In 2012 we published a joint report with the Chartered Insurance Institute (CII), painting a picture of what the UK’s commercial insurance market might look like in 2022. Now we have passed the halfway point of the journey, we have evaluated what has played out as expected, what is new, and what this means for the insurance executives and underwriters of today.
In SME insurance, many changes are playing out as we forecasted in the UK. There has been notable progress towards direct and online distribution for micro and small risks. At the larger end of SME, person-to-person relationships still predominate, but the economics of the traditional branch-based model continue to deteriorate. Insurers are using significantly more automated / model based pricing, and broker platforms (with straight-through processing of placement) are gaining an ever greater share. All these trends will go further over the next ten years. Customers will demand more price transparency, faster turnaround times and lower cost – forcing insurers to significantly re-engineer their service proposition and operating model. Similar trends are also beginning to play out in other mature markets such as Germany and the USA, meaning insurers in these markets will soon also be facing tough choices.
In the large corporate and wholesale markets worldwide, customer needs have evolved less rapidly than we predicted. Some corporates are retaining more risks (but fewer than expected), and markets for “new economy” risks, such as supply chain and cyber, have not grown to their full potential yet (though we still expect the long term impact to be large as “industry 4.0” changes the risks companies face and how they manage them).
Instead the real pressure has been on the supply side – with the ongoing abundance of capital continuing to put the traditional industry under major cost and competitive pressure. The traditional broker-insurer-reinsurer value chain is fragmenting with innovative insurers showing willingness to separate capital provision from risk selection and underwriting, and some non-insurer players (brokers, MGAs, reinsurers) in effect starting to bypass traditional primary insurers to create their own new hybrid models. Insurers have been caught between the pincers of cheap capital and distributor encroachment – already catalysing consolidation on a major scale, and some belated attempts at digitising a traditionally “artisanal”, decentralised approach to selecting and pricing risk.
Harsh Choices for Leaders
In short, CEOs of established insurers and brokers face a number of complex and difficult choices over the next few years. There are no easy answers for how to achieve this. Established players need to be willing to tackle the major costs and disruption required to create new platforms and propositions. They must also undertake the unenviable task of moving away from legacy systems and distribution assets. Worst case, if they do not find new ways to compete, they risk remaining lumbered with declining volumes and high trapped costs – and with their value-added being slowly but steadily eroded.
There are also major implications for individual underwriters and for underwriting leaders. We see far less traditional case-based underwriting in regional offices for SME – but more automated, portfolio-underwritten business that may open up opportunities for those willing and able to fit into teams combining sophisticated analytical, data engineering, technological and entrepreneurial skills. In the large corporate world, automation will go less far, and there will still be demand for those able to understand, select and price complex risks. However the types of risk involved, and the skills needed to manage and prevent them, will shift significantly. There will also be significant pressure to reduce the cost and complexity of today’s fragmented and artisanal process flows.
Forward thinking and going bionic
Underwriting leadership will need to work out how they will source the capabilities needed, whether and how they can upskill existing staff, and how they will make their departments an attractive place for new kinds of talent. They will need to help underwriters be more creative and open-minded in ways of assessing, pricing and limiting risk for clients. The industry will also need to radically embrace the possibilities of technology and analytics – taking a bold and even somewhat bionic approach. By 2027 the best underwriting teams will be a heady mixture of statisticians, engineers and technology developers
Individual underwriters will need to adapt their skills and outlook to this radically changing world. Some may choose to see this as a threat – and it is true that some traditional underwriting roles will disappear, or at least shrink in numbers. But there will be also significant opportunities for those willing to be entrepreneurial, to learn new skills and to embrace change.