After lunch I joined the Insurance track and listened to Don Light of Celent (who wrote this nice paper some time ago) and Mike Gordon of Fair Isaac. Mike started and his first slide was headlined “survival of the fittest” which seems like the right headline! There is clearly a lot on in insurance these days – consumer needs, risk management, innovation and competition all intersecting.
- There is a drive to ensure that insurers don’t become commodities and this means finding the right consumers.
- New regulations around risk making risk management more complex
- Competition in the form of mergers and acquisitions
- Innovation in insurance products and the innovation in products being insured like hybrid cars
A soft market, high oil prices, emerging competition, market saturation and regulations form the environment for insurers going forward. Profits were good in 2006/2007 but the market is becoming softer and pricing is getting much tighter. Insurance markets are being impacted by the market slowdown, subprime problems and inflation. These make some new markets, like Russia or China, more attractive despite their risk. Emerging markets, like SE Asia, are performing better than established ones.
The market slowdown means fewer cars, lower house prices (and thus insurance premiums) and more fraud. Solvency II is the European equivalent of Basel II for Insurers but it will probably also impact US insurers just as Basel II has impacted US Banks. Add this to the increased regulation that is happening in the US (especially as it is an election year) and you can see how regulation is going to be important. Finally high levels of saturation along with new entrants (like Tesco stores in the UK) means that growing market share is really hard.
Donald went next and asked where is the insurance industry going 3-5 years or more into the future. The definition of the future constantly changes as time passes – our view of the future is constrained by the present and by the changes we expect. He identified four forces:
- More data to manage and analyze
Digitalized photos, consumer databases, geo-coding and more dramatically increase the data available for underwriters and actuaries. Analytics must be applied to data to drive performance improvement and this too is clearly driving insurers.
- More product innovation and more competitive markets
Time to market – product freshness – is increasingly important and new products or product features likewise. Service levels and general responsiveness matter more now.
- More demanding customers and distributors
Not only are customers more demanding, so are distributors who now want more real time information and straight through processing. Consumers, of course, want to be always connected and able to get what they want, when they want it.
- More inquisitive regulators and investment markets
Regulators and markets are flexing their muscles and scoring points with voters by bashing insurers.
The future of technology in Insurance is driven by the general future of technology.
- Processing power is increasing.
- Applications are becoming more flexible, more integrated and have ubiquitous connectivity.
- Communications bandwidth is increasing and mobile/wireless becoming more prevalent.
- Content is becoming richer and more complex, more immersive
- Voice and other input mechanisms are increasingly possible
- Storage is becoming virtualized and dramatically larger storage is needed
Insurance’s future is driven by all of this and Don identified 4 areas:
- Changing Insurance Model
More objects of insurance, including intangibles, and risks are going to change in frequency and severity. Regulatory challenges will also drive changes in the mechanics of the insurance contract. New kinds of coverage, like Pay as you Drive, will come and securitization will become more important.
- Changing technology impacts insurance
Virtual presence will overtake physical presence, straight through processing and self-service continue to grow and even dominate and everything is stored and available electronically at every stage of the relationship.
- Another change
Turnover in generations changes technology usage and pushes the value of process and decision management up so that can be repeatable and embeddable. Productivity and cost must continue to improve, not least to ensure that new workers will stay in the industry (which they won’t if it seems too old fashioned).
- Insurance organizations will change
More agile, more transparent, flatter and more innovative. Business as usual will not work.
Mike came back up to do a wrap focused on decision management and how it enables a strategic response to these trends.
- Retain profitable customers
Look beyond cost because profitable customers are often NOT driven by cost. Identify those who are price sensitive and those who are value sensitive and optimize for this. Who is profitable? What do you offer them? How do reach them?
- Develop and manage new product portfolios
New and innovative products aimed at specific micro-segments will be key. Who needs what product when, why and for how long? Adaptive control is something that will become more and more important in insurance, just as it has in banking.
- Greater financial transparency and risk management
Model-driven reserving, risk profiling and probability of loss, risk models deployed as operational business rules
- Automated Underwriting
This is still a key to better efficiency and effectiveness. Lots of legacy applications, even legacy rules engines, that can be improved by analytics and take advantage of new more powerful rules engines. Commercial is now focused on this more, not just for STP but also for training/enforcement.
- More claims and fraud identification
Improving claims by reducing leakage, identifying customers when they are signed up, eliminating fraud etc.
Lots of slides, lots of material, lots to think about for insurance companies.