Can commercial insurers transform, cut costs and ... · 4 Can commercial insurers transform, cut costs and accelerate growth Minds made for transforming financial services5 Commercial

Can commercial insurers transform, cut costs and accelerate growth?Minds made for transforming financial services

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The better the question. The better the answer. The better the world works.

Can commercial insurers transform, cut costs and accelerate growth? Minds made for transforming financial services 1

Traditional forms of segmenting the commercial insurance market are becoming increasingly irrelevant. Future segmentation will be based on needs rather than the insured’s turnover and number of people within the business. Companies don’t want to buy products; they want to buy protection and a service based on their individual requirements.

Distribution models will continue to evolve, creating a new commercial insurance ecosystem with a wider range of actors than ever before. Insurers have not responded successfully to changing customer needs, resulting in more innovative organisations such as managing general agents (MGAs) and InsurTechs gaining market share. These organisations have focused their efforts on proposition, service and distribution, and their dynamism has attracted talent away from established insurers, leaving them at risk of being further left behind.

New technology will have a wide–ranging impact on insurers, to drive new business models, as well as

enabling digitisation of the existing business model. The insurance value chain is no longer a linear set of interactions. It is an evolving ecosystem of interconnecting parties, who can take on different roles within this model depending on the client and the particular interactions involved.

Commercial insurers who do not prioritise these issues will lose their position in the market as they will become increasingly uncompetitive. Insurers that do prioritise them and take transformative action can accelerate their future growth. They can offer a superior service to companies — while also halving their costs.

In this paper we will identify the compelling reasons why insurers need to act — from the changing shape of the economy and shifting customer needs, to the evolving distribution landscape and new technologies coming into play. We also highlight the key areas in the commercial insurance value chain where insurer action can achieve maximum impact.

Making the case for changeThe commercial insurance industry enables the world of commerce, which is changing at an unprecedented rate. Insurers are struggling to keep up. Without profound shifts in business models, insurers are at risk of more innovative incumbents or new entrants gaining significant market share.

When the financial services industry works well, it creates growth, prosperity and peace of mind for hundreds of millions of people. No other industry touches so many lives or shapes so many futures.

At EY Financial Services, we share a single focus — to build a better financial services industry, not just for now, but for the future.

We train and nurture our inclusive teams to develop minds that can transform, shape and innovate financial services. Our professionals come together from different backgrounds and walks of life to apply their skills and insights to ask better questions. It’s these better questions that lead to better answers, benefiting our clients, their clients and the wider community. Our minds are made to transform a better financial services industry. It’s how we play our part in building a better working world.

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1Making the case for change

2Market forces at work

6A new approach to segmentation

10The evolving distribution landscape

14New technology driving new business models

18Halve costs and improve customer service

22Three fundamentals for transformation success

Automotive and transportationOver 33 million autonomous vehicles will be sold globally in 2040, up from 51,000 projected in 2021.10

Cust

omer

exp

ec

tations

Digital

Globalisation

Government and public sectorPolice crowdsourced the identities of 2,880 suspects via a smartphone application during the 2011 London riots.2

Technology, media and telecomsThe combined company value of the big tech giants amounts to 19% of GDP.1

Mining and metalsOne of the leading global mining groups is investing US$2.2bn into the world’s first ‘intelligent mine’ with driverless trains, trucks and robotics.3

Power and utilitiesRenewables will capture two–thirds of global investment in power plants and account for 80% of new power capacity in the EU by 2040.4

Real estate and constructionRobotic technology will vastly improve construction efficiency with the first Semi–Automated Mason, capable of laying up to 3,000 bricks a day, six times faster than a human bricklayer.5

HealthUse of IoT devices to monitor and treat illness could have a potential annual value of US$1.1trillion globally, by 2025.6

Oil and gasCurrently, only 1% of data from an oil rig’s 30,000 sensors is analysed: innovative big data technologies are set to change this.7

Financial servicesHalf of FinTech companies expect global revenue growth of over 100% in the next year.8

Life sciencesAdvances in genomic profiling and biomarkers combined with rising demand will cause the global precision medicine market to grow 8.47% CAGR to US$88bn in 2023.9

Commercial insurance is

failing to keep pace with the world

around it


The commercial insurance industry enables the world of commerce, and that world is changing at an unprecedented rate

Market forces at workAn evolving economy and growing commercial insurance market present both an opportunity and threat to incumbent insurers. But there are good reasons why the industry can and will transform itself — emerging stronger and more innovative.

2


Commercial lines insurance follows commerce and the health of the UK economy in being impacted by macroeconomic and political factors, such as regulatory and compliance developments, Brexit and the effect of US tax and evolving tariff policies.

Despite these drivers, we expect the UK commercial insurance market to continue growing, at a rate of 3.8% per annum from 2018 to 2025 (excluding the Lloyd’s market)12 — outpacing the 1.8% forecast growth in UK GDP, as it has for the last three years (2015 to 2017).13

The sector mix will change as a result of the digital transformation of the UK and global economy. Continued investment in technology will mean that the UK financial services industry is one of the UK’s highest growth sectors (+5% growth), representing 35.9% of GDP by 2025 and remaining a leading innovation hub globally.14 The other high growth sector will be technology, media and telecoms (TMT), recording 13% growth and accounting for 10.6% of GDP in 2025.15

As the market evolves, this sector mix will require insurers to start changing their product offerings, particularly given the move from manufacturing and goods–driven business models towards companies characterised by less tangible intellectual property, services and financial products.

Despite this growth in the market, incumbent insurance players face a number of severe threats that need to be addressed. For example, the combination of surplus capacity and a perma soft rating environment are eroding underwriting profits. Traditional business models centred around people and paper are inefficient, with extensive duplication across the value chain — resulting in costs increasing more rapidly than growth

in revenues. Meanwhile, emerging technology has highlighted to the industry that current processes can be done better and more cheaply. Further challenges come from new entrants such as InsurTechs or reinsurers partnering with InsurTechs, which are targeting underserved risk segments such as the SME market. The bottom line is that if established insurance players fail to evolve, their inertia will enable more proactive competitors and new entrants to steal market share.

But where there are threats, so there are also opportunities. Both commercial insurers and new entrants can capitalise on the current environment. For example, as the shape of the economy changes and intangible assets account for increasing amounts of corporate value, so the gap between insured and insurable risk is growing — generating new market opportunities. Both insurers and brokers can also tap into new potential revenue streams, for example, as providers of on–demand analytics, enabling smarter business decisions. Existing markets are also rapidly expanding. This is particularly driven by the risks associated with cyber and the internet of things (IoT). From another perspective, commercial insurers have the opportunity to achieve improved risk selection, packaging and capital allocation as underwriting becomes more granular and real–time.

Three reasons we believe commercial insurers will succeed We believe the commercial insurance industry can and will transform itself — emerging stronger and more innovative than ever before.

1. Traditional industry players have inherent strengths that will remain critical

Insurers have large balance sheets and clients trust that insurers will manage their claims and losses. They have established relationships, particularly with mid–market and large corporate segments. Insurers own an important asset in the form of historical data sets of exposures, losses and causes of loss — which other players would need to build. Incumbent commercial insurers also have experience of the complex and constantly evolving regulatory environment.

2. Recognition of the need for transformation is now pervasive across the industry

Leaders in the commercial insurance industry are voicing the need for change and announcing transformation initiatives to alter the way the industry has traditionally worked. Some have already begun innovating, with increasing participation from InsurTech players. For example,

36% of insurers already operate some form of innovator lab,16 and a quarter of insurers with venture capital activities have allocated funding of more than US$1bn.17

3. Companies that pose a real threat to traditional players are largely focused elsewhere, although there are movements to suggest that if insurers do not act, other new entrants may prevail

Although some of the big technology players have experimented with insurance aggregators and investments, none have so far cemented themselves into the insurance industry. We believe these brands will have an increased presence in personal lines, and there are signs that they are potentially looking to enter some commercial lines activity, particularly for SMEs. However, the commercial insurance value chain is a complex set of activities, requiring significant skills and expertise, which would be challenging to enable from scratch. As an additional deterrent, capital and regulatory barriers to entry remain high.

We expect the UK commercial insurance market to grow

at a rate of

3.8%11

2017 2025

£21.24bn£28.6bn

1: “The trillion–dollar question: can the tech giants keep growing?”, The Guardian, August 2018. 2: “Gov on the go: Boosting public sector productivity by going mobile,” Deloitte University Press, Febuary 2013. 3: “Rio Tinto put its faith in driverless trucks, trains and drilling rigs”, The Economist, December 2017. 4: World Energy Outlook 2017, International Energy Agency, November 2017. 5: “Bot the builder: the robot that will replace bricklayers”, Financial Times, February 2018. 6: “The Internet of Things: Mapping the Value beyond the Hype”, McKinsey & Company, June 2015. 7: “The Internet of Things: Mapping the Value beyond the Hype”, McKinsey & Company, June 2015. 8: “UK FinTech Census 2017: The voice of FinTech”, HM Treasury, EY and Innovate Finance, 2017. 9: “Global Precision Medicine Market 2018–2023 — Market Projected to Reach $87.87bn”, Markets Insider, September 2018. 10: Autonomous Vehicle Sales Forecast 2018, IHS Markit, January 2018. 11: “Value of premiums written on the United Kingdom (UK) insurance market from 2009 to 2025, by major classes of business (in million GBP)”, Statista,

and EY analysis. 12: EY analysis. 13: EY analysis of Global Economic Databank, Oxford Economics. 14: EY analysis of Global Economic Databank, Oxford Economics. 15: EY analysis of Global Economic Databank, Oxford Economics. 16: “A New World of Opportunity: The insurance innovation imperative”, KPMG, 2015.17: “The New Deal: Driving insurance transformation with strategy–aligned M&A”, KPMG, 2017.


The insurance products of today are solving yesterday’s problems. Today’s customers require something different

Despite a surplus of insurance capital, insurable risk today is only a small proportion of the total risk that commercial customers face:

• There is a lack of historical data for these risks to enable effective pricing through actuarial models.

• There is an increasing need for insurance cover for temporary risks which do not fit into traditional annual cycles.

• Many risks are now too complex or do not fit into the insurance industry’s traditional line of business structure.

• There is a lack of widespread access to cost effective insurance, in particular in emerging economies.

87% of the total market valuation of S&P 500 companies is derived from intangible rather than tangible assets. In 1985, this was just 32%.18

Liabilities are shifting, for example from owners to device manufacturers, and insurers will need to be able to provide long–term coverage for this.

There are rapidly evolving expectations across the different market segments, including requirements for on–demand coverage for shorter periods, and cyber risks that go well beyond the coverages provided today.

The rise of disruptive technologies has allowed prevention to become far more important than protection for clients.

The lines between personal and small commercial are blurring as personal assets become used for commercial purposes on a temporary basis.

A new approach to segmentationTraditional forms of segmenting the commercial insurance market are becoming increasingly irrelevant.

Future segmentation will be based on needs rather than the insured’s turnover and number of people within the business. Companies don’t want to buy products; they want to buy protection and a service based on their individual requirements.

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Customers want to insure an evolving range of risks, in different ways, for varying periods. They don’t want to be offered a pre–determined product based on an assumption of their needs.

The insurance industry’s response is hampered, however, by its traditional approach to segmentation. At present, the commercial insurance market is generally segmented by size of customer: large corporate, mid corporate and SME. SME business is seen as consisting of low value, standardised property and casualty (P&C) products, mid–market as mid–size risks which require more specialist advice, and large corporates are assumed to have high value, complex risks that require large capacity and bespoke underwriting.

Segmenting by size in this way will need to be abandoned. These are yesterday’s terms, no longer suited to the market of today and the future. Instead, successful commercial insurers will look at their clients on the basis of their needs. Propositions will be tailored to actual need, taking account of factors such as

business complexity and the extent of virtual and third–party supply chains. A business may be small but still need specialist capability and a proposition suited to its needs.

Approaching the market in this new way will have an impact on every component of the commercial insurance value chain — from origination and engagement, through to risk advisory, solution development, trading, underwriting, servicing, claims or loss management and portfolio management — with a dramatic realignment of value, costs and industry structure.

Technology will be the primary driver of cost reduction and redistribution across the value chain, as traditional processes and roles disappear or undergo significant evolution. However, insurers should not see cost reduction as the only benefit. Providing customers with protection that better suits their needs and is accessed in a way convenient to them, will significantly increase customer experience and help insurers to grow market share.

In essence, the gap between customer needs and traditional insurance industry solutions is greater than ever, and widening further

What does this mean in practice?We believe that traditional segmentation will transform into needs and behaviour–based models, with distinct propositions and solutions for clients.

Traditional insurance segments

Segments are defined by size metrics such as employees, revenue or premium

SMEi

• 1–250 employees• Typically single location

and non–complex requirements

• Insurance sold to owner or FD

• Served by local brokers/agents

Mid–market

• 250–5,000 employees• Typically single country

with simple but large risks• Insurance sold to CFO• Served by local/regional

brokers

Large corporate

• 5,000+ employees• Large and complex risks,

potentially in multiple countries

• Insurance sold to risk managers

• Served by regional/global brokers

‘Simple and good enough’

• Easy, quick and simple policies to buy, with an increase in packaged products

• Clients get assurance that they are getting a good deal and their claims will be paid

• Clients are provided with basic advice on what they should be buying

‘Trusted advice and best solutions’

• Expert risk advice is provided by specialists

• Clients get access to the best globally available protection solutions

• Clients find it easy to understand their insurance status

• Clients’ multi–national complexity can be handled seamlesslyii

‘Connected risk ecosystem’

• Clients can easily obtain real–time updates on their assets, exposures and claims

• On–demand pricing and cover is provided by the industry

• Prevention services can be triggered by risk monitoring

• Distribution is either direct (single carrier), via e–brokers (panel of carriers), or via aggregators (many carriers)

• No advice or robo–advice • Trusted brands and/or peer–to–

peer communities• Fully automated rating/

underwriting• Simple application process,

using third–party data sources and real–time quote and bind process

• Distribution is dominated by brokers, with expert local advisors connected to global networks

• Brokers are able to move risk anywhere in the world to find the best solutions

• Use of portfolio analytics to create superior solutions in partnership with insurers

• Largely automated rating/underwriting, with manual intervention on an exception basis

• Insureds, brokers, insurers and related providers are connected in digital ecosystems, with real–time data flows between them, including IoT data

• Bespoke underwriting to set frameworks and develop smart contracts, followed by on–demand pricing and coverage adapted in real–time for specific risks and timeframes

• Elimination of human intervention for simple endorsements and parametric claims

Future insurance segments

Segments are defined by needs and behaviours

Future segment propositions

Shift from a relatively homogeneous ‘one–size–fits–all’ approach to truly distinctive and tailored

Notes — i: Most SMEs would flow into the ‘Simple and good enough’ category; however, some will have more complex needs or be part of industry ecosystems and have needs best served elsewhere. ii: Complex multi–nationals, in particular those in emerging markets, have additional needs related to, for example, local regulations and the need for local policy issuance.

“ Successful commercial insurers will look at their clients on the basis of their needs”

18: “Annual Study of Intangible Asset Market Value”, Ocean Tomo, 2015.


Brokers claimed a 77% share of commercial insurance distribution in 2016, and we expect them to retain their dominance.19 The use of brokers will remain particularly attractive for larger businesses requiring coverage for more complex needs and a wider range of risks. However, purchasing behaviours are evolving, triggering growth for direct channels (particularly for smaller businesses with simpler risks) and new forms of distribution.

A new commercial insurance ecosystem is developing, changing the role of existing players, and introducing a new set of entities to support new technologies and transformed ways of working. In the SME/‘Simple and good enough’ segment, changes to purchasing behaviours will require the introduction of e–brokers and aggregators, and other new players will largely centre around new types of data and analytics services the industry will start to use. Our view of the future landscape later in this section shows the level of change we believe will be required for each party. Of these future changes, InsurTechs and MGAs in particular have already gained increased traction in the market. Given the (relatively modest) speed of innovation within insurers, we expect this to continue.

Delegated authority arrangements are an important and significant component of the commercial and specialty insurance market. The global delegated market reached around £70bn in gross written premiums in 2017, following accelerated growth (with a five–year compound annual growth rate of 6%), and we expect this trend to continue.20 In the region of £5bn of premiums were written through UK MGAs in 2017, and European insurers used delegated vehicles to write approximately £6bn of business across the region.21 Growth will also be encouraged by the increased sophistication of delegated agents (making them more attractive to carriers) and the increased take–up of the delegated model by reinsurers, brokers and alternative capital providers as they seek to own more of the value chain and therefore profit.

Delegated authorities and MGAs are increasingly used as a mechanism to access niche markets. MGAs centred around specific areas of expertise are offering much more innovative products and better levels of service, particularly for new product protection areas such as cybersecurity. This is driving greater use of MGAs, and in turn causing a shift in talent from traditional insurers to the MGAs, enabling greater innovation in these companies.

The distribution landscape is evolving, with traditional intermediated business via brokers and then insurers no longer the only route to market The evolving

distribution landscapeDistribution models will continue to evolve, creating a new commercial insurance ecosystem with a wider range of actors than ever before.

Insurers have not responded successfully to changing customer needs, resulting in more innovative organisations such as MGAs and InsurTechs gaining market share. These organisations have focused their efforts on proposition, service and distribution, and their dynamism has attracted talent away from established insurers, leaving them at risk of being further left behind.

10


InsurTechs are also causing significant disruption to traditional distribution models, although their presence has been felt more strongly in the personal lines than commercial lines space. InsurTechs have focused predominantly on sales and distribution, or have looked to deliver specific value chain solutions, and few have covered the end–to–end value chain. Funding for these firms has increased dramatically, with US$2.3bn invested globally in 2017, representing a 32% annual increase on 2016.22 As with the emergence of banking Fintechs, InsurTechs have initially focused on quick wins within personal lines, with only one in four serving the commercial sector.23

The growing presence of InsurTechs in sales and distribution shows the customer desire for a different service and proposition from their insurance providers. Insurers need to take note, learn from these market developments and apply their insights in the way they develop their own business model propositions. This is particularly true in the SME/‘Simple and good enough’ segment, where InsurTechs have been most aggressively targeting the market.

Although InsurTechs are disruptive, many insurers are embracing their potential. A number of high profile insurers and reinsurers are actively investing

in InsurTechs, either through incubators or corporate venturing (investment and acquisition). Alongside private equity houses, (re)insurers are the biggest investors, so helping to fuel the InsurTech movement. Commercial insurance participants can gain from both the new technologies and new ways of working; 81% of outperforming insurance businesses have either invested in, or are already, working with InsurTechs.24

While some InsurTechs will try to disrupt the industry, the stronger trend is towards InsurTechs becoming enablers — starting to focus more on point solutions to support insurers in underwriting, claims, IoT and artificial intelligence. Of InsurTechs targeting the commercial lines industry, 75% can be seen as enablers.25 Insurers need to capitalise on these innovators’ strengths and use them to enhance their propositions.

At the same time, insurers need to ensure they avoid being disrupted by InsurTechs and MGAs focused on distribution. They need to take action to improve their distribution activities and maintain relationships with their customers. Otherwise they risk a future where their role in the value chain shrinks to that of being simple providers of capital.

“ High profile insurers and reinsurers are actively investing in InsurTechs”

19: “UK Commercial Insurance Distribution 2017”, Global Data, May 2017. 20: EY analysis. 21: EY analysis. 22: “Fearless Innovation: InsurTech as the Catalyst for Change Within Insurance”, Accenture, March 2018. 23: EY analysis. 24: “Friend or Foe? Insurtechs and the global insurance industry”, IBM, February 2018. 25: EY analysis.

Today Future

Global brokers Global brokers

National/regional brokers National/global brokers

Local brokers Broker networks

Tied agents Tied agents

Global composite insurers Global composite insurers

Domestic/mutual/specialty insurers Domestic/mutual/specialty insurers

Physical markets (e.g., Lloyd’s) Virtual markets

MGAs MGAs

Captives Captives

Wholesale brokers Digital wholesalers

Reinsurers Reinsurers

InsurTech InsurTech

New E–brokers

New Aggregators

New Independent risk managers

New Ecosystem utilities

New Data providers/oracles

Degree of anticipated change New Analytic providers

Significant Major New Loss prevention specialists

Fundamental New player New Securitisation specialists

The future commercial insurance distribution landscape

The new distribution landscape will require fundamental changes to a number of players, and will see many new parties enter as well. These new parties will be largely focused around providing additional services for the ecosystem around data and analytics. For insurers, this will mean changes to how they need to operate, and who they need to interact with.

• Loss adjusters• TPAs• Regulators

• Software providers• Consultants• BPO

Other players present both today and in the future:


New technologies give insurers access to better data, greater ability to share data between parties, and better ability to price and manage risk effectively. As a result, the true value of these new technologies will come from their ability to support a different, new type of business model.

Given the intermediation, type of risk and frictional costs associated with commercial lines insurance, we believe new types of technology will have a far greater impact on commercial than personal lines. The volume of data required to price risk effectively, and the number of parties involved, means new technologies can fundamentally change the game for insurers, brokers and insureds.

Commercial insurers could also use these new technologies to digitise their existing businesses and current ways of working. Typically, organisations spend

far more on legacy systems than on disruptive change, so improving the performance of legacy systems and processes can have a marked impact. Where insurers are not ready to be disruptive in the market, applying a combination of technologies such as robotics, machine learning and digital interfaces can drive automation across the legacy estate and deliver significant performance improvements. However, if insurers do not use the power of these technologies to change their business model, they risk being disrupted by more digitally–enabled new entrants, or by incumbents that have fundamentally changed their business models — reducing their cost of doing business while improving customer experience.

As commercial insurers increasingly use such technologies in combination, rather than in isolated silos, their true power to improve efficiency and performance and shift the market will be realised.

Disruptive technologies are creating opportunities for insurers to meet their customers’ needs more effectively and run their operations more efficiently

“ New technologies will enable a new business model for insurers that choose to take the opportunity”

New technology driving new business modelsNew technology will have a wide–ranging impact on insurers, driving new business models, as well as enabling digitisation of the existing business model.

The insurance value chain is no longer a linear set of interactions. It is an evolving ecosystem of interconnecting parties, who can take on different roles within this model depending on the client and the particular interactions involved.

14


The new commercial insurer business model will be interconnected with the whole commercial insurance ecosystem, and focused more heavily on its future propositions than ever before. While the role of the insurer and some of the key functions performed will not change, it will look and feel like a different business model, particularly in external interactions.

Customer focused

Needs and behaviour driven

Governance,

Underw

riting

capital and risk

prevention

management

man

agem

ent

ecos

yste

mSu

pplie

r an

d

Loss

development

Proposition

Service and

claims

Innovation focused

Insureds

MGAs

Digital wholesalers

Reinsurers

e–brokers

Aggregators

Securitisation specialists

Loss prevention specialists

Analytics providers

Data providers/

oracles

Ecosystem utilities

Independent risk

managers

Regulators

Brokers and agents

Virtual markets

Ecosystem connected

Ope

ratio

nally

ag

ile

Tech

nolo

gy p

ower

ed

Tale

nt

awar

e

Analytically informed

Data centric

Underwriting• Greater emphasis

on automated underwriting — with bespoke underwriting an infrequent activity

• Data and analytics driven risk selection and underwriting

• Trading is largely through virtual markets and e–brokers rather than face to face

Loss prevention• Greater focus

on using IoT, external data and advanced analytics to change the proposition

• Close working with data providers and loss prevention specialists to offer a differentiated service

Supplier and ecosystem management • Increased

emphasis on managing all suppliers and vendors in the ecosystem, to enable the insurer to meet its goals

• People dominated function with specialist skills

Proposition development • This will become

one of the primary activities for insurers, and a key area of people focus

• Ongoing development of solutions which can be electronically traded will be key to future success

Governance, capital and risk management • New risk

aggregations due to changing economy and the new risks it presents e.g., cyber

• Greater separation of risk selection and trading — less risk held on balance sheet, which is instead passed to other markets and instruments

Service and claims• Servicing and

claims do not fundamentally change, but far greater use of artificial intelligence (AI)and robotics will remove human intervention, and allow for straight–through processing

• Greater use of parametric policies allowing for auto–settlements

We believe that these new technologies will enable a new business model for insurers that choose to grasp the opportunity. Commercial insurers’ models will become customer focused and needs–based, digitally connected to the many parties involved in the ecosystem via a sophisticated service–driven API architecture — sharing data, enabling transactions and providing insight. The interconnected nature of the ecosystem will fundamentally change the role of traditional parties in the insurance value chain, as well as introducing a whole set of new players focused on loss prevention and providing additional data and analytical capabilities.

The new disruptive technologies have made this type of model possible. Moving towards a new business model will only be possible, however, if insurers also take another look at market segmentation and distribution as part of their evolving business proposition.

The segments individual insurers focus on will influence their emphasis on capabilities and interactions within

the ecosystem, although the overall model will feel the same.

For example, insurers focusing on the SME/‘Simple and good enough’ segment will need less focus on underwriting, which will be largely automated. However, they will require much greater emphasis on proposition development through analytics. Their key ecosystem partners will be e–brokers, aggregators, insureds and analytics providers.

In contrast, for insurers focused on the large corporate/‘Connected risk ecosystem’ segment, their model’s primary focus will be on the interconnected–ecosystem, where digital connection with most of the external parties drives the value. The key to this ecosystem is the use of smart contracts to drive service and claims, based on pre–agreed underwriting and tolerances.

The new commercial insurer model

“ The interconnected nature of the ecosystem will fundamentally change the role of traditional parties in the insurance value chain”


To succeed, commercial insurers must:

• Re–segment their customers to drive better, targeted services based on customer needs and behaviours, not based on existing product offerings

• Optimise their distribution to prevent being disrupted by the growing MGA and delegated authority sector as well as InsurTechs, focusing on how they can maintain and strengthen the relationship with the customer, and so avoid becoming just a capital source

• Truly change their business into a customer–focused and needs–based, digitally–connected model, leveraging the capability of new technologies

• Manage and lead talent in the shift from a technically focused, siloed and fragmented workforce to an interconnected, collaborative and customer–centric one

Insurers that succeed should be able to manage twice as much business for half the costs. We believe that a reduction in costs will be most profound in trading, where a movement towards e–trading, portfolio solutions and ecosystems based on new technologies and distribution models will fundamentally revolutionise activities and therefore associated costs.

Similarly, there will be cost reductions across the industry in underwriting and servicing, primarily driven by automated underwriting and a greater use of self–serve digital capabilities.

We do, however, believe that costs will increase in some areas. This is particularly likely in solution development, where success will require a far greater focus on tailoring products to new client sub–segments and in portfolio solutions. However, increased expenditure here will be far outweighed by the overall reduction in costs that we will see across all segments of commercial insurance.

The evolving landscape in which commercial insurers operate offers huge potential for new revenue streams and improved performance, and acts as a real threat for those who choose not to act

“ Insurers that succeed should be able to manage twice as much business for half the costs”

Halve costs and improve customer serviceCommercial insurers who do not prioritise these issues will lose their position in the market as they will become increasingly uncompetitive.

Insurers that do will halve their expense costs, and offer a superior customer service to clients.

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In each market segment, by focusing on specific parts of the commercial insurance value chain, insurers can generate added value and/or significantly reduce their costs. We have analysed the current industry expense base, as a percentage of net written premium (NWP), and determined our view on the future industry expense base, through the application of new technologies and activities across the value chain.

• We have analysed the UK cost base across all parties in the commercial insurance value chain• For each current segment we have determined the cost base per key activity, as a percentage of the net written premium,

ascertaining where the greatest expenses lie within the value chain• Based on our assessment of what the future model for commercial Insurers will look like and how key steps in the value chain

will evolve, we have calculated the future cost base per key activity area, and therefore the overall expense base reduction across the industry

Source: EY analysis of industry cost structure, 2018.

Future commercial insurance industry cost structure

Flat/increase in costs 0%–50% reduction in costs 50%–75% reduction in costs 75%+ reduction in costs

Disruptors entering the market will have a significantly lower cost base than incumbents. To remain competitive, the focus must be on moving away from costly and inefficient legacy systems, and towards slick customer experience, automation and artificial intelligence, while also introducing value–add human intervention into processes.

Insurers’ priority actions to enable this transformational change and remain competitive will be determined by the market segment(s) in which they operate:

Traditional SME — ‘Simple and good enough’

Transformed into a ‘Simple and good enough’ segment, the greatest cost reduction can be achieved by fully automated trading, online self–serve capability, and fully automated underwriting — potentially delivering cost reductions of 40%–50%. To enable this, the key areas to focus on will be:

• Greater investment in solutions tailored to specific sub–segments

• Straight–through processing

• Omni–channel customer experience

• ‘One–click away’ insurance, linked into e–brokers and aggregators

Traditional mid–market — ‘Trusted advice and best solutions’

The transition from traditional mid–market to a ‘Trusted advice and best solutions’ segment will involve a heightened focus on intangible risks and very complex needs. Insurers active in this area should focus on e–trading rather than face–to–face operations, greater use of portfolio solutions, and an increased use of self–service. The primary changes made by insurers focusing on this segment will need to be:

• Enabling an automated and integrated core platform at the heart of the business to enable e–trading via brokers

• Making greater use of automated underwriting and portfolio solutions

• Maximising the automation of low value, low complexity claims

Traditional large corporate — ‘Connected risk ecosystem’

Transformation into a ‘Connected risk ecosystem’ segment will require a fundamentally different business model focused on tangible risks, high volumes of data, and standardised risk profiles of large portfolios. This new segment will find significant cost reduction through lower origination costs as relationships become deeper and more engrained and automated trading within pre–agreed smart contracts increases. The primary changes for this segment will focus on:

• Establishing an automated and integrated core platform directly linked to brokers and clients

• Using risk ecosystems enabled by blockchain to provide an immutable transaction ledger

• Intelligent analytics enablement

• Obtaining value from real–time data

While technology will be the primary enabler of transformation across all segments, successful change also requires a fundamental rethink of how insurers run organisations — particularly the change required to the workforce. Underwriting and claims professionals will see significant changes to their roles, moving away from non–value–add processing activities (which can be automated) to high value decision making and business development activities and more time spent on ongoing innovation — all with the aim of delivering a high quality customer experience.

Value chain activities Segment SME – ‘Simple and good enough’

Mid–market – ‘Trusted advice and best solutions’

Large corporate – ‘Connected risk ecosystem’

Origination and engagement

Today

Future Key driver

9.5%

4.0%Digital marketing

3.4%

3.4%Relationships

2.6%

1.3%Relationships

Risk advisory

Today

Future Key driver

3.9%

1.3%Robo–advice

4.9%

6.1%Decision support

risk advisers

6.4%

6.4%Risk specialists

Solution development

Today

Future Key driver

2.1%

3.0%Innovation

2.9%

4.3%Innovation

2.0%

2.0%Ecosystems

Trading

Today

Future Key driver

7.7%

1.0%100% e–trading

9.6%

2.4%75% e–trading

portfolio solutions

11.7%

2.9%Ecosystems

Underwriting

Today

Future Key driver

3.8%

1.6%100% automated

5.2%

2.6%50% automated

portfolio solutions

5.2%

2.6%Decision support/

on demand

Servicing

Today

Future Key driver

6.8%

1.3%Online

6.1%

3.0%Online

5.3%

2.6%Online/smart contracts

Claims/loss management

Today

Future Key driver

4.2%

2.8%Digitised

2.0%

1.5%Digitised

2.6%

2.0%Digitised/smart contracts

Portfolio management

Today

Future Key driver

0.5%

0.6%Optimisation

1.3%

1.5%Optimisation

1.3%

1.6%Optimisation

Opex costToday

Future

38.5%

15.6%Cost/NWP

35.4%

24.8%Cost/NWP

37.1%

21.4%Cost/NWP

Key


Without fundamentally changing their business models, insurers will not be able to survive in their current construct — losing market share in the face of competition from more nimble and agile new entrants, or incumbent insurers that have been far more ambitious and disruptive in their approach.

Higher customer expectations cannot be ignored. Insured parties are looking for a better service for a lower cost. Commercial insurers have the potential to meet such demands — but only by undergoing significant transformation, both as individual organisations and in the industry as a whole.

To remain competitive, commercial insurers will need to focus on three fundamentals:

1. Re–segmenting their customers to drive better targeted propositions and services

2. Optimising their distribution to strengthen customer relationships

3. Applying technology to develop a customer–focused, digitally–connected business model

The pace at which insurers will choose to undertake these activities will vary, depending on ambition,

current position in the market and existing technology architecture. However, without such action, insurers risk becoming irrelevant and uncompetitive in the market. Disruption will be far more profound in commercial lines than personal lines over the next few years, given current inefficiencies and the advent of new technologies enabling a fundamental reshaping of the business market.

We believe that the industry can and will transform itself, and emerge stronger and more innovative than ever before — given its inherent strengths and the recognition of the need to change pervasive across the industry. Insurers that choose not to act may be disrupted by new entrants or incumbents; success in this industry will require focused activity on future–proofing and transforming the business.

EY is at the forefront of these market developments. We are already helping many commercial insurance ecosystem participants to define their future business model. We are starting to implement their visions for the future and the underpinning new technologies. As they transform their models, they anticipate seizing a greater market share from a far lower cost base.

In the short–term, effective action may be focused on fixing point–to–point legacy issues, as a part of a ‘no regrets’ programme of work. However, in the long–term, commercial insurers need to be far more ambitious, and become disruptive forces in their own right in order to reshape how insurance is managed

Three fundamentals for transformation success Commercial insurers are facing a combination of disruptive forces far more powerful than any seen in recent years. New technologies and emerging players are driving change: established insurers need to respond by harnessing those new technologies and re–designing their business models in order to deliver a better customer service — from a lower cost base.

22

How EY can help

To discuss how EY can help to transform commercial insurers, please get in touch.

We have developed a number of key services to these challenges to support insurers in their commercial insurance transformation journey:

• Insurwave — blockchain platform• Core platform replacement• Digital platform enablement• Intelligent automation• Advanced analytics• Insurance workforce of the future • Business model re–design

ContactsPreetham Peddanagari EMEIA Digital Insurance Lead, Ernst & Young LLP [email protected]

Simon Burtwell UK Insurance Advisory Lead, Ernst & Young LLP [email protected]

Tony Sault UK General Insurance Lead, Ernst & Young LLP [email protected]

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EY is a leader in shaping the financial services industryOver 30,000 of our people are dedicated to financial services, serving the banking and capital markets, insurance, and wealth and asset management sectors. At EY Financial Services, we share a single focus – to build a better financial services industry, not just for now, but for the future.

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