exist, argues EY’s David L. Brown.
Reinsurance and insurance companies operate in an extremely dynamic economic environment. They continue to be challenged by soft premium rates, especially in the property business, as well as increased competition, low interest rates, global tax reforms and increasing geopolitical uncertainty.
As a result of these factors, we have seen many large mergers and acquisitions (M&A) during late 2016 and early 2017 and we expect this M&A trend to continue. Many insurers and reinsurers are taking this unique market opportunity to really think about their business, how to reduce cost of operations, and finding creative ways to truly transform their operations. Growth, innovation and underwriting profitability remain at the top of the agenda.
EY’s 2016 Global Insurance CFO Survey: Providing Insight to Support Growth, captures interviews of chief financial officers (CFOs) of approximately 60 insurance companies. Providing better insight to improve business decision-making was by far the top finance priority for CFOs, along with improving expense efficiency and using new technologies to optimise effectiveness and growth.
As it relates to technology, we are seeing more innovation in the re/insurance industry than we have in decades. Moreover, I believe we will see more changes in the next five years than the industry has seen in the last five decades.
When I look at the changing demographics and the technologies that are driving customer behaviour, such as Uber and driverless cars, technology has the potential to change the nature of insurance and the definition of the customer.
Henry Ford, founder of Ford Motor Company, said: “If I had asked people what they wanted, they would have said faster horses.” Similarly, Steve Jobs of Apple helped us want a product we did not know we needed: the smartphone, a device we now cannot live without. Which innovation of tomorrow will replace today’s must-have items?
At a meeting at our EY Innovation Center in Union Square in New York I was amazed by the types of projects we are working on with our clients, in areas such as robotics, data analytics, and blockchain. It is an exciting hub where “suits” and “jeans” are being brought together to solve tough problems. We host clients for facilitated innovation sessions and can even help clients set up mobile innovation labs in their own offices. When we look across the insurance industry, we see the majority of companies either forming their own innovation labs or departments, or thinking through their strategy for the future.
Blockchain has leapt to the forefront of the insurance industry and EY has partnered with the industry to spearhead a number of “proof of concept” trials to automate customer-to-business transactions. Digitisation and technology are changing the way consumers buy and is increasing their purchasing power. Ultimately, the shifting demands from customers are shaping technology to transform the re/insurance industry. Blockchain is one exciting example of how this is being done.
Digitisation has also led to the rise of insurtech disruptors, new startups unburdened by legacy systems and operating models. These insurtech companies have a somewhat limited market penetration, but their potential to change the fundamental fabric of the industry is huge. We have already seen existing carriers partner with insurtechs to leverage new thinking and new technology.
Our May 2017 publication, Robotics and its role in the future of work, addresses some leading practices and uses of robotics. Robotic process automation (RPA), also known as software robotics, is the use of a new class of software to automate business processes at a fraction of the cost of traditional solutions.
RPA works by replicating the tasks that people currently undertake. This could include new systems or using existing core systems and legacy applications.
The promise of software robotics is to deliver a solution that can rapidly automate manual back-office and customer-facing processes, making them faster, significantly more cost-effective, and improving consistency and regulatory compliance, all with a return on investment typically in less than a year.
Rather than representing a threat to the existing workforce, our experience suggests that robots are best thought of as a complementary workforce working hand in hand with people to help them improve their performance and focus their time on other, higher priority, tasks such as strategy and innovation.
Robots can enable people to work better, smarter and more creatively. EY has a global robotics capability with a proven track record of successful implementation, while in Bermuda, our local advisory and technology teams are working with clients on a number of robotics proof of concept engagements.
According to a recent EY publication, Global Insurance M&A Themes 2017: Dealing with Uncertainty, insurers are focusing on core business lines, but also investing to expand and enhance core operations through technology and inorganic growth activities. EY’s top three M&A predictions for 2017 include portfolio optimisation, technology-driven investment, and ongoing consolidation.
Clear challenges in protecting and improving margins, achieving cost efficiencies and investing in future technologies and capabilities continue to make a compelling case for large-scale insurance consolidation. On the topic of technology-driven investment, there were 207 insurtech transactions in 2016, almost double the number of the previous year, with similar growth in each of the past three years. We expect this trend to continue.
The recent rise in cyber incidents, the uncertain global geopolitical environment, and the increasing risk of terror attacks, have combined to create a feeling of uncertainty in all of us. However, for companies that get it right, there are tremendous opportunities to develop insurance products related to these new and developing risks. We believe that companies that are nimble and agile in responding to new and developing technologies and cyber risks will have significant opportunities.
As the world’s developing nations strengthen their economies, the re/insurance companies will also have a key role to play in shrinking the insurance gap that we see far too often in catastrophic loss events which can have such a tragic human impact but often are only minimally insured. I have no doubt that the re/insurance industries will continue to respond to these challenges and play a key part in the development of our global economy in the future.
At the time of writing Bermuda is hosting the 35th America’s Cup. We hope the winds will freshen, premium rates will increase, and the industry will catch breeze in its sails, heading to an even brighter future.
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