Dealing with the disruptors
While the dark cloud of disruption looming over insurers is nothing new, what has changed is the urgent need to respond.
In the good old days insurers had 3-5 years to adapt, but now it’s more like 1-2 years, according to QBE Group CEO John Neal.
He told last week’s Australian and New Zealand Institute of Insurance and Finance Reinsurance Rendezvous conference in Canberra that the trends disrupting “business as usual” are alternative capital, commoditisation, reshaping of the insurance value chain, regulation on capital and solvency, Big Data, digitisation and increased customer sophistication.
However, he says alternative capital should not overly worry insurers. Nor should the “quite scary” money being poured into insurtechs, whose failure rate is about 92%. These emerging competitors are comparatively small and stymied by regulation and lack of distribution networks.
Instead, it is the way such nimble newcomers are throwing up new ideas, models and ways of thinking, like the distant cries of a revolution getting closer by the day.
Mr Neal says inefficiencies in the way insurers run their businesses invite these newcomers to disrupt the established players, because they believe they can surely do better.
To highlight such inefficiencies, Mr Neal harked back to the halcyon days when he started working in the industry – when insurers got 25 cents in the premium dollar and 75 cents went to running the exposure and paying the claim.
Today it’s not unusual for broker commission levels to be north of 25%. He cites Towergate in the UK taking a “mind-boggling” 35%.
“Paying 25 points commission away and you’re running your business at 15,16 points, you’re spending 40, 41, 42 cents in the dollar. That is where we are going to get disrupted.
“While the interested competition will get put off by the regulation, they are going to get intrigued by the fact we spend so much of the money we get from the customer… rewarding the intermediary.
“So some way or another, we need to get that cost touch-point back down, I think, beneath 25%.”
He says insurers need to reduce costs.
“A broker has an amazing role to play in advocacy and actually selling insurance. And that’s the reality of where we’ve got to get to because, as an insurer, I can’t afford 25% commission for business insurance.
“I’d rather it was intermediated, and 99% of our business is intermediated, but if the commission levels remain as they are, then certain classes of insurance will have to be disintermediated.”
Mr Neal says QBE has employed a tough program to remove costs from the business. It is the beginning of a journey that will involve automation and rethinking of processes.
One example of technology-driven efficiency is QBE’s use of drones following the recent Ecuadorian earthquake. Loss adjusting was completed in a quarter of the time it would have taken normally.
As for pricing, Mr Neal says a lot can be learned from personal lines insurers. Recently he visited David Stevens, director of UK car insurance specialist Admiral, and asked how many times the group has changed pricing in one day. He was staggered to learn the record figure was 15.
Admiral analyses 2 million competitive quotes a week and, on average, changes its pricing 3-4 times a day.
“Personal lines guys really are way, way ahead,” Mr Neal said. “Their pricing is incredibly sophisticated.
“In the US and the UK they will run those businesses with staggeringly tight margins. They’re running it to a two-point margin on the underwriting.”
He says there is no doubt insurers must act now, quoting former General Electric CEO Jack Welch, who said: “We’ve long believed that when the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight.
“The only question is when.”