Insurtech and the commercial insurance market
Which is more challenging - internal operations or climbing the Game of Thrones ice wall?
Hello fellow commercial insurance enthusiasts. This article is taking the first steps to highlight a few challenges in the commercial insurance market. For mountain climbing enthusiasts, you might find it easier to climb the ice wall in the Game of Thrones than attempting to overcome internal operational obstacles that paralyze the commercial insurance industry. Of course not every commercial insurance organization is structured in the same manner, but many of you will recognize the examples below and in future articles.
For me, the definition of insurtech does not solely relate to incorporating technology into an organization – it also means breaking down existing operational silos and rebuilding new streamlined structures. Let’s be realistic - managing customer requirements with current commercial insurance operations structures is expensive and exhausting!
Any new re-engineering should incorporate ongoing strategic innovation and implementation, proactive use of technology and ensure that all parties have aligned objectives to rapidly respond to new opportunities and exit unprofitable ones while improving operational efficiency and controlling costs.
Operational Silos – Release the wrecking balls!!!
Commercial insurance companies consist of various operational silos. Unfortunately, over the years, these silos have subsumed the key functions of underwriting and claims and, in effect, are controlling the overall strategy and direction of a company’s risk appetite without substantive feedback from underwriting and claims – the teams that actually interact with customers! There are numerous reasons why these operational silos have been implemented, but a key reason is the inclination to avoid risk.
Yes, there is a touch of irony here as the industry is supposed to be in the business of assuming risk - but these companies are also protecting their own balance sheets while attempting to manage increased regulatory requirements. However, if you are an underwriter or claims manager, climbing over the ice walls in the Game of Thrones, must appear easier than dealing with the daily internal operational challenges.
The primary support operational silos receive means that underwriting and claims team struggle to receive resources and appropriate technology investments to support existing business, improve service and produce innovative, effective and profitable risk management products in an extremely competitive market.
We are repeatedly informed that insurers spend between 20-40% of each dollar/pound/euro of premium on costs of operations and customer acquisition costs, marketing and distribution. I would argue these costs do not factor in costs due to internal frictions – and they are VERY expensive!!!!! Furthermore, by prioritizing these operational silos, internal imbalances impact all areas of the organisation:
Product deliverables – Whose team are you actually on?
For those who would argue the structure of commercial insurance companies is not a hindrance to producing business or creating new products, I’d like to share a real-life example of how one commercial insurance company saw its market share and resulting profitability significantly reduce due to its own operational silos:
The underwriting teams’ inability to respond quickly to market conditions was predominantly driven by a lack of support and priority by the legal and governance departments. The company had no streamlined collaborative protocols between departments to support new product or policy form development, nor was technology used to manage the product development process.
Company A’s internal operational silos restricted a path for innovation, reduced long term value and allowed competitors to reduce Company A’s market share. The company’s poor execution also evidenced their inability to respond quickly to market changes - brokers and competitors began to challenge Company A's market leadership abilities.
Compliance operations – The growing beast
The disconnect between regulators and commercial insurance compliance is a pet peeve of mine - instead of investing in systems that improve compliance by streamlining internal processes, risk identification and risk management, companies have greatly expanded compliance staff numbers over the years and added another silo of operations. This operational expansion slows down customer support, increases costs and still contains high levels of inefficiencies. Of course I’m aware compliance is critical, but there are easier and more cost effective ways to achieve compliance goals and improve regulatory reporting.
Artemis Specialty Ltd conducted a London market broker survey in 2015 to identify how quickly the market develops new products and the quality of service – the results were depressing. Brokers expressed a growing concern that underwriters were spending up to 40% of their time on internal and regulatory functions in lieu of servicing business.
Further discussions indicated many commercial insurance companies have inadequate technology in place to support their business. Effective technology will provide underwriting and claims personnel with the required tools to meet corporate underwriting, claims and regulatory guidelines and reduce the number of compliance employees (no, I’m not anti-compliance employee!). Additionally, underwriting and claims teams can focus 100% of their time on new and existing customers – the key reason they are employed!
Innovation Labs – Another operational silo?
A number of commercial insurance entities have created innovation labs which, at first glance, is an admirable step to introduce disruption - but it does raise a number of questions:
Will this be viewed and managed internally as an additional operational silo?
If the innovation lab is separate from existing operations, how will it challenge the status quo?
Where is the buy-in at all levels of the company? How do you create excitement across the entire organisation to participate in innovation experiments?
Can it be described as innovation if a lab is only created to digitize existing legacy products?
Innovation is about the creation of new ideas, processes and products. These are built, tested and validated, then incorporated within the organization to achieve results.
Internal Disruption is difficult but M&A is easier? Seriously?
I am, and will always be, customer-centric. Over the past 15 years it has become glaringly obvious that it is time to develop a new business model for our customers – they deserve it! My goal is not to criticize the commercial (re)insurance industry but, instead, continue to encourage a new innovative way of looking at operations and how technology can create new opportunities. But one does have to raise an important question: why is internal disruption “difficult”?
During the last 10-20 years, there have been numerous commercial insurance mergers and acquisitions. Companies acquire other companies and instill a new corporate identity on to the new acquisitions and new employees while integrating legacy systems. If a company is capable of a merger and acquisition, why is it not capable of implementing and managing its own internal disruption to create new innovative, efficient and customer-focused environments?
I have restructured numerous companies over the years to refresh the innovation culture, create new products, improve efficiencies and increase customer service and satisfaction - surely this can be replicated throughout an organisation and at the corporate level? How many operational meetings have I attended over the years to push for improved internal collaboration, efficiencies and the transformation of the broking, underwriting or claims operations and processes? Why is the response almost always: “It’s too difficult”.
Many analysts cheer when companies are acquired or merged as there is now “scale” and a “reduction of costs” through redundancies and other “efficiencies”. I have attended numerous analysts’ calls throughout my career and noted they rarely question M&A technology efficiencies in depth; in fact, it’s rare when technology questions are raised during annual or quarterly financial investor and analyst updates. Will analysts and investors now raise more technology questions due to the increased insurtech enthusiasm and press? I would be a bit more curious about how a company is meeting new technological challenges and its impact on future company profitability.
And finally …..
Existing commercial insurance strategies of top line growth or releasing underwriting reserves are not sustainable - nor is it a sustainable strategy to create mass redundancies when the former strategies no longer work.
A new commercial insurance model is not about implementing a digital front end to create a smoke-and-mirrors modernization image to support existing products - nor is it simply about partnering with or acquiring an insurtech company. It’s about breaking down existing operations and rebuilding a collaborative and innovative model to improve operational efficiency, control costs, create innovative products, improve customer engagement experiences and produce sustained profitability. Let’s break down these barriers!