This is a slightly contrarian piece as it pours some cold water on the disruption hype that appears to have taken hold of the global insurance community.
Let us start with the ubiquitous notion as such. “Disruption” is worn out to an extent that any clear meaning has all but evaporated. In addition, it is not new and hardly different from Joseph Schumpeter’s definition of “capitalism”, coined in 1942, as a permanent process of “creative destruction”. Many proponents of disruption may never have heard about Schumpeter but will certainly take note of Jeff Bezos’ view: “At Amazon, we’ve had a lot of inventions that we were very excited about, and customers didn’t care at all. And believe me, those inventions were not disruptive in any way. The only thing that’s disruptive is customer adoption.”
Effective guide to change
For insurance executives who have to perform the art of the possible, this approach may serve as a more effective guide to change than fancy consulting mantras.
In the context of disruption, technologists immediately refer to Airbnb and Uber which are shaking up and fundamentally threatening the travel accommodation and taxi industries. Despite the dramatic changes brought about by Big Data, the Internet of Things, autonomous cars and peer-to-peer (P2P) insurance, for example, the insurance industry is unlikely to be prone to disruption as defined by the technology industry.
Here are six specific arguments to support this proposition:
First, insurance customers are buying contingent rights to access cash frequently in situations of severe distress. It goes without saying that the scope for disrupting this business model is fundamentally different from transportation or temporary accommodation.
Second, insurers already embrace many innovative technologies in order to enhance each and every link of their value chain. This includes the formation of non-actuarial, Big Data teams using various non-traditional predictive models. Kept in perspective, digital technologies are a great opportunity for innovation, rather than a source of disruption.
Third, insurance requires massive amounts of capital to cover catastrophic scenarios. It is hard to see how P2P insurers, for example, would be able to build the level of scale needed to accumulate capital and use it efficiently. Such startups will inevitably be reliant on reinsurance for wholesale backing, literally. As such some of them look like brokers with uninspiring long-term profitability prospects.
Fourth, an online only insurance customer relationship may not survive critical situations arising from (major) claims payments or the sudden emergence of complexity requiring human interaction. Removing any alternative option for interaction may backfire.
Fifth, the rise of autonomous vehicles would shift risk from personal lines to commercial lines. Whether overall risk pools and the associated premium volumes will ultimately shrink is debatable and not predictable. Certain heavy personal lines motor insurers would face tremendous pressure to adapt – with many years available to do so – but probably not outright disruption.
Sixth, regulators may simply kill any “disruptive” venture as soon as issues around customer protection or perceived unfair price discrimination emerge, which could be only a matter of time. This is a valid scenario, especially in politicised and fragmented regulatory environments such as in the US.
Full-blown transformation
Even if insurance avoids disruption in its literal sense, there is no doubt that it will (have to) undergo a full-blown transformation. There will be no alternative to a fully digitised value chain. And there will be no alternative to partnering with companies that originate and analyse real time data or provide superior customer access.
Once the respective strategies are in place, insurance executives should keep their minds firmly focused on what will remain the key performance indicators: underwriting margin and customer retention. M