U.S. insurers will need to focus on innovation to remain successful: EY

2016 will likely be one of continued disruptive change in the property and casualty insurance market in the United States, and insurers will need to focus on innovation in all areas of the business to remain successful, suggests a new survey from Ernst & Young, an assurance, tax, transaction and advisory services firm.

The 2016 EY US property/casualty insurance outlook, released on Wednesday, said that “digital technologies, such as social media, analytics and telematics, will continue to transform the market landscape, recalibrating customer expectations and opening new ways to reach and acquire clients.” As well, the rise of the “sharing economy,” under which assets like cars and homes can be shared, is requiring carriers to rethink traditional insurance models.

“Combined with an outlook for slower economic growth, increased M&A and greater regulatory uncertainty, the stage is set for innovative firms to capitalize on an industry in flux,” the report said. “Insurers that stay ahead of these shifts should reap substantial benefits, while laggards risk falling behind, or even out of the race.”

Dave Hollander, principal, Ernst & Young LLP and EY global insurance advisory leader, added in a press release that “economic growth remains slow, regulatory pressures such as the Department of Labor fiduciary rule and systemically important financial institutions rules continue to intensify, competitive pressures from new entrants from other sectors and markets around the world abound, and technology has created refined distribution channels and risk-pricing approaches. A customer and digitally centric business model is essential to reduce costs and offer lifetime value for end customers and channel partners alike.”

The report said that competitive pressures in the insurance industry have been building as cost-effective solutions in digital communication, distribution and infrastructure become widely available. “Digital technology is eroding the advantages of scale enjoyed by established insurers and empowering smaller players to compete for market share through more flexible pricing models and new distribution channels,” the report said, using the example of the recent launch of Google Compare, which enables customers to comparison shop for insurance, as the start of a larger wave of “InsuranceTech” activity in 2016.

At the same time, customer expectations and behaviours are evolving at a rapid pace, “often faster than traditional mechanisms can react,” EY said. “Driven by their interactions in other digitally enabled industries, such as retail and banking, property-casualty customers are increasingly demanding a more sophisticated and personalized experience – including digital distribution, anytime access, premiums accurately reflecting usage and individual risk, and higher levels of product customization and advice,” the report said. “Policyholders are also seeking coverage of broader risks, such as cybersecurity risk and under-protected property exposure.” [click image below to enlarge]

To remain successful, EY recommends that U.S. p&c insurers focus on the following eight areas:

• Digital leadership – Insurers will need to lay the groundwork for digital transformation, build a back office to support digital platforms and start new initiatives such as next-generation portals, customer experience and data access.

• The next wave of M&A activity – The M&A surge from 2015 is expected to continue in 2016 as acquirers, particularly Asian buyers, seek access to U.S. markets to build scale, the report said. Insurers will need to establish a well-defined process for post-merger integration to remove cost redundancies and inefficiencies. Those that refrain from M&A activity will need to focus on recruiting human capital and accessing distribution that provides high-retention, profitable business to compete against larger, better-capitalized companies;

• Creating a culture of continuous innovation – Insurers will need to shed their conservative orientation and cultivate a culture of innovation to remain relevant in changing times, the report suggested. They should explore new technologies and models used by startups and make innovation a top strategic priority, changing metrics, celebrating controlled failure and rewarding collaboration in ways that do not exist today;

• Shift from a product to a service orientation – Insurers will want to enhance their service capabilities while developing products that can serve new customer needs and behaviors. Insurers should also take a more value-added, advisory approach, carefully analyzing their customers’ risks and developing risk-mitigation strategies and insurance coverage tailored to their needs, typically in more of lifetime value or even pay-as-you live-and-change model, EY suggested;

• Build a next-generation distribution platform – Consumers want the same flexibility to learn, compare, purchase and report a claim as they have become accustomed to in other industries. Insurers will need to streamline costly and duplicative infrastructure, consider acquiring captive distribution to add customers and boost business, and rethink compensation plans for distributors, including changing level-commission compensation standards in favour of greater upfront cash payments that reward access to new profitable customers;

• Improve performance through analytics – Harnessing large volumes of data from real-time sources can help insurers develop new products and refine pricing strategies. Insurers should apply proven analytics to the homeowners market to understand and price risks and use analytics to manage commercial market risks;

• Develop the right talent to lead change – Insurers need to be proactive in recruiting and retaining innovators and leaders, while providing existing teams with new skills required to succeed, the report said. In addition, insurers will need to develop expertise in health, wealth and risk advisory skills so they can bundle products and provide services to meet their customers’ changing risk needs and expectations; and

• Make risk management a C-suite priority – With a more complex and volatile landscape for insurance firms, risk managers are being held accountable for improved financial performance and value creation. Insurers will need to stay current on changing regulatory frameworks, communicate the issues that will affect the industry and respond to changes as they emerge. They also will need to watch for emerging risks, such as cyberattacks, and prepare for natural or man-made catastrophe losses. “Even with another benign natural catastrophe year, cyber is emerging as both an opportunity and a very real threat to profitability and predictability,” the report concluded.