According to the 20th PwC CEO Survey,1 the insurance industry
has seen the maximum disruption
among all sectors. Changing
customer behaviors, advancing
technologies and over-regulation
have taken a toll on insurers
leaving them grappling with a
less-than-desirable growth rate.
The increasing competition from
InsurTech companies has also
posed a direct challenge to
traditional insurance players.
However, the landscape is
witnessing a slow, but steady
change. Insurers realize that they
have more to gain by collaborating
with these technology disruptors
than considering them competition.
This is evidenced by the increasing
number of partnerships, funding
and acquisitions2 of InsurTechs by traditional insurance players in
the last few years.
Even as the industry gears up to
chase aggressive revenue growth,
Mergers & Acquisitions (M&A) and
partnerships present a viable
opportunity for inorganic growth. M&As provide insurers a chance to
exit non-core businesses and
re-define business models to
promote more innovation for
deeper digital transformations.
Such initiatives also offer an
opportunity to establish a stronger brand,3 optimize underperforming
portfolios, acquire technology
capabilities and gain access to
mature markets.
Amidst these strong drivers, the
one uncertainty involving deals has
been around tax and regulation although it is not expected to last
long. With more clarity anticipated
in the months ahead through better
tax reforms and softening
regulations, the insurance industry's growth initiatives are
likely to pick up steam once again.
In this context, let us explore the
sweeping changes that are
currently underway in the
insurance sector.
Meeting Evolving Customer Expectations
Addressing the needs of evolving
digital customers is at the
forefront of most insurers' agenda
today. As customers become
increasingly demanding, inefficient
processes, a high number of
intermediaries and outdated
technology systems come in the
way of meeting their expectations.
This is also the gap that smart
InsurTechs were able to exploit by
harnessing technology to get
closer to customers.
For traditional insurers that want
to quickly gain new capabilities to
grow, acquiring or investing in
these InsurTechs would make
better sense than trying to develop
these capabilities internally. A case
in point is the acquisition of
Meshify, an Internet of Things (IoT)
startup, by HSB to roll out
IoT-based insurance products.
As companies add more digital
specialists to their talent through InsurTech acquisitions or
partnerships, they will be able to
meet the demands of their
customers better. Practices such
as instant application processing,
paperless claims, on-the-spot
settlements and hyper-personalized
services will become
the norm. Newer products and
services designed for the emerging
sharing economy such as
ridesharing insurance will gain
more traction.
Impact of Industry Consolidation
As the M&A momentum picks up
again, the insurance industry
worldwide will see further
consolidation. This can lead to two
possibilities. With less competition,
more collaborations and decreased
margin pressures, insurers will
finally have more bandwidth to
re-focus on acquiring new
customers. Microinsurance and
specialty products such as crop
insurance, motor insurance and
health insurance are likely to grow
in volume as companies cater to a
wide and growing range of risk
profiles and preferences.
Economic recovery, clarity in
regulatory measures and
government policies will also
hopefully increase penetration rates,4 especially in developing and underdeveloped economies. This
will benefit both consumers and
insurance companies alike. Better
risk coverage will offset the
absence of a comprehensive social
protection plan while providing the
insurance sector with a new
growth platform.
The other possibility is the increase
in premiums due to the absence of
pricing pressures and competitive
forces. This will, however, need to
be kept in check by governments
and regulatory bodies through
broadened anti-trust regulations or
enforced rate settings.
The introduction of public
insurance exchanges can also go a
long way in keeping prices under
control by providing greater visibility to consumers.
Empowering customers to
compare costs and benefits at a
single glance will foster healthy
competition. Customers can
potentially combine their buying
power to bargain for improved
benefits as well in exchange for higher premiums.5 The introduction
of the Patient Protection and
Affordable Care Act in the U.S. to
cover essential health benefits with
capped healthcare expenses is an
example of such a marketplace.
Overall, the advantages of higher
insurance penetration and wider
risk dispersal are likely to far
outweigh any disadvantages
stemming from industry
consolidation.
Collaboration Across the Value Chain
Technology disruption has already
had a transforming effect on the
insurance value chain through the
introduction of automation and
robotics for streamlining back-office
processes. Companies such as Knip
have replaced traditional brokers
with their digital counterparts to
provide a summary view of policies
and premiums.
M&As offer further opportunity for
both insurers and technology
leaders to collaborate and capture
more market share. Take, for
instance, the case of a leading
European insurance company.
In the last one year, the insurer
has acquired or partnered with
multiple technology startups
including a bike insurer, an online
rental car insurance platform,
and a car communications specialist to obtain enhanced
capabilities.
Many insurers have even set up strategic capital venture arms6 to invest in innovative technology
companies. Tech giants such as
Google and Ali Baba have backed
multiple insurance startups
demonstrating their interest to
capture more of the market. It won't
be too long before these players
also look to acquire regulated
businesses to establish a firmer
foothold in the industry.
The expected disaggregation of
insurance processes is likely to lead
to more consolidation as companies
look to invest, partner or acquire to
minimize the risk of losing their
current market positions. Insurance
companies can use their consolidated standing and scale to
establish a better connect with their
customers. And customers will reap
the benefits in the form of increased
visibility and personalized services.
M&A offers conventional insurers
a reliable way to address their
limitations while building upon
existing strengths. Many insurers
may opt to pursue these
possibilities through venture funds,
equity investments and
partnerships to test the waters
before jumping in. However, as
digital developments and lifestyle
changes open up possibilities for
companies to enhance their profiles
to become asset managers and risk
advisors, insurers will have to
aggressively start pursuing all
possible growth opportunities
to stay relevant.
References:
1. https://www.pwc.com/gx/en/ceo-survey/2017/industries/pwc-ceo-20th-survey-report-2017-insurance.pdf
2. https://www.pwc.com/gx/en/insurance/assets/pwc-insurtech.pdf
3. https://www.willistowerswatson.com/en/press/2017/11/Value-of-global-insurance-MnA-deals-soar-in-2017
4. https://www.global-counsel.co.uk/sites/default/files/special-reports/downloads/Global_Counsel_ASEAN_Insurance_Markets_Report_low-res.pdf
5. https://www2.deloitte.com/us/en/pages/life-sciences-and-health-care/articles/health-care-consumers-health-insurance-exchange
6. https://www.cbinsights.com/research/2016-insurance-cvc-total/