Editor’s note: this is the second in our Solving For Tomorrow series, in which we offer our thoughts on the state of the insurance industry, the challenges carriers face now, and the opportunities they must take advantage of to remain competitive in an ever-changing future. Stay tuned in the coming months, as this will be a regularly published series. We hope you enjoy and learn, and we’re always happy to receive your questions and feedback. In case you missed it, you can read the first installment here.
In our last installment, we discussed major forces shaping our industry, delving into Tailwinds, or forces that can increase opportunity. In this installment, we will cover Headwinds – forces that may jeapordize the future.
Headwinds
Adverse selection: Racing off the edge of a cliff
One of our interviewees described the dynamic of adverse selection as “A marathoner who’s able to get to the water table first, drink as much as he needs, then knock over the table so those behind him will be dehydrated for the rest of the race.” Needless to say, you don’t want to be behind that person in the race.
In today’s climate, two conditions have exacerbated the trend:
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The overall macro cycle
This mature, highly-competitive industry is still caught up in a soft market, where prospects have a great deal of bargaining power.
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The lopsided nature of loss
The highest risk quintile of policies has the potential to produce nine times the amount of loss as the lowest risk quintile* – meaning that carriers who have a disproportionate number of these high-risk policies stand to lose up to nine times more than their competitors.
*SOURCE:https://www.the-digital-insurer.com/wp-content/uploads/2014/10/372-evolution-revolution-how-insurers-stay-relevant-digital-world.pdf; starting page 114
Carriers who are not able to accurately price their products and reduce their loss ratios are left to deal with inherently riskier policies that may eventually endanger their survival.
For Personal Lines:
A harder act to follow
Price comparison/aggregator sites, coupled with the proliferation of digital disruptors (e.g., Lemonade, Besurance, and Haven) promising quotes within seconds, have put pressure on carriers to lower prices and reduce time to decision.
The downside of making it look easy
The jury is still out on whether these new players will maintain long-term profitability. Additionally, there is the question of how these easy/automated underwriting processes stand up against fraud. Insurers who sacrifice quality of underwriting for speed and price to compete recklessly with these newer carriers could be stepping into the trap of adverse selection.
For Commercial Lines:
Loss at a larger scale
Given the size of each individual commercial policy and the ever-increasing complexity of modern businesses, the impact of adverse selection is magnified. If rules and products are not able to account for the changing nature of risk in today’s climate, it could result in massive losses for carriers. While the pace of change has made it harder and harder to build profitable products through traditional means, the ability to do so has become that much more important. The carriers who are able to learn and to adapt their products and services will be the ones who can extract maximum value from the most attractive prospects and avoid losses down the line. The carriers who aren’t will be left with loss-making prospects and an uncertain future.
Changing channels: Biting the hand that feeds you
Fundamentally, channels are about the nature of power among customers, carriers, and their sales channel: who has it, why they have it, and how to respond to it. The nature of this relationship is playing out in almost direct opposition across Personal and Commercial lines – with agents being threatened with disintermediation on one side, and brokers dictating terms to carriers on the other side. Underpinning these forces are core changes to clients’ and consumers’ needs – namely, buying behaviors driven by access to new channels and technologies.
For Personal Lines:
Who has the power
First, it’s the policyholders—who are now used to online comparison shopping and demanding a higher quality of service. Second, it’s carriers—as they build out the capabilities to be able to service needs and sell directly. In general, the move has been decisive—carriers are moving more of their sales online, going direct to the consumer and cutting out agents, both captive and independent.
How to respond to it
Carriers who, out of strategic preference, continue to rely on their agent channels, must reexamine and fortify the value their agents are able to provide. This has meant ensuring that agents have real-time access to information, a robust set of relationship-building tools and the permission they need to provide a layer of value that clients can’t get from a website.
Why they have it
This is partially due to carriers being under pressure to find new ways to cut costs. Sales commissions account for a double-digit cut out of the bottom line, and are seen as an obvious source of savings, especially as policyholders’ preferences and buying behaviors have changed. The relative simplicity of these products allows for an easier and more complete translation to a direct sales model.
For Commercial Lines:
Who has the power
Large Commercial brokers, who have a great deal of power, are demanding a higher quality of service, faster updates to products, and new ways to meet clients’ needs/specifications. Carriers who can’t respond quickly enough could be excluded from broker recommendations or shut out of the channel altogether.
How to respond to it
Carriers need to find ways to be truly responsive to broker expectations—not just at a superficial level, but in terms of fundamental changes to products and services. For Large Commercial, key underwriters need to be more relationship- rather than transaction-focused. Delivering product is no longer enough—being responsive and consultative have become key to maintaining broker/carrier relationships. For small and medium-sized enterprises (SMEs), insurers need to provide automated straight-through processing and collaboration between agents/brokers and underwriters.
Why they have it
The evolving needs of corporate clients, coupled with the complexity of the products in the commercial lines space, have led to a reliance on brokers, who clients count on to properly recommend and negotiate policies. Aggregator models and exchanges are poised to make things more complicated—giving agents/brokers access to a broader (and often cheaper) set of specialized products outside of their immediate carrier relationships.
In our next installment, we will delve into Wildcards - forces of as-yet undefined impact. If you can't wait to read more, download The Future Playbook today.
