Six real world challenges for the insurance industry

Operational Resilience

Data systems salesmen routinely exaggerate the benefits of big data, particularly in industries they don’t really understand. In contrast our regulators understate the benefits and overstate the risks. There is of course a trade-off between improved products and services and access to customers’ data. But it is all too easy  to expect the benefits of big data – tailored services, quick delivery, greater choice – while objecting to the data processing that makes all this possible. Insurers need to think for themselves about the ethical standards that should be expected in our industry, and then explain the consequences to regulators and customers alike.

Squeezing the middle of the value chain

The trend towards MGAs in GI and platforms in savings both point in the same direction. Market participants are looking for capital light approaches to insurance. Taken to its logical end, this trend leads to a wide variety of intermediaries with direct access to customers and a much smaller number of very large international capital providers, closer in nature to reinsurers. There is little room for the traditional carrier in this model. It also definitively breaks the link between consumer protection and prudential regulation.

Domination of large data providers

Uber has not destroyed taxis, and AirBnB has not destroyed hotels. Instead they have exposed huge levels of demand that was not previously met. There is great potential for digitalisation to tap currently unmet needs for protection and to access policyholders. But who will be doing this? Large American data providers are unlikely to want to become insurers, if only because the returns in such a highly regulated industry are not attractive to them. But they can extract returns by controlling distribution from just outside the regulatory perimeter. They will also be able to offer other services linked to insurance in a way that the FCA makes very difficult for insurers to do. By the time regulators notice what is happening, they could be in a very strong position indeed.

The disappearing retail customer

Digitalisation allows customers to fragment their insurance cover and select only the bits they are really interested in. Instead of comprehensive motor cover, a pay as you drive approach (until the arrival of driverless cars ushers out personal motor insurance all together). Instead of contents insurance, customers can protect only those items they really care about, or would find difficult to replace. The trends point to a world where personal insurance is a relatively low value item, increasingly replaced by a broader offering of catastrophe insurance.

Over-regulation

Last but not least, and returning to Brexit, the UK is in competition with other jurisdictions to provide a good location to do insurance. Beyond a certain point, reached long ago, it is not the case that higher standards attract business. If conduct regulation gets in the way of  easy contact with customers, they  will move outside the regulatory boundaries. If prudential regulation demands too much capital, risks will be placed overseas.

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