Fine-tuning insurance business models
Insurers promise “we’ll be there when you need us.” In exchange for premiums paid today, buyers trust that they can rely on certain financial help if they face peril in an uncertain future. To reinforce that promise, insurers have to diversify risk, and scale helps them deliver on that promise. And, to some extent, they’ve been trying to fine tune the balance between centralized, standardized and controlled capabilities and decentralized models.
An insurer’s capital and reserves have to be rock solid, but buyer attitudes and behaviours are changing. Once they’re assured that claims will be paid (one of the primary factors on which insurers are rated), customers probably care less about size than they once did. When policyholders think of a word to describe the typical carrier—with imposing headquarters, products sold through a bricks-and-mortar agency sales force and so on—many no longer pick the word “trust.” In a recent survey of US adults, just 37% of respondents indicated that they trusted the insurance industry “to do what is right”—ranking established carriers below some well-known internet brands that are known more for flexibility than heft.
Established carriers may still be able to outperform emerging rivals. But to remain relevant, they have to get past outdated assumptions about what it takes to succeed. Increasingly, we see industry leaders rethinking their purpose and looking to alternative business models, along with the need to think about their companies’ structure.
Here we look at a few ways that business is changing. However different the new models may be for property and casualty (P&C) versus life and annuity, there’s a common theme: In this environment, flexibility and responsiveness matter more than ever.
Restructuring the balance sheet for insurers
Do all the spinoffs and divestitures mean that insurance operating models are under stress? Yes. The distractions and inability to fund growth at scale, together with interest rates at historic lows and capital pressure are forcing companies to rethink their models. As some companies exit, others are stepping in, often with different drivers and broader revenue sources. Some asset managers, for example, have expressed interest in expanding their assets under management through deals with insurers. Two key factors are driving this trend: asset managers are generally able to generate a higher risk-adjusted return on assets, and more assets under management drives additional fee income. For some of the same reasons, private equity firms have also pursued insurance company deals.
But it’s getting a lot harder to remain profitable with the traditional model. For many insurers, the key may be in becoming more flexible through a more sophisticated capital management structure. Some companies may generate excess capital by ceding more business to reinsurers. Others may set up new offshore entities or expand their work with other companies to share risk in captive insurance arrangements. Over the next 12-18 months, we expect forward-looking insurers to aggressively reduce the capital intensity of their business as they make these kinds of strategic decisions. This could lead to some challenging questions.
Rethinking insurance product design: Adapting to pay-as-you-go
Most of today’s insurance products are remarkably similar to those of a generation ago, underwritten with similar principles and sold through the same agents and brokers. But this static period could be coming to an end, led by the rise of usage-based insurance (UBI) and behaviour-based insurance (BBI) policies.
Pay-as-you-go policies are still niche products, but they have attracted more attention during the pandemic. When people see their cars sitting unused for months, many wonder why they’re paying for coverage they don’t really need. Commercial tenants feel the same frustrations as they pay to protect unused office space. Other companies have had to manually adjust their workers’ compensation coverage to reflect layoffs. There’s a growing sensitivity to align insurance premiums with their perceived value.
In the early months of the pandemic, we saw some companies grant temporary rebates or refunds based on reduced risk exposures—sometimes at the behest of regulators. Most leading personal auto carriers have now introduced some sort of UBI/BBI program, though these tend to lean to offering discounts rather than recalculating premiums. Still, there are indications that new approaches are coming across the industry, and they could gain traction quickly with buyers who may feel that they’re already paying for benefits they can’t use. Meanwhile, even if revenue drops, insurers could see profitability increase as they use data more effectively to assess their true exposure.
In our 2021 CEO Survey, executives indicated that they will turn to new product launches as a major component of growth over the next year. But launching an insurance product that’s truly new is very different from rolling out a new smartphone, and building insurance products that policyholders perceive to be priced more fairly could be particularly difficult. Still, you’ll want to avoid the temptation to follow someone else’s lead, because building a new product from scratch will take more time than you think. You’ll need to develop new technical competencies, including different ways to assess, underwrite and price risk. You’ll need to incorporate real-time information and be prepared to update your assessments continuously. You’ll also need to assess how to market these products alongside your traditional offerings, given that premiums might drop, or you might choose to offer additional layers of protection for the same price, changing your products’ competitive positioning.
While the shift toward UBI/BBI is likely to occur first in individual P&C policies, it’s a logical fit across the P&C spectrum. We already see new and unique coverages throughout the inland marine market, and remote sensors could change the way companies evaluate risk for property in transit. These principles also apply more broadly, as accident and health (A&H) lines incorporate just-in-time coverage for travel and other defined behaviours. And in life and disability insurance, carriers are starting to get access to far more granular information about their customers’ true exposure, drawing on data from fitness trackers and smartphones. Business clients may be willing to share behavioural data that shows they’ve lowered their risk, though they may have some privacy issues to navigate. Carriers may determine that they can earn a greater return from charging less by uncovering new and growing markets—if they can do so without inviting adverse selection. Clearly, there’s a lot to learn here, and you’ll want to give yourself adequate time to understand how to adapt pricing profitably for the period of time in which your customers use your products. It’s not a good time to play catch-up.
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