It’s well known that the insurance industry has developed organically over centuries, its growth fuelled by meeting societal needs (everybody needs insurance, as begrudgingly as we may purchase it), but accelerated by historically unscrupulous sales practices. Of course, the latter have been curbed in recent years by increasingly strict regulation in areas such as commission and capital management, but the industry reaps the benefits of history.
We cannot ignore that the size of incumbents’ in-force books and capital reserves, built up over generations, make it difficult for new entrants to capture market share. That is one of the reasons our sluggish, institutional and often clunky industry still holds significant economic sway in an age that favours responsiveness, innovation and customer-centricity.
An opportunity to evolve – starting today
While for many years the insurance industry has relied on its legacy and niche expertise to maintain its strength, it is now finding itself under pressure from various corners. Buzz phenomena such as big data, InsurTech, blockchain and AI all threaten to disrupt the traditional insurance business model, while increased demands and expectations from regulators and shareholders mean that up-to-date MI needs to be easily accessible. In order to remain relevant and grow, insurers need to evolve, compete and innovate in their front, middle and back offices.
This requires an emphasis on strategic thinking. The industry needs to be better at making strategic decisions, and the only way to accomplish this is through robust, reliable and timely data.
Industry regulation and market demand require ever more sophisticated financial models pushing leaders to recognise the need for faster, clearer and deeper insights into their risk, capital and strategic management. Yet even where insurers are investing in new systems lack of forward thinking often see them falling short of expectations including financial return.
Financial models, which have always mirrored the organic growth of the insurance companies they serve, urgently need to be critically re-evaluated and streamlined, along with the systems and processes within which they operate.
A Marriage of Strategy and Regulation
Leaders of insurance companies need to ensure that any strategic decisions made – including those around the development and maintenance of financial models and systems – are executed within the constraints posed by the complex and ever-expanding swathes of the regulatory environment. Solvency II and IFRS 17 have dominated industry focus over the last ten years, and more changes are sure to follow Brexit. In conjunction with these regulations, it is important to adopt a holistic approach, covering the different dimensions of the Finance Target Operating Model (TOM). Methodology advice and implementation capacity from expert consultants will be indispensable.
Cut costs and become more customer-centric
While companies are making the budget available to accommodate the new regulation, it is equally important to develop strategies to reduce waste. “Insurers are under more pressure than ever to effectively manage their current operating expense environment. Persistent low investment returns, ever-increasing competitive pressures and enduring excess capacity have hampered the industry’s ability to grow revenue faster than the rate of operating costs,” according to KPMG’s Operational excellence in insurance report.
An emphasis on efficiency is crucial to the future success of what is often considered a bloated industry: cutting costs rather than passing them on to increasingly savvy customers will be the way for insurers to become more profitable and more competitive. However, without the skills or time to develop a strategy from within organisations, utilising the expertise of process and efficiency specialists will help to equip teams to adopt a culture of continuous improvement.
Recognising when to acquire and when not to
Another area where insurers will need support is in the increasing number of mergers and acquisitions that are likely to take place in the industry. “If you can’t beat them, join them”, the old saying goes, and it seems that it will ring true for incumbent insurance companies looking to compete with disruptors.
“Levers to drive innovation, customer-centricity and digitalisation will include in-house development, venture capital funding, acquisitions and partnerships. Many of the scale players have already embarked on this journey. AXA, for example, announced it would invest €200 million per year in innovation acquisitions throughout its business.” (Your Future, Now. Knight Frank)
For incumbent firms, partnering with start-ups gives greater access to its millennial population, a market known globally as “digital natives” in the industry, and one insurers often struggle to access.
It’s not about starting over
Dismantling centuries of ingrained practices and building a more sustainable industry from scratch is not the most practical, nor necessarily the best way to solve the issues faced by the insurance industry today. In order to thrive in the digital age, insurance companies will need to:
- improve their models, systems and processes so that they do not just deliver operational results, but also so that they may become strategic decision-making tools.
- foster a mindset of efficiency to cut costs and remain competitive.
- boost the impacts of the above, and other, strategic decisions by embedding a culture of optimisation and continuous improvement.
It is clear that holistic thinking is needed. We are already seeing this happening with IFRS 17 and the goal of shifting the insurance industry towards standardisation and tighter regulations globally. Innovation and streamlining of models, systems and processes will have far-reaching benefits, linking formerly siloed departments and unlocking synergies across the business. Large-scale changes like these are highly complex and without expertise within the business, consultancies offering actuarial, technological and process improvement advice are best placed to help drive transformation.
Get in touch today to find out how MBE Consulting can support you in delivering change within your organisation.
