A chance of rain: why insurers need to capitalise on innovation & technology
After the series of natural disasters which decimated the general insurance industry’s results last year, there has been a slight reversal in fortune – although this year’s result is probably ‘average’ at best.
In 2016, the insurance industry’s profits rose 18 percent to $4,058 million but those reassuring headline figures come off the back of an incredibly tough 2015 for the general insurance industry, so must be viewed in context.
Whilst 2015/16 experienced a substantial number of weather events, there was nothing of the scale and magnitude of the five natural catastrophes – the 2014/15 Brisbane and Sydney storms – which significantly impacted the previous year’s results.
Gross written premiums only increased by 2.5 percent to $40,953 million, reflecting the pressures on the industry, particularly in relation to soft commercial pricing.
Limited opportunity to hike investment returns through changes in asset allocation and other strategies also poses a problem. With a largely conservative asset allocation, the industry can expect a continuation of the current low investment returns.
In light of current competitive market conditions, insurers need to think differently.
Opportunities for top line growth exist for those insurers that capitalise on innovative products and technologies. Keeping ahead of the curve and meeting the constantly changing needs of customers is now a reality and those not prepared to keep up with the change in pace will likely fall behind.
Over the last year, Insurers have also continued their ability to maintain cost discipline. The industry expense ratio decreased marginally in 2016 to 25.7 percent. As tough as it might be, insurers must walk the tightrope between continuing to find cost savings whilst also investing in innovation and new products to support growth.
The development of innovative products and solutions for customers will aid top line growth, but insurers must continue to focus on their core operations, particularly as it relates to ongoing expense management, with insurers continuing to leverage global lower cost services, automation and rationalisation of processes. The quantum of ongoing savings which can be achieved remains to be seen.
Apart from assessing the year’s figures, we’ve also examined some of the trends affecting the industry. All of these need to be addressed if the industry is to maintain its upward trajectory – and some of these trends will present genuine opportunity for the Insurance sector into the next 12 months.
- InsurTech – Insurers are looking for new technologies to improve their customer experiences, deliver innovative products and services and transform their business models. This poses a great opportunity for tech startups and insurers to collaborate.
- New Payments Platform – With the first market release of the New Payments Platform (NPP) project in late 2017, Australia is about to see a significant change to the payments landscape through the introduction of a ubiquitous real time payments capability. It will provide Insurers with the ability to transact real time 24/7/365.
- Blockchain – will enable new business models and potential improvements in core business processes within industry and regulatory regimes despite significant challenges (privacy laws, regulatory approval / requirements, etc.) that need to be overcome before blockchain technologies can be widely used in the insurance sector.
- Driverless cars – all major automakers have driverless car development programs, and many automakers already have cars on the road with advanced driver assist technology. The challenge now will be shifting liability from human to manufacturer.
- Telematics – telematics can instantaneously tell an insurer where and how a policyholder drives. Telematics will eventually become the norm for the Australian motor vehicle insurance industry, and the benefits – especially price – will be too hard to ignore.
- Cyber insurance – A more sophisticated approach is needed. Policy wordings are complex, contain various exclusions, and at present large scale risk transfer to insurers is not happening.
- Big data – Few Insurers are capitalising on the potential benefits data analytics can provide. Leveraging data will assist insurers in understanding the customer and their risks better.
- Sustainability – unprecedented collective action to ‘create the world we want’ should see insurers step up. The role of the insurance industry is prominently and explicitly articulated in the Sendai Framework for Disaster Risk Reduction (2015 – 2030), the Paris Agreement on Climate Change, establishment of the Global Insurance Development Forum and re-invigoration of the United Nations Principles of Sustainable Insurance.
- Conduct and culture – customers continue to feel a sense of mistrust with the general insurers and examples of customer detriment continue to emerge. With increasing focus from ASIC, the media and consumers, it is clear that doing nothing is not an option.
We presented these findings to a packed session in Sydney last week and will be doing so again in Melbourne tonight. The interest levels among industry players to raise their game is clear. They just need to seize the opportunities that innovation is presenting them.