Wherever you turn in the business and technology media, the talkis all about the next disruption. In the beginning, there wasGoogle and Amazon. More recently, there's been Facebook and socialmedia platforms. Insurance has managed to sidestep most of theseearly forces of radical change by doing what it does best: limitingrisk and staying the course. But now, with ground-rumbling shiftsthat can only mean more upheaval of traditional business modelsacross the board, the insurance industry is facing some very realdisruptors it can no longer ignore—and in some situations, isactually doing the disrupting itself.

The big five disruptors are agency displacement, monitoringtechnology, the blurring of financial services, the regulatoryenvironment and demographics. Not only does each of these drivershave a profound impact on the insurance industry at large, butthere are very specific implications for the property and casualtyinsurance sector.

1. Agency Displacement: Is There an Agent in the House?

Since the advent of insurance exchanges, agencies have had toadapt to bringing more value to the insurance process—throughservice, support and education of the customer—or go out ofbusiness. Property and casualty agencies in particular havesurvived on transactional business—personal auto, home, small life,business owners' policies—that have heretofore been a 'sold anddone' affair. The unsettling fact is that the more transactionalthe insurance product, the more likely that it could end up beingsold through an exchange. And if the product can be self-served bythe customer, the need for the middleman is eliminated. Therefore,agents and agencies who rely on transactional business are the onesthat are most at risk.  

The insurance exchange or marketplace is just one of the factorsthreatening to displace agencies as we know them. But there's adeeper impact to them too, in that they threaten to displaceproduct differentiation. In insurance, we live and die bydifferentiation—some companies have better service, some havebetter coverage through their policies, or simply enough variationto suit the needs of multiple customers. You only have to think ofthe different levels of deductable for casualty to get a sense ofhow insurance products fit different needs. But with the advent ofinsurance exchanges, such as Google's insurance marketplace,there's only one factor left over which to compete—and that'sprice.

So these online marketplaces represent for the industry a raceto the bottom in service and in quality—with a reduced role for theagent in helping a customer select the ideally matched product.Liberty Mutual is one carrier trying to stay out of the boxeveryone else is putting themselves into, by refusing toparticipate in the exchanges. Perhaps you have seen LibertyMutual's television ads that speak to how Liberty handles anautomobile insurance claim. That is a key differentiator forLiberty Mutual as they eschew the exchanges. Liberty Mutual aside,those that participate in the exchanges will soon be selling "whitepaint" with not a shade of difference between policies, price beingthe only determinant.

In a similar vein to exchanges, another huge disruptor is theconcept of "Pay-at-the-Pump." In a nutshell, these insurance planswould replace the present system of customer-selected policies witha government program. In this scenario, every car is covered bybasic auto insurance when the car is registered and tags areissued, and the state would take the proceeds of a gasoline surtax(up to 50 cents per gallon) to pay for future claims.  Theidea is that insurance companies would bid competitively to insureblocks of motorists, with states contracting with them on claimshandling. Those of us who have been in this business for awhileremember, not fondly, the Joint Underwriting Authorities (JUAs) that tried manage automobile insurance and failedmiserably, leaving behind billions of dollars in shortfall.

2. Technology: Telematics,Anyone?

Technology is creating a tremendous opportunity for theinsurance industry, while at the same time seriously complicatingmatters—the perfect definition of a disruptor. By having access tomasses of real and factual data on customers, carriers are now ableto ascertain the actual risk presented.

By this time, we all know about telematics and how good driverscan lower their premiums through its use.  But think aboutit from the carrier's side.  When the insurance companycan price to the risk, based on the information they'reable to get from the insured's car, it obviates or at least reducesthe need for actuaries.  Whether it's from a car or a homesecurity system, by getting the actual data from a device connectedto the client, insurers can more accurately price theirproducts.

In certain cases, customers with an extremely low risk profilemay opt to raise their deductibles very high so that they can pay alower premium. Companies that carry insureds with low-risk driversand safely garaged cars are going to take a hit in premiums. Bycontrast, when it comes to fleets, telematics may help insurersactually raise premiums. Most of us have had encounters on the roadwith careening, speeding trucks on the highway, or deliveryvehicles tearing down a quiet, residential street. Insurance companies will know when commercial vehicles are beingdriven recklessly, and will be able to price for thatrisk. 

On the homeowners' insurance side, telematics is making wavesthrough big data. At some point in the near future, every piece ofproperty is going to be geocoded. It will no longer be a questionof, "For your piece of property and your zip code, you can talk toany of these three agents." Once everything is geocoded, agentswill be assigned to a certain territory or number of houses intheir market. And when anyone wants to buy a house in that area andneeds a homeowner's quote, they can go online and buy theirinsurance. When the transaction is done, the buyer has hisinsurance and the agent has his commission.

This cuts two ways.  Insurance companies are underpressure to be able to affect that kind of transaction, and this iswhere the industry is headed, though no one is quite there yet. Butit's a huge disruptor for the P&C industry because it willaffect commission rates. Millennials, for example, may be veryresistant to paying 15% commission on a transaction they researchedand completed themselves.  This tech trend is consequentlyalso a disruptive threat to agencies as we currently know them.

3. Banks-as-InsuranceCompanies-as-Banks: A Blurring of Financial ServicesBoundaries

Another disruptor is being seen in the blurring of boundariesbetween insurance companies and banks.  Here's where theinsurance industry is doing some disrupting of its own. While thisshift may not affect the P&C industry immediately, it willdefinitely have ripple effects in the not too distant future. Ledby Mutual of Omaha, we now have banks that are carrierowned, selling insurance in retail locations throughout thecountry.  Mutual of Omaha, for example, has started achain of 40-plus banks. In the past, traditional banks have triedselling insurance, but didn't fully understand that with insurance,the underwriter is taking the risk.

This will be a game changer. With a whole new set of investmentproducts offered by insurance companies, suddenly customers want toget their agent service in brick-and-mortar "banks," rather thanhaving their agent explain it and hand it to them over the kitchentable. With this blurring of financial services, the cleardemarcation that existed before between insurance companies andbanks and investment brokers is going to disappear.

This will send the industry's distribution channel into a stateof flux. Agents' spectrum of offerings will need to bebroadened—the monoline carrier that only writes a certain type ofcoverage will be heavily affected. In order to survive, insuranceagents will have to be able to sell all kinds of products, helpingcustomers take care of all their household needs. Commercialcarriers will have to become true business partners with theirclients—in small businesses, for example, where personal andbusiness affairs are mixed up together, insurance agents will haveto be able to manage it all. State Farm is already doing this, buttheir agents aren't compensated, nor are they specificallytrained.

In this sense, the blending of services represents a disruptivethreat from within the industry—suddenly there will behighly professionalized agents appearing on the scene who knowfinancial services deeply, versus agents who just sell auto or homeinsurance.

There will also be a blending of complementary services—forexample,  personal investment products will eventuallyhave joint agents who will distribute and sell both menus ofproducts under one agency roof. Personal investment advisory firmswill be selling a lot more insurance than they do now, andinsurance companies will be getting a lot more involved in thesecurity side. In effect, regulatory disruption (see next page) iscreating a merger or consolidation of all financial services underone heading.

4. Regulatory Disruption:Another Step Away From Private Enterprise?

Changes in the regulatory landscape pose an enormous disruptionto insurance. Take  storm coverage for homeowners inhurricane states along the east coast. One customer who livesslightly inland of Ft. Lauderdale, Fla., pays $3100 for homeowners'coverage. If he lived in Iowa, he'd be paying $600; if he wereright on the coast his premiums would cost $9500. Governmentregulators have established state-run "wind pools" to take thebusiness out of the private market, because it was unwilling toprovide insurance to homeowners in these areas at any price. Sothese premiums are very high—and traditional carriers are losingbusiness as a result.

More regulation equals more oversight. Licensing of P&Cclaims adjustors is another example of regulatory disruption.Company and independent adjusters will have to submit continuingeducation and all the other certifying processes that agentsalready have to complete. Education perpetuation for licensedpeople is going to get harder. There will need to be moreprofessionalism in the agent ranks, and "fly-by-nighters" won't beable to survive. The already complex ins and outs of the industrywill become much more complicated, and there will be a regulatoryenvironment that will combine federal and state regulations. In theshort run, this will disrupt the industry's distributionchannels.

As described above, the trend is toward a blending ofagents—people who used to sell only P&C insurance are going tohave to sell more types of insurance, like life and financialproducts. My prediction is that the day of the monoline agent willcome to an end. Carriers are pressuring agencies, demanding: "Areyou going to bring on a new Life producer?" This gets costly forthe agency, and amid this, agents are going to be dealing more withrisk management than they have in the past. In a sense, the newregulatory environment is moving the insurance industry away fromprivate enterprise and more toward being a government-type,mega-overarching entity, as evidenced by movements such as ACA andPay at the Pump.

5. Demographics: Ready orNot, Here Come the Millennials—and Immigrants

No roundup of disruptors to the insurance industry would becomplete without addressing the changing demographics in the U.S.The Millennial segment, currently defined as those between age 18and 34, make up 25% of the population. For the purposes of theinsurance industry, the common denominator with Millennials isprice. They spend hours online painstakingly looking for the bestprice, searching for the absolute best deal.   

The other side of the demographic disruption is that we'rebringing millions of immigrants into the country, including peoplewho do not have a history, understanding or a comfort levelwithinsurance. This will make for big changes. People who onlyspeak their native languages will have a harder time navigating notonly what is available to them, but what they need. Insurancecompanies will have to be able to service this market. On thepositive side, this is a whole new subset of people that theinsurance industry can educate and sell to.  

 In the end, in P&C, it's all about customerrelations. Despite  the technology and all of the otherdisruptors, the core of the insurance business relies on agents whohave a personal relationship with their insured. People may believethat car insurance is car insurance—they're all created equal; butwith the blendings and crossovers coming down the pike forinsurers, the customer will want to know that there's a personbehind all of these products, and that this person can be reliedon.  Indeed, the bigger the disruption, the greaterpotential role of the agent.  Which gets us full circleback to the question: Can insurance afford to ignore thesedisruptive factors any longer? My vote is a resounding 'no.'

John Sarich is VP of Strategy at VUE Software. He is a senior solutionsarchitect, strategic consultant and business advisor with over 25years of insurance industry experience. John can bereached at John.Sarich@VUE Software.com