The future of insurance
Being the chief executive officer of an international consultancy company, I spend much of my time speaking with senior people who work with and in international insurance and reinsurance companies. Whenever the conversation turns to the future of insurance, many people will talk about the more distant, in business terms, future, perhaps ten or 20 years away.
The majority of such people would say that they see that the insurance industry will have to change and adapt during that time, in particular, it will have to react to the challenges in technology, the potential for driverless cars, for example.
What may seem counter-intuitive to many people is that predicting the nearer term — the next five years, for example, is actually more difficult. This is, however, something that is of vital importance to companies as they try to plan and strategise and grow their companies over the next few years. This is something that my company and I help organisations think about and implement, and the subject of this commentary.
Uber for insurance
If you speak with any start-up companies who are targeting financial services or insurance companies specifically, known as fintech and instech companies, they will very often be keen to describe themselves in terms of previous successful organisations.
This means that phrases such as the Uber of this, the Amazon of that or the Slack of this sector are common shortcuts to help people understand a start-up company's offering quickly.
One of the significant questions that any start-up organisation will be asking itself when it is looking at a well established and traditional business sector is: “If this service were invented today, what would it look like?”
This is precisely the thought process and approach that Travis Kalanick and Garrett Camp (Uber's founders) went through.
What they decided in the age of the smartphone was that ordering a cab shouldn't be about making a phone call or waving your arm on a street corner, it should be about using the powerful computer and communications device that many people carry in their pocket.
The one thing that we can say for sure is that if insurance were invested today, a world with smartphones, the internet and arguably easier access to capital than at almost any other time in history, the end product, service or process certainly wouldn't be the same as we have today.
My first prediction for the next five years is that insurance products, particularly consumer lines, are going to start to evolve. In some cases, it will be the insurers that we are familiar with who are going to start this process, but there are also going to be new names and competitors who are going to start this process too.
New entrants to the insurance market
Markets mature and evolve, they go through defined stages. At each step a company, its customer, clients or consumers will have individual needs, requirements and expectations from the company. Crossing the boundary into the next stage of maturing has traditionally meant increased security for the organisation as the barriers to the competition are that little bit greater, and the loyalty of an established client base provides a degree of security and safety.
The opposite side of the maturity curve is that as organisations and markets mature, they become increasingly defensive, spending more time defending their position than evolving their business. In the most mature of sectors, which includes insurance, the products can become commoditised and very often differentiated on cost.
This point is usually the point that new companies enter a market. We've already mentioned the potential of start-up organisations to be disruptive, but another threat is for a well-funded competitor to enter the market from another sector.
For the insurance market, there has been lots of concern expressed about the possibility of Google offering insurance, the perceived threat being that Google has so much data about individuals and in many cases businesses that their underwriting process may be better informed than some insurers.
I think the more significant threat potentially comes from another major player from in the technology sector in the shape of Amazon. As has been widely reported Amazon has recently entered the healthcare and health insurance market in the US.
Initially, this will be a captive arrangement serving the health insurance needs of Amazon, Berkshire Hathaway and JPMorgan Chase who have joined forces to reduce the cost of the tripartite's health insurance costs.
Combine that fact with the announcement of Amazon's purchasing of the US pharmaceutical company PillPack who fulfil prescriptions by post rather than forcing patients to collect refills from their doctor or regular pharmacist. Given the $1 billion that Amazon paid for this organisation it would difficult to imagine that Amazon was only planning to use this service for its “internal” requirements.
What might Amazon insurance look like? Given Amazon's reputation, knowledge of, and relationship with the customer, I would expect that Amazon will initially focus on the direct to consumer business, this will mean that cover such as property insurance, travel insurance, personal electronic [gadget] insurance and perhaps even motor might be among the first lines.
Thinking that Amazon will be satisfied with those lines of business is likely to be wishful thinking for some. I believe that they will follow a similar strategy to those we have observed previously, where having won over the consumer, they will look to win over the consumer within the business.
This approach will likely see products aimed at the small and medium businesses market. This will, of course, include their health insurance product, in the US if not elsewhere, and will likely include products such as workers' compensation, directors' and officers' insurance, and professional indemnity coverage aimed at companies within their target market.
None of this means that Google might not make a play for the insurance market as well, they certainly know a lot about their potential client base that could be used to improve underwriting. At this time though I think it is unlikely that Google will be the first to make this move and it may be more likely that they continue to sit on the sidelines.
So, my second prediction is that Amazon will be a significant player in the insurance market within the next five years. Firms that are looking to either take advantage of or mitigate their exposure to such a change should start working on this sooner rather than later.
In part two of this commentary, to be published tomorrow, I will discuss how the traditional roles of insurer and reinsurer may change and what they may mean for the future of the insurance sector.
• Darren Wray is the CEO of Fifth Step Ltd. For more information about the firm, visit www.fifthstep.com