Filed Under:Markets, Commercial Lines

Innovation can overcome growth obstacles for insurers


Here are some observations and their implications for a P&C industry in transition. (Photo: iStock)
Here are some observations and their implications for a P&C industry in transition. (Photo: iStock)

Property and casualty insurers may have their hands full in 2017 coping with an overcapitalized market, the impact of the 2016 election, and the threat of game-changing disruptions.

But that doesn’t mean they don’t have significant opportunities for growth and operational transformation this year and beyond.

Indeed, as they focus on how to respond to big picture trends, carriers also need to expand their market penetration and profitability in an increasingly connected, sharing economy, while meeting the heightened expectations of digital age consumers. How will they manage all that?

Below are some observations and their implications for an industry in transition, based on our research at the Deloitte Center for Financial Services and discussions with Deloitte’s subject matter specialists.

Expanding IoT

To start, look for the expanding Internet of Things (IoT) to open up new horizons for both personal and commercial lines. Insurers are likely to increasingly capitalize on the use of sensors in vehicles, homes, and businesses to improve underwriting and claims management, while facilitating new types of coverages and risk-mitigation services based on real-time information.

Usage-based auto insurance is where this trend began, and a moment of truth may soon be coming as the industry looks to determine whether such telematic-based systems actually improve pricing decisions and loss experience, to the benefit of insurers and policyholders alike, as well as to the satisfaction of regulators.

Longer term, cyber insurance may turn out to offer the greatest growth potential, thanks in part to the IoT-driven proliferation of connected properties, vehicles, devices, and people, which is creating a host of new exposures for insurers to cover.

M&A activity

Beyond efforts to generate organic growth, merger and acquisition activity should pick back up later this year as carriers look to put excess capital to work and increase their reach, scale, and product mix in a very competitive market. However, volatility in size and deal volume among individual segments of the business should be expected. Targets will likely include InsurTech startups, which offer some intriguing possibilities to diversify an insurer’s investment portfolio while importing much-needed innovation capabilities.

With economic growth uncertain given a slowdown in hiring, an anticipated rise in interest rates, the potential for changes in trade policy, and global developments such as Brexit to cope with, insurers will continually be looking to maintain if not improve their bottom line by increasing efficiency and eliminating unnecessary expenses. The challenge will be how to balance cost control efforts with the need to keep investing in technology to drive growth and upgrade core systems.

There are a number of different levers insurers can turn to make that happen, both in terms of fine tuning their current operations as well as considering how they might be restructured more cost-efficiently. In either case, a growing number of insurers will likely look to shift to a more variable cost model to allow for greater flexibility in the mix and volume of their lines of business.  

Robotic process automation

Internally, one major initiative drawing attention is the potential for robotic process automation to eliminate a lot of the keystrokes, clicks, and calculations now performed by a variety of clerical and analytical personnel. Externally, we are also likely to see the integration of more sophisticated virtual assistants to support and in some cases perhaps supplant live staff in sales, claims administration, and routine customer service. An increasing percentage of small business insurance is likely to be sold direct to consumers online, perhaps with the help of robo-advisors.

The people part of this equation will loom larger, especially since all the transformation going on is so tech-centric. The growing talent gap is not only a challenge in terms of replacing those heading for retirement, but also in recruiting more tech-savvy people to take the business to where it needs to be in this increasingly digital economy.

Speed bump ahead road sign

Insurers are facing some potential speed bumps, includng new regulatory standards. (Photo: iStock)

Meanwhile, there are some potential speed bumps to consider, including new regulatory standards, such as the changes in capital standards under discussion. Insurers are also likely to face more formal cyber security compliance demands from regulators as they strive to be ever more secure, vigilant, and resilient in protecting their systems and client information.

Usage-based auto insurers should be prepared for additional regulatory scrutiny as telematics programs reach their logical destination. That is, rather than offering discounts to policyholders just for agreeing to have their driving monitored, insurers will eventually look to raise or lower prices based on actual performance — and perhaps even consider surcharging those who decline to take part. How will insurers respond if regulators want to look under the hood, so to speak, and challenge them to justify their telematics-driven pricing decisions?

Disruptive competition

Disruptive competition will also pose an increasing threat to insurers of all stripes, thanks in part to the proliferation of new risk-transfer options. There will likely be expanded use of insurance-linked securities, perhaps starting with the development of a market for cyber risk bonds if insurers don’t move more decisively to meet the risk-transfer needs of this growing market. We also expect to see growth among on-demand, usage-based insurance platforms, as well as peer-to-peer insurance exchanges.

Longer term, personal and commercial auto insurers are going to be challenged to address the existential threat posed by the development of autonomous vehicles. Auto carriers may have to diversify their product lines to make up for potential loss of premium as liability shifts from drivers to manufacturers and software programmers. But for now, the biggest concern may be how to discourage distracted driving, while balancing the benefits of all the sensor-driven safety technology being built into vehicles (in terms of how that might lower claims frequency) versus the impact on severity (since smart cars may be more expensive to repair after an accident).

In any case, nimble will be the new normal for insurers in the years ahead, as companies transform their operating and business models to be more responsive to customer needs and internal demands for greater efficiency. Technological innovation is a key component as carriers increasingly evolve into full-fledged InsurTech companies in their own right.

Customer centricity

But even with increased automation, human capital may yet make the biggest difference for those seeking growth and greater efficiency, as insurers seek higher grade talent with more sophisticated and specialized skills, such as data scientists and social media experts.

In the end, customer centricity will likely be a key consideration. The timeworn phrase, “the customer is always right,” perhaps never has resonated louder than it does now, given the heightened demands for customized products and 24/7 online service among today’s web-savvy consumers.

(For more insights and analysis about the year ahead, listen to our webcast, “Insurance Outlook 2017: Innovation Can Overcome Growth Challenges.”)

Sam J. Friedman ( is insurance research leader with Deloitte’s Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.


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