The insurance industry is facing a number of existential challenges, yet most insurers have been reluctant to reinvent their products and operations, maintaining the status quo based on a series of long-held "orthodoxies" that may no longer shield them from long-term disruption.

Among the forces of change confronting insurers are rising customer expectations for personalized coverage and service in an increasingly connected world, macro-shifts in the economy and culture that threaten to dismantle their traditional business models, as well as new categories of exposures that offer both growth opportunities and inherent bottom-line risks.

The pace of change will likely accelerate over the next few years, fueled in large part by technological game-changers such as the Internet of Things, blockchain-based infrastructure options, and emerging consumer-driven risk-transfer vehicles. In this volatile environment, many insurers may be disrupted or even displaced by more innovative competitors if they don't take charge of their own destinies and disrupt themselves first.

To protect their franchise and find pathways to sustainable organic growth over the long term, many insurers will have to transform themselves in fundamental ways. Yet that's likely to be easier said than done, given the industry's historic resistance to anything but incremental change.

What's stopping insurers from being more proactive and adaptable, especially with mounting competitive threats on the near horizon? The answer may be a series of orthodoxies — core presumptions about the strength and uniqueness of the industry's traditional value proposition and business models. Such orthodoxies have served as entry barriers effectively insulating insurers from being disrupted in a significant way by internal or external upstarts, allowing them to make do with relatively modest alterations in their policies, operations, and distribution systems. They include the belief that:

    • Consumer familiarity and comfort levels with established insurers precludes wide-scale disruption by newcomers to the business.
    • Insurance is often a complex, opaque, and even misunderstood product, which gives the industry's seasoned agent and broker sales force a considerable edge over would-be alternative distribution challengers.
    • Insurers have effectively cornered the market on the data, models, and analytical talent to underwrite and price exposures as well as facilitate risk management.
    • Since the premise of risk pooling is fundamental to the business of insurance, the massive capital reserves assembled by carriers cannot be easily replicated by new players.

These orthodoxies are in jeopardy of being rendered moot by a wide array of disruptive forces. They include:

    • Enhanced connectivity creating new types, sources, and owners of data.
    • Evolving risk-transfer options drawing new sources of capital and competition.
    • Emerging financial technology (a.k.a. fintech) alternatives upending insurer operating systems and capabilities.
    • Challenges to traditional ways of living and doing business raised by the sharing economy.

The bottom line is that insurers cannot afford to wait on the sidelines as disruptive trends in technology, the economy, and society threaten to negate the orthodoxies under which the industry has operated. If insurers don't move more quickly and decisively to reshape the rapidly evolving ecosystem on their own terms, others will likely dictate those terms for them.

In future blogs, I'll examine these orthodoxies in greater detail, elaborate on the risk of disruption, discuss how insurers might effectively disrupt themselves to remain relevant, and forecast how these market dynamics may play out over the next five years or so. In the interim, you can access Deloitte's report, "Insurers on the Brink: Disrupt or be Disrupted."  

Sam J. Friedman (samfriedman@deloitte.com) 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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