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Three burning questions for P&C insurers

Senior Partner Pradip Patiath discusses hot topics on the minds of P&C CEOs and his thoughts on how these trends might play out.
Pradip K. Patiath

Advises financial institutions on transforming their performance and achieving superior growth with digital and analytics

The P&C insurance industry is riding a wave. According to McKinsey’s 2019 Global Insurance Pools, the industry’s gross written premiums hit €1.4 trillion in 2017, up 5.1 percent from the year before. And despite the steady onslaught of natural catastrophes, carriers are still awash in cash.

Insurance executives, far from sitting still, have been reassessing their current strategies and building resilience to withstand a changing landscape. The impact of digital technologies is on their minds, but that’s just one component. Here are three topics P&C CEOs have been discussing, as well as some of my thoughts on how trends might play out in the coming years.

1. How will technology reconfigure the insurance business value chain?

Currently, the insurance business system flows from customer through retailer or wholesale broker, to underwriter, to service agent, to balance sheet, to reinsurance company. Each of these stakeholders plays a distinct role.

But P&C executives are starting to reexamine each link in the value chain and explore how artificial intelligence or automation might enable new business models. For example, carriers could decide to create a shared-services organization for functions such as claims. Vertical integration is also on the table.

So far, P&C carriers have largely been monitoring the changing value chain to determine how soon it will shift and the underlying factors that will catalyze this change. Personal lines have already been reshaped by technology, and most industry executives expect small commercial to change over the next several years. However, midmarket and large corporate segments will likely modernize over the next decade.

2. How will smart homes and the future of mobility affect carriers that are heavily focused on personal lines?

Technology is starting to shift the risk associated with home and auto products. In smart homes, more and more sensors on appliances and equipment can detect and notify owners of problems before damage can occur.

Auto insurance lines face an even more dramatic tech-driven disruption. The United States currently has approximately 1,000 P&C carriers, more than three-quarters of which depend on auto premiums to survive. Ride-sharing has already altered the landscape. With the introduction and eventual mass adoption of autonomous vehicles, rates of ownership and accidents will plummet, shifting the owners of risk from personal to commercial. These and other factors will significantly erode the premium pool.

Carriers that depend on personal auto could pursue one of several options: consolidation, a route the seven largest P&C insurers are taking; diversification by moving beyond personal auto into home, commercial, or specialty products; or the pursuit of opportunities involving new kinds of risks.

The latter option involves determining how technology will shift risk and how to cover it. As transportation becomes more of a mobility business, for example, what’s the right risk to insure and the right mechanism? Similarly, in homes with sensor-enabled products, if a water heater causes a flood, which party is liable? The answers to such questions could present new opportunities.

3. Is the current distribution of profits sustainable, and what forces might affect the balance?

Historically, the vast majority of profits have gone to distributors: currently, most brokers operate at a return on equity of more than 25 percent, while insurers typically operate around 8 percent.

Why are distributors in such an enviable position? Because they own the relationship with the customer, they are best placed to build ties and strengthen loyalty. In addition, the balance of manufacturing and distribution tilts toward distribution, primarily because manufacturing isn’t as differentiated as service can be.

Carriers can bolster their position by becoming the preferred destination for customers. That may involve finding potentially “sticky” products. By doing so, carriers create a direct channel to the customers, cutting out distributors in the process.

Such shifts present opportunities for growth and new business models. Success doesn’t require P&C insurers to see around corners—just to have a clear-eyed view of where the value lies.

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