PwC: embrace disruption or get left behind
Insurance sector leaders who act decisively to embrace disruption from technological advances such as insurtech and artificial intelligence, will emerge as survivors and winners.
While those who hesitate face being left behind and seeing their market share eaten away by proactive competitors and innovative start-ups.
Those are among the thoughts of leading PwC executives Stephen O’Hearn and Arthur Wightman, who spoke about the concerns and risks identified in the Insurance Banana Skins 2017 report.
“A huge part of the winners and losers is the mindset the CEO creates around embracing a culture of experimentation. This is really about a series of little decisions — but changing that behaviour is huge,” said Mr O’Hearn, global insurance leader at PwC.
He is in Bermuda this week to discuss the findings of the report, a biennial survey that tracks the concerns and risks of 836 chief executive officers around the world.
The number one concern globally is change management, while the 49 CEOs in Bermuda who participated in the survey named cyber-risk as the biggest threat.
Technology is also near the top of the list, and for the insurance sector the hot areas are insurtech and artificial intelligence.
The concerns overlap, with disruption the catch-all term that most usefully describes the multitude of challenges.
CEOs who embrace the disruptive forces sweeping the industry will put their companies in a better position to thrive, according to Mr O’Hearn, and that view is shared by Arthur Wightman, PwC insurance leader, who said: “The industry is build up by a number of companies with very significant scale.
“If you have a CEO who is prepared to disrupt their organisation from the inside, while at the same time their organisation is being disrupted from the outside, those are likely to be the organisations that will be most successful.
“There is nothing like entrenched captive market share to leverage up, as opposed to disrupting from outside to gain market share.”
Mr Wightman said change management and attempts at cost management in the insurance industry had been slow and of limited scope for many years, and that approach would no longer “cut it” going forward.
In an environment of barnstorming innovations such as blockchain and insurtech that tap the market in new and novel ways, boldness and adaptability are more important than ever.
Some big players are on this track, including XL Catlin with its Accelerate team, which is pursing business opportunities from technologies such as AI. And this week Chubb appointed a leader for its stand-alone cyber-risk practice.
Elsewhere, Munich Re and Sompo Holdings are among investors in Trov, a US-based technology start-up providing on-demand insurance.
Mr O’Hearn said: “That business model is insuring high-value items, such as golf clubs, skis, cameras, for a limited period of time, say two weeks, two days, or two hours while there are being used.
“It is all conducted through a mobile phone. You can hit a toggle switch for when the insurance coverage starts and again to turn it off. Premium flows for the period the insurance is being purchased.
“It is creating a buy-on-demand as opposed to the annual purchase of insurance. That model is absolutely disrupting the conventional insurance model.”
He said traditional insurers and reinsurers are becoming more capable of dealing with the changes.
“There has been a huge increase in incumbent insurers partnering with insurtech, where previously they were of the mindset that they would do it alone in their own incubation centres and labs. There is an increasing trend to partner with those who innovate full-time,” he said.
Mr O’Hearn believes the insurance industry is now competing, perhaps for the first time, on the basis of customer experience.
He also said costs and innovations are elements of change management.
“We’ve never seen this industry as focused on cost as it is today. It is being addressed by business transformation activities, outsourcing, and shared services. As an industry we are way behind the rest of the world in terms of those activities.”
He said automation and AI are part of the sustainable cost agenda and could dramatically change cost structures, with AI systems increasingly able to process claims without human intervention.
“The highly paid claims specialists are then freed up for the more judgemental, subjective claims,” he added.
Globally, cyber-risk was the second-biggest threat identified by the CEOs in the survey, however it topped the list of concerns for insurance industry leaders in Bermuda.
Mr O’Hearn acknowledged that the vast amount of “health and wealth” data held by insurers makes them targets for hackers, however, he said cyber-risk is a significant growth opportunity for the industry.
“The industry is looking for growth opportunities. Here is a specialised opportunity that is a corporate fear of every commercial customer.
“To be able to protect that is an opportunity for this industry to really step up to. Cyber coverage being written at the moment tends to be low-level policies.
“There is an opportunity for much more assertive underwriting, vulnerability assessments, and penetration studies in the underwriting process to really assess the risk, really price it properly and grow a cyber business.”
Mr O’Hearn said it was a responsibility and an opportunity sitting squarely in front of the industry.
While cyber insurance premiums reached $1.3 billion last year, a growth of 35 per cent, there remains a level of wariness due to difficulty quantifying and pricing cyber-risks and liabilities. A KPMG report published this week, titled Seizing the Cyber Insurance Opportunity, noted that insurers are only “dipping their toe in the ocean” when it comes to insuring cyber-risks.
Mr Wightman said: “The industry is still split. There are some that are really stepping up, there are others that want to step up, and then there are those that are sitting there thinking ‘goodness me, why are those people stepping up’ — they can’t understand how they are underwriting with any degree of certainty the outcomes that will manifest.
“The industry is trying to size up what is the downside risk from a cyberattack, where is the actual exposure and how do you attribute value to that exposure.”
The Insurance Banana Skins report was undertaken by the Centre for the Study of Financial Innovation, in association with PwC. It can be downloaded at http://www.csfi.org/
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