Industry transformations occur when the pain of staying the same is suddenly greater than the pain of changing, according to Karen White, CEO of RMS.
“The second thing that has got to be present for those transformations to occur is that technology actually has morphed and evolved enough to be harnessed to accelerate those changes,” she said at the Reinsurance Symposium in Baden-Baden, Germany, held in October. “The question is: Are we at one of those moments?”
White and other executives who participated in a panel discussion titled “Is the Re/insurance Sector Ready for Industry 4.0?” agreed that transformation is underway but isn’t generally keeping pace with the evolving risk needs of clients. The key to unlocking Industry 4.0 is embracing data and technology, the panelists agreed.
Other speakers on the panel included James Nash, CEO, International Division, Guy Carpenter (which sponsored the meeting); Ian Branagan, senior vice president and group chief risk officer, RenaissanceRe Holdings; Laurent Rousseau, deputy CEO, SCOR Global P&C; Chris Klein, panel moderator and former head of strategy management for EMEA at Guy Carpenter; Jon Hancock, director of performance management, Lloyd’s.
“We’re now living in the age of intangibles,” explained Nash. “Today, some 90 percent of the S&P 500’s market [capitalization] is intangible assets, whether that’s data, intellectual property, or brand and reputation.” He said this compares to just 17 percent around 35 years ago when he first came into the industry. “This massive shift presents an exciting opportunity for both insurance and reinsurance companies,” Nash said.
Hancock at Lloyd’s cited a 2017 survey of risk managers who said that half the top 10 risks that keep them awake at night were uninsurable—not because they can’t be insured or have prohibitively high premiums but because the industry hasn’t thought of products or services yet to respond to them.
How can the industry develop innovative, customer-focused products? The key is data and technology, agreed the panelists.
Nash highlighted how technologies are transforming the ways that reinsurers and insurers develop new products, optimize underwriting and deliver operational efficiencies to the benefit of the end customer. “Reinsurance will be an important part of the solution as the expertise, support and partnership on offer empower insurers to innovate and to grow.”
Robotics, artificial intelligence, ubiquitous sensors and the Internet of Things all have the potential to change how and what the industry underwrites, Nash said. “Everything will be measured all the time, meaning that underwriters will, in theory at least, have access to real-time data for all lines of business.”
He asked the audience to imagine a world where network sensors, which are embedded in billions of products, devices or services, will report risk information to underwriters in real time. “Risk uncertainties, and by its extension their associated loss costs, will decline.”
Over time, Nash continued, a greater level of underwriting insights could reinvent insurance by shifting its value proposition to not just protection from but also the prevention of risk.
The quantity and quality of data associated with Industry 4.0 should enable more precise underwriting, which brings many opportunities to grow and innovate as well as to enhance risk understanding and increase efficiencies, Nash said.
Harnessing Tech-Driven Innovation
White said the industry’s harnessing of technology-driven innovation is central to its ability to adapt to meet the demands of evolving risks and provide greater customer value, which is important as the world faces the impact of extreme weather, climate change, manmade disasters, a shift from tangible to intangible assets, and emerging risks.
“These kinds of market disruptions create new opportunities and open the door to new business models. The other side of that coin is that industry disruptions are often ruthlessly unkind to incumbents who don’t embrace change,” White continued.
Hancock said, “Data is key to a successful Industry 4.0 business model, and data analytics is a powerful tool to drive more relevant customer insight, better decisions and more innovative [products].”
But industry participants have to be willing to accept change if the industry is to remain relevant to its customers. Hancock quoted Winston Churchill, who said: “Time after time, history ran over the Luddites and romanticists, those who sought to restore the old and delay the new. And every time, history did it with faster, more reliable and more advanced vehicles.”
The challenge for the insurance industry is to find ways to meet societal demand in terms of risks covered, product and distribution, said RenaissanceRe’s Branagan. “What do clients want? What does society want? It’s the core activity that we must continue to explore in order to maintain the value proposition of our industry into the future.”
The types of risks, products and methods of distribution are constantly changing, Branagan noted.
While that has been and will continue to be an evolutionary process, “the speed of change has increased in the last few decades and will continue to do so. Our challenge for the insurance industry at all points in the supply chain…is to meet that societal demand in terms of risk covered, products and distribution,” he said. “So for me, the first issue in this Industry 4.0 topic is that [the industry is] meeting demand and not declining our way to oblivion.”
He cited Nash’s comment about the growth in intangible assets and the fact that the insurance industry covers less risk that people have today than it did 30 years ago.
Nevertheless, Branagan was optimistic that the industry will be able to meet the challenges ahead but acknowledged there is much to do. “The supply chain in our industry continues to be impeded by legacy inefficiencies, high costs, duplication, manual processes and poor integration. But I believe there is great potential for change.”
The industry has an opportunity to augment its value proposition to society by leveraging technology, data and “the skills embedded in our people to understand, quantify and confidently take on new risks, new types of risks, wrapped up in new products, in new forms of distribution,” Branagan continued.
He summed up RenaissanceRe’s role as one of meeting “client demand with the most efficient capital that we can find. We try to achieve this by holistically looking at the insurance supply chain.”
“We believe our industry has an opportunity to enhance our collective and individual value proposition to society by working together and leveraging digitalization, data and underwriting expertise to meet this constantly evolving risk landscape and nature of consumer demand,” he said.
This concept of increased collaboration and increased coordination is critical to the success of that movement, he continued. “Personally, at this moment, I’m focused on the extent to which greater collaboration and industrywide standards adoption around data, flows of data, tools and systems to measure risk can lead to greater integration along the points of the [industry] supply chain.”
Challenges and Opportunities
Hancock agreed that while the scale of the challenge ahead for the industry is enormous, it provides a massive opportunity.
He pointed to the example of cyber risks, which has a global current gross written premium (GWP) of around $2 billion to $2.5 billion, of which Lloyd’s writes about one-third of the market.
The good news is that many studies predict that will rise to about $20 billion GWP by 2025, Hancock said. “If I were a betting man—an insurance type rather than a casino type—I would say it will be a lot quicker than that.”
And yet cyber itself is still a relatively underdeveloped product, he affirmed. “Our understanding of the potential exposures is incomplete. We don’t have 350 years’ history of cyber cover like we do for wind or earthquake or fire cover.”
There are plenty of other examples of new and emerging products being developed to serve a new and emerging demographic in sectors such as the shared economy, he said, citing ridesharing and homesharing.
“Again, these products are very much in their infancy but quite reflective in the way people are running their lives and running their businesses. I could be using my car as a taxi in one moment and driving my family around in the next moment. I could be living in my house one day and acting as a landlord the next day.”
And new products are moving away from the traditional annual 12-month cycle for policies to on-demand coverage that can be switched on and off, he said. “Customers quite rightly want products that can be arranged quickly and efficiently and products that reflect their lives, not the lives that we would like them to live.”
Hancock said it’s very good news that the industry is reacting to change, “but I think we need to aspire to take things a step further and start creating products as the need evolves, not sometime after the need evolves.”
But the industry also needs to move beyond product innovation to product delivery, he said. “Customers are also expecting us to deliver those products in new and different ways. Quite rightly, customers expect to find an insurance policy just like any other product—in a digital, online, bespoke, flexible, trackable service.”
Hancock cautioned that a reluctance to embrace all things “Industry 4.0” will have an impact on the people the industry hopes to attract and retain. “Unless we manage it carefully, we’ll face a talent crisis. A large number of longtime professionals are about to reach retirement, and there’s currently a lack of new people coming in with the new skills we need for the future,” he asserted.
As a result, the industry will need a blend of new and traditional skills. “We need data analysts as well as underwriters,” Hancock emphasized.
“We need a different offering to attract those new skills and those people who come and bring those skills,” he continued. “For the younger generation, maybe, just maybe, insurance isn’t seen as cutting edge, tech savvy or an interesting industry to work in, especially when we’re competing now with the likes of Google and Apple and Facebook for exactly the same talent.”
He said the industry’s call to action should be that “we all need to sell what a wonderful industry this is and show people what great opportunities they can have to really drive change and really do great things for society.”
What Won’t Change in Industry 4.0
In his presentation, Laurent Rousseau, deputy CEO, SCOR Global P&C, said that some aspects of the industry would remain unchanged during this period of rapid transformation.
What is not going to change for reinsurers “is the need for greater sophistication and depth,” he said.
“When I see reinsurance companies forgetting that, when I see reinsurance companies focusing purely on the transactional aspect of our business, I think they are losing sight of what really makes a difference, which is the ability to have our own in-depth view of risk,” Rousseau added.
“What is also not going to change is that clients will continue to demand better prices and faster delivery,” he confirmed. He said the industry should approach what it does in a client-centric way and focus its value proposition fully on the needs of clients.
Lloyd’s Embraces Industry 4.0
Hancock discussed how Lloyd’s is embracing the Industry 4.0 concept, aiming to transform the market with its Future at Lloyd’s project. The blueprint for the project was rolled out in September 2019.
Hancock said it sets out a plan to build “the most advanced insurance marketplace,” which will be achieved with six key initiatives that cover everything from a complex risk platform, to making it more efficient for capital, to encouraging innovative business, to driving down net costs, to improving the claims experience.
“Data and technology are absolutely critical” to each of these initiatives, he said. For example, Lloyd’s claims solution will use technology and data to speed up processes and reduce costs. Hancock said Lloyd’s would like to get to the point where it knows its customers are going to experience a loss before they do, “so we can actually help them prepare for an event that hasn’t even happened yet. And when a claim does happen, you just pay it immediately.”
That’s the transformational aspect of Industry 4.0, which “we absolutely have to harness and see the amazing impact it has on the world.”
Hancock emphasized that most of the technology being used is technology that already exists. “We now have an opportunity to harness that technology…and offer a different joined-up solution.”
“Every syndicate, every organization is different, as is every broker, insurer, reinsurer, loss adjuster and lawyer across the whole industry,” Hancock affirmed. “And everybody will approach things in their own way. One thing is for certain: Doing nothing is not an option. We have to change if we are to remain relevant to our customers and relevant to our employees of the future. And we will.”
If something as complicated as Lloyd’s can do it, anybody can, Hancock said. “I think it boils down to this: Insurance will only change if we all change.”
Hancock offered one final quote from Irish playwright George Bernard Shaw, who said: “Progress is impossible without change, and those who cannot change their minds cannot change anything.”
“Our challenge is to change our minds,” he said in his concluding comment.
This article was first published in the March/April print edition of Carrier Management, with the online version published on Jan. 27.
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