NextWave Insurance: personal lines and small commercial - How insurers must change to thrive in the next normal - EY
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NextWave Insurance: personal lines and small commercial How insurers must change to thrive in the next normal
NextWave
Insurance:
personal lines and
small commercial
A message from the EY Insurance leadership team
The most serious threats — pandemics, societal megatrends, disruptive
technology advancements, and intensifying competition from new and
traditional players — also hold the greatest potential for growth and
transformation. Insurers that can demonstrate new and differentiated value
to individuals, businesses, and communities around the world will seize that
potential and prepare themselves for success on the industry’s next frontier.
The industry Insurance leaders must maintain their resilience in navigating an
uncertain present and a complex and turbulent future. As the strategic
faces a great evolution of the industry accelerates, the most effective response for
paradox of risk insurers is to harness the power of change and thoughtfully design
their futures. They must develop their vision for the future and adjust
and opportunity. their strategic and tactical plans to realize that vision.
Tomorrow’s leaders will be purpose-led in their strategies, more agile and
nimble with their resources, and dramatically more customer-centric. They will
engineer their operations for efficiency and incorporate analytics in all aspects
of the business. Across the organization, human talent will focus on higher-
value tasks and work with technology in entirely new ways. Top performers
will opportunistically launch innovative new products and tailored service
experiences to capture customer loyalty and market share. All of these
changes were necessary before the onset of the COVID-19 pandemic,
which has only intensified the need for transformation.
02 NextWave Insurance: personal lines and small commercial
We welcome the opportunity to discuss your perspective on these issues,
as well as your company’s particular transformation journey into the next About EY
NextWave
wave of insurance.
The EY NextWave vision
represents the EY perspective
on the most powerful trends
and forces shaping the
Isabelle Santenac Ed Majkowski industry’s future. The process
Global Americas brings together strategic EY
Insurance Leader Insurance Consulting Leader
thought leaders, industry
and functional professionals
and technologists, outside
experts and academics.
In collaborative ideation
workshops, these groups help
clients envision a brighter
Peter Manchester Grant Peters
future and map out the
EMEIA Asia-Pacific
Insurance Leader Insurance Leader road ahead.
03 NextWave Insurance: personal lines and small commercial
02
Table of contents A message from the EY Insurance leadership team
Executive summary 05
Framing the next wave: trends and forces that explain
where we are today and where we’re heading 07
Envisioning the next wave: 10 market scenarios 16
01 06
New types of policies The auto insurance
protect small businesses market dramatically
and society against the contracts as driverless
unthinkable vehicles and ride-
17 sharing eliminate risk 27
02 07
Personal carriers shift Cyber risks present a
focus from automotive hundred-billion-dollar
policies to home-centric opportunity and a
trillion-dollar threat
29
product hubs
19
03 08
Real-time risk visibility The ecosystem expands:
and responsiveness cloud models and new
become reality connections enable
radical innovation
21 31
04 09
Direct, digital and The subscription revolution
embedded sales become arrives: insurance becomes
dominant channels deeply woven into consumers’
33
for growth everyday lives
23
05 10
Weaponizing data AI adoption
and competing on accelerates in claims:
experience, tech the last processor
turns out the lights
25 35
giants reinvent the
insurance model
How to lead the next wave: from purpose and
business model to offerings and capabilities 37
The bottom line: it’s time for change 44
Authors and contributors 45
04 NextWave Insurance: personal lines and small commercial
Executive
summary
Our world has never been more
in need of a high-functioning and
innovative insurance industry. With
unsurpassed ability to understand
and model risk, insurers have a
critical role to play in helping society
prepare for and protect against the
threats presented by pandemics,
climate change, cybercrime,
disruptive technologies, demographic
shifts and social unrest. Insurers must
play a critical role in helping
to restore the global economy.
05 NextWave Insurance: personal lines and small commercial
NextWave Insurance: executive summary
These profound changes, as well as industry-
specific trends, present unique opportunities
If insurance is
for insurers with a clear plan for the future. changing, how
The industry has many strengths to leverage, including strong
capital positions, decades of risk and claims data, many well- should personal and
known brands, and a profitable customer base with relatively low
propensity to switch. small commercial
Still, the challenges and need for change should not be
underestimated. COVID-19 offers an opportunity to restore trust insurers change?
if insurers can live their purpose and demonstrate leadership in
getting the global economy back on track. Consumer trust has been We believe tomorrow’s winners will drive
slipping and could further erode if they fall short. transformation through:
Growth is a challenge for most carriers, and maintaining recently
improved results will be increasingly difficult. New alliances and • A clear purpose and inspiring mission that
partnerships will be necessary to expand capabilities and foster resonate with employees and consumers,
innovation. Legacy technology needs significant updating, and the while strengthening trust and clarifying the
workforce requires new skills and higher levels of engagement. value of insurance
Looking further out, the lost revenue from inevitable and potentially • Ubiquitous use of digitization, automation and
substantial reductions in personal and commercial auto risk will AI that drives vastly improved expense ratios
need to be replaced. Regulatory and liability issues will only grow and leaner, more flexible cost structures, as
more complex. Tricky ethical questions regarding consumer well as supporting operational resilience and
privacy and the use of data and artificial intelligence (AI) are sure maintaining productivity for remote workers
to emerge. Large-scale, direct-to-consumer players will continue • Customer experiences as good as or better
their relentless capture of market share. New competitors will force than those offered by digital leaders in
insurers to rethink their services and offerings. Pandemics, cyber other industries
catastrophes and natural disasters may pose existential threats
• A data and analytics environment that
for some insurers. All the while, managing channel conflict and
provides continuous and actionable insight,
cannibalization of existing lines of businesses will require delicate
with a clear focus on target outcomes
balancing acts.
• A commitment to designing, launching,
While many of these forces have long been on the radars of senior
and servicing innovative new products and
insurance executives, the urgency for action has increased.
experiences more quickly and at a fraction
The fundamental question for insurers is: will growth opportunities of today’s costs, with offerings aligned to
outweigh the threats in the next wave of insurance? The possible changing consumer needs
developments and outcomes presented here examine how leaders
• Highly agile organizations, cultures and work
will seize the potential upside, as well as the worst-case scenarios
environments that foster innovation, provide
laggards will likely face.
meaningful work, and support personal and
professional growth for a diverse workforce
• Win-win collaborations with InsurTechs,
non-insurers and nontraditional competitors
“
• New approaches to distribution and supply
chain, featuring product specialists, third-
We always overestimate the change that party platforms, and the right mix of digital
innovation and the human touch
will occur in the next one or two years
and underestimate the change that will Carriers that can envision the future and have
the courage to invest in thoughtful, customer-
occur in the next five or ten years. focused transformation will overcome today’s
threats and seize the next wave of opportunities.
Bill Gates
06 NextWave Insurance: personal lines and small commercial
Framing the
next wave
Trends and forces
that explain where
we are today and
where we’re heading
07 NextWave Insurance: personal lines and small commercial
Framing the next wave
The numbers must
get better
Today’s marketplace is hypercompetitive with extremely tight
margins, slow (if any) growth and high operating costs. The
industry’s current economics are unsustainable,
Compound annual growth rate (CAGR) in gross Combined ratios, US insurers, 2018
99.3%
written premium (in US$), non-life, global
P&C
99.3%
4.3%
Personal
lines
Non-life
Source: EY analysis, SNL Financial
2.2% Overall Operating ratios, top 20 European insurers
Source: SwissRe
94% 2012
Distribution and transactional costs, as 98% 2017
a percentage of premiums collected Source: EY analysis, SNL
30%-40% Average expense ratios, top three
Asia-Pacific markets
28.0% 2012
30.2%
Source: Geneva Association
2017
Source: SwissRe
08 NextWave Insurance: personal lines and small commercial
Framing the next wave
Trust suits
the brand
20%
The insurance industry is built
on a foundation of trust between
the carrier and its customers.
This fundamental promise of
decline in consumer trust of US financial
protection and reliability services companies, 2017–18
cannot be compromised. Source: Edelman
Framing the next wave
Consumers expect
something different
51%
Consumers are embracing new technology to
buy products and services. Consumer trends
in retail, transportation and other industries
will soon come to insurance; carriers with
strong technology, intuitive experiences,
and clear value propositions will have a US consumers aged
huge head start in winning market share. 35–49 interested in
After COVID-19, consumers will expect more subscription models, with
flexible and usage-based products that are higher interest relative to
easier to research and purchase through marriage, having children
digital channels. and other
life events
Source: EY NextWave Consumer
19% 31%
Financial Services
European consumers European consumers who would
interested in buying consider buying nontraditional
insurance from services (e.g., broadband,
nontraditional competitors, energy or data storage) from
including tech giants their bank or insurer
Source: Fujitsu
10 NextWave Insurance: personal lines and small commercialFraming the next wave
Revenue threats
and opportunities
are everywhere
Megatrends and disruptions driving uncertainty today will have definitive impacts
in the near to middle term, potentially diminishing traditional lines of business and
revenue sources. At the same time, innovators — including non-insurers — may view
crises as opportunities to enter the business, either directly or through partnerships
with incumbents.
Climate $219 billion
change
combined global insurance losses from natural
disasters, 2017–18 Source: Swiss Re
90%
natural disaster costs that can be attributed to
weather-related events in an average year Source: Munich Re
5x
total economic losses caused by hurricanes in 2017
relative to average of the prior 16 years Source: Aon Benfield 2018
30%
average percentage of catastrophic losses covered
by insurance, 2009–18 Source: The Economist
$180 billion
global protection gap for weather-related risks
Source: Swiss Re
11 NextWave Insurance: personal lines and small commercialFraming the next wave
COVID-19
The pandemic demonstrates the industry's
risk-opportunity paradox: widespread remote
working increases cyber risks but reduces the
likelihood of automotive claims.
During the lockdown, P&C (property and casualty) insurers
responded with auto premium holidays and rebates and
reinforced their messaging about telematics-based products
that offer discounts in exchange for driving data. The stability
of retention rates post-COVID-19 shows the effectiveness of
these strategies.
$10.5 billion
estimated amount of auto premium refunds,
discounts, dividends and credits offered by insurers
in the wake of COVID-19 Source: Insurance Information Institute
40%–60%
reduction in miles driven and car trips taken during
lockdown Source: Swiss Re, Arity
0.1%
growth in global non-life premiums, 2020
Source: Swiss Re
$40 billion–
$100 billion
projected losses for P&C insurance industry
due to COVID-19 Source: EY analysis, Swiss Re
12 NextWave Insurance: personal lines and small commercialFraming the next wave
Driverless
cars
23 million
number of level-4 autonomous vehicles on the road
by 2025 Source: Stevens Institute of Technology
21%
compound annual growth rate of collision-avoidance
technology market 2018–25 Source: Grandview Research
$96 billion
usage-based auto insurance market, 2025, 4x
growth from 2018 Source: Markets and Markets
Cybercrime
7.1 billion
number of identities exposed in data breaches
2010–17 Source: Symantec
$23 billion
global cybersecurity insurance market by 2025
Source: Adroit Market Research
38%
global organizations reporting that they are
prepared to handle a sophisticated cyber attack
Source: ISACA
13 NextWave Insurance: personal lines and small commercialFraming the next wave
The upside of
underinsurance
Insurers are well-positioned to help protect
the many underinsured consumers and
businesses around the world. They must
find ways to engage younger consumers —
the so-called “generation rent” — sooner.
As these consumers wait longer to
40%
purchase vehicles (which they may never
do), buy homes, get married or have
children, their first interactions with
insurers happen later in life. Insurers must
innovate with technology to engage and
support underserved markets. Insurers in US consumers who can’t
emerging markets exhibited great creativity meet a $400 short-term
in using mobile phones to provide micro-
emergency
insurance, asset-based coverages and Source: US Federal Reserve
embedded insurance purchases in their
efforts to connect to the underinsured.
14 NextWave Insurance: personal lines and small commercialFraming the next wave
Percentage of US consumers aged Home ownership among
25–37 who are married millennials
83% 70% China
67% 46% Mexico
57% 35% US
46%
31% UK
28% Australia
1968 1982 2001 2018 26% UAE
Source: Pew Research Center Source: HSBC
8–20 years
average number of years by
which retirees in six major global
economies will outlive their
retirement savings
Source: World Economic Forum
15 NextWave Insurance: personal lines and small commercialEnvisioning 01
New types of policies protect
small businesses and society
the next wave: against the unthinkable
02
Personal carriers shift focus
10 market from automotive policies to
home-centric product hubs
scenarios
03
Real-time risk visibility
and responsiveness
become reality
The following scenarios reflect our
04
thinking about likely developments in Direct, digital, and embedded
the next 5-10 years. Many of the issues sales become dominant
are already influencing C-suite and channels for growth
05
board-level decisions. Soon they will
Weaponizing data and
become operational realities, the new competing on experience,
normal, across the industry. tech giants reinvent the
insurance model
06
The auto insurance market
dramatically contracts as
driverless vehicles and ride-
sharing eliminate risk
07
Cyber risks present a hundred-
billion-dollar opportunity
and trillion-dollar threat
08
The ecosystem expands: cloud
models and new connections
enable radical innovation
09
The subscription revolution
arrives: insurance becomes
deeply woven into consumers’
everyday lives
10 AI adoption accelerates in
claims: the last processor
turns out the lights
16 NextWave Insurance: personal lines and small commercial01
Envisioning the next wave: 10 market scenarios
New types of
policies protect
small businesses
and society against
the unthinkable
Leaders launch relevant new products quickly to meet
market demand and shore up their reputations.
Laggards continue to offer the same policies.
In the wake of COVID-19, there was simply too great for the industry to assume
considerable public outcry and litigation by itself. Insurers clarify policy language
relative to pandemic exclusions. While and identify what is covered and what is
insurers are often on strong legal ground, excluded. Some carriers go on the offensive
their trial in the court of public opinion and develop new policies that address some
diminishes brand reputations and weakens elements of the market need for pandemic
trust in the in the industry. Despite billions business interruption coverage.
of dollars returned to consumers in the
form of premium holidays and rebates, These new policies are underwritten and
the pandemic’s overwhelming damage to priced so small businesses gain some limited
small and medium sized businesses is of protection and are structured on triggers
greater interest to elected officials and the and thresholds that build on traditional
media, who often play to perceptions that loss limitations and deductibles. Pricing
the industry isn’t standing by its customers these new policies is extremely challenging,
during a global crisis. given the lack of actuarial history, potential
concentration risk, and the lack of any
In response to the controversy, insurers known or predictable period of restoration.
engage regulators on private-public Parametric coverage helps address the
consortiums to backstop future pandemic lack of risk assessment clarity and claims
risks. Industry risk pools are formed in adjustment complexity.
markets around the world as the risks are
17 NextWave Insurance: personal lines and small commercial01. New types of policies protect small businesses and society against the unthinkable
How this changes insurance Impact and value
in the next wave
Accepting the challenge, leaders to insurers’ purpose statements.
for customers:
put their brightest data scientists These complex offerings are • Increased preparedness and protection
on the task of modeling and communicated in simple terms so against future “black swan” events
pricing the risk, with appropriate that they can be sold through digital • Clearer understanding of coverages
triggers for government-backed channels. Carriers find ways to
protections. They use advanced enhance pandemic-related health
• More flexible buying options — via
bundles and through digital channels
analytical techniques and apply protections, adding new coverages
learnings from the COVID-19 and preventive services within
pandemic, natural disasters and personal lines. They also develop and
cyber attacks. The necessary risk market new product bundles that
management discipline proves too transcend traditional product silos.
much for laggards, and they miss the Implications and
possibilities for
opportunity for improved customer Insurers engage regulators and
retention and revenue growth. collaborate on extensive education
insurers:
programs for agents, brokers and
The most innovative carriers policyholders. The industry is
enhance their offerings with able to generate new premiums
risk advisory services that help as it lives its purpose through • Demonstrated leadership in helping
businesses prepare for the enhanced risk awareness, society restore the economy
unthinkable and that directly align prevention and protection.
• Proactive engagement with
governments on broad societal risks
• Increased insight into the potential
impacts of unthinkable events
• Increased revenue through new
offerings for prevention and protection
• Clearer contractual language to reduce
the risk of litigation
1,229
number of COVID-19-related legal filings against the
insurance industry in the US (as of September 14, 2020)
Source: University of Pennsylvania
34%
top-line growth achieved by leading digital-only Chinese
insurer during COVID-19
Source: Zhong An
18 NextWave Insurance: personal lines and small commercial02
Envisioning the next wave: 10 market scenarios
Personal carriers
shift focus from
automotive policies
to home-centric
product hubs
Leaders proactively manage falling auto premiums
with blended offerings and new features centered
on homeowners insurance.
Laggards don’t make the adjustment and suffer
significant premium erosion.
In the aftermath of the economic lockdowns reflect the reality of dramatically more
caused by COVID-19, automobile traffic complex households, including property
significantly diminished across the country. coverage, small business endorsements,
As the lockdowns eased and the economy warranty coverage, cyber coverage, pet
came back to life, miles driven rebounded, insurance, enhanced liability and personal
though remote working significantly reduced article coverage, and other features.
commuting. It is not clear when — or if —
miles driven will return to prior levels. Leading carriers increase their digital
engagement with customers, with
COVID-19 accelerates the shift away connected data and ancillary services
from auto-centric insurance relationships supporting the broader homeowner
to products and services that provide ecosystem. The top performers live their
protections for the unique needs of missions and align the value of insurance to
individual homeowners. Carriers get distinct and evolving customer needs.
creative in designing new features that
19 NextWave Insurance: personal lines and small commercial02. Personal carriers shift focus from automotive policies to home-centric product hubs
How this changes insurance Impact and value
in the next wave
As the focus shifts from auto For their part, laggards are slow
for customers:
to home, leaders embrace the on the uptake with usage-based • Better pricing and coverages reflecting
opportunity to get closer to insurance (UBI), bolt-on features and how people live, work nd drive
customers. Auto policies become targeted offerings for market niches. • Increased ability to shift protections and
increasingly usage-based, with They also struggle to integrate add services as needs change
premium and coverage adjustments features in bundles that are easy to
to reflect fewer miles driven. understand, buy and use.
• Clearer understanding of the value
of insurance
Leaders focus on personal Getting it right requires greater
protections, with new and diversified imagination, more sophisticated
offerings built on the foundation of underwriting and richer digital
homeowners coverage, with added
features to provide for rent and
engagement to enable intuitive
experiences (e.g., “swipe left, swipe
Implications and
mortgage payments in the case of right” for additional coverages). In possibilities for
insurers:
future job loss or major economic many cases, leading insurers partner
disruption. They apply lessons from with third parties to offer tailored
early adopters that struggled with coverages and add-on services.
first-generation income protection These developments further
• Increased relevance, engagement and
products. Because they are priced accelerate the shift to subscriptions
retention
attractively, the new solutions gain and non-indemnity revenues.
traction and retain share even as • Clearer demonstration of purpose,
employment levels normalize. Gig resulting in higher levels of trust
workers especially like the offerings • Enhanced ability to launch new products
tailored to their needs. and add features and services to
existing offerings
Employees who will work remotely at least
some of the time:
48% Post-pandemic
30%
Source: Gartner
Pre-pandemic
20%
growth in time spent online in China during
quarantine
Source: Nomura
20 NextWave Insurance: personal lines and small commercial03
Envisioning the next wave: 10 market scenarios
Real-time risk
visibility and
responsiveness
become reality
Leaders act on the insights boldly and swiftly.
Laggards can’t keep up with all the data.
Leading insurers are data-driven and who like personalized guidance for traffic,
insight-enabled in everything they do, weather and fitness will likely accept similar
from straight-through processing in both services for risk exposures (particularly if it
back-office and customer-facing functions, helps them save money).
to sophisticated pricing and underwriting
algorithms, to thoughtfully segmented Leaders will be those firms that buy, build
digital marketing programs. or partner for the infrastructure and tools
they need to capture, manage and analyze
The next major innovation opportunity real-time risk performance data effectively.
with data and analytics involves rapidly They will continuously operationalize
identifying and precisely measuring and monetize their information assets by
risk, and then using that insight to adjusting pricing and providing immediate
proactively meet customer needs. In the performance feedback to customers.
wake of COVID-19, risk forecasting and
management take center stage in helping Even if laggards collect the data — 90% of
the global economy recover and prepare which didn’t exist two years ago and which
for future threats. will only expand exponentially with the
advent of 5G — they will be overwhelmed
Consumers have become accustomed to with its volume, variety and velocity and
tailored notifications and prompts through will struggle to produce meaningful or
activity trackers, wearable tech and mobile valuable insights.
apps. Consumers and business owners
21 NextWave Insurance: personal lines and small commercial03. Real-time risk visibility and responsiveness become reality
How this changes insurance Impact and value
in the next wave
Insurers will capture streams of at different times or on different
for customers:
data from apps, mobile devices, roads, conducting safety training • A safer and lower-risk lifestyle
wearable tech, connected vehicles, for workers). Satellite imagery and and workplace
smart homes and workplaces, as predictive analytics will enable • Potential cost savings through lower
well as alliance partners and the insurers to provide real-time feedback premiums
billions of devices connected to the to insureds on wildfires, storms and
Internet of Things (IoT). By applying other weather-related exposures.
• Higher prices for higher-risk individuals
and companies, including those that can’t
AI, machine learning and other
However, as insurers become more or won’t take corrective action to reduce
advanced analytics techniques,
savvy and sophisticated in risk-based their risk profiles
insurers can measure risk and price
premiums in real time, leading underwriting and pricing, higher-risk • Increased profitability for small businesses
to discounts, tailored prevention individuals and companies may be based on better risk management
services and usage-based products. priced out of the insurance market,
furthering an already serious
Implications and
Through mobile apps and insurance gap.
personalized portals, insurers
possibilities for
can promote risk awareness and Real-time risk visibility is clearly
prevention by sharing proactive tips a win-win. For small businesses,
insurers:
and alerts. These capabilities have better risk management promotes
been extensively piloted by many bigger profits. For individuals, it’s
insurers. The next step is to drive about safer and better lifestyles.
widespread customer adoption. At the same time, insurers benefit • More accurate risk measurement for
from closer long-term relationships more informed decision-making
Customers can also lower their based on more frequent • More precise and profitable pricing
premiums in real time by adopting interactions and opportunities to through real-time premium optimization
low-risk behavior (e.g., driving add value.
• Algorithmic underwriting and
continuous rules refinement
• Increased customer engagement
and trust
27%
proportion of corporate data
that is used for analytics
Source: Forrester
22 NextWave Insurance: personal lines and small commercial04
Envisioning the next wave: 10 market scenarios
Direct, digital and
embedded sales
become dominant
channels for growth
Leaders seize the cost savings and master the
omnichannel approach.
Laggards have trouble moving beyond their historical
channels and never catch up to early adopters.
The long, slow decline of the traditional In the future, agents will emphasize advisory
agency model will continue and even services for consumers and businesses with
accelerate in mature markets. COVID-19 more complex risk profiles. They will embrace
was a wake-up call in that insurers glimpsed contextual information, complete customer
a future in which digital is the only viable data, next-best-action analytics and one-and-
sales and service channel. Agencies will done processing. They will deploy mobile
aggressively fight and take defensive steps technologies, such as texting and apps, to
(e.g., consolidation and enhanced services) enhance sales and service experiences. As
to protect their position. They will enhance agents go upmarket, insurers will benefit
digital capabilities to meet consumer from lifetime premiums generated and
demand and complement — rather than durable customer relationships built on
replicate — the capabilities of large insurers. financial well-being.
Several large carriers will remain committed
to agency models. The human touch will However, direct and digital channels will
be less frequent and focused on higher- come to dominate the mass market because
value moments. And the human touch will consumers prefer the simplicity and control.
be delivered via the phone, web chats or Embedded sales will grow as more companies
videoconference rather than face-to- selling products and services seamlessly offer
face settings. insurance at an attractive price, which will
generate additional revenue.
23 NextWave Insurance: personal lines and small commercial04. Direct, digitaland embedded sales become dominant channels for growth
Impact and value
COVID-19 will accelerate digital channels and digital engagement
adoption across the business, from strategies to boost retention and
customers:
sales and service to risk management loyalty. They might use automated
and operational resilience. The pricing reviews to automatically renew for
transition to direct, digital and policies at the most competitive
embedded will occur at different rates market price. The most effective • Flexibility to shop, buy and transact in
in different regions. China, already insurers will target and cross-sell channels they prefer
among the most digitally advanced more effectively and build out robust
markets, will see rapid innovation and self-service capabilities. They will • Access to personalized advice and
sophisticated hybrid strategies. Ping also enable digital agents with AI guidance when needed
An will lead the way with its pervasive and machine learning to engage with • Insurance becomes an integrated
use of AI-driven distribution. In other customers using text, video and voice component of everyday purchases
Asian markets, the agency model recognition technologies.
• Transparent and tailored relationships with
will remain viable, with agencies
insurers across a complex spectrum of risk
consolidating to control market For laggards, channel conflict and
share. In Europe and Middle Eastern cannibalization will prove exceedingly
markets, the continuing growth of the difficult to manage. Investing in
aggregator model will influence the
fate of the agency base.
multiple channels will be too great a
cost. Some may remain committed to Implications and
Direct and digital leaders will be those
the potentially profitable, but slowly
fading, revenues of their old-line
possibilities for
companies that use data and analytics
to target profitable customers, while
minimizing acquisition and service
distribution networks.
insurers:
unit costs. These firms will use affinity • Dramatically lower transactional costs
• Higher demand for highly sophisticated
How this changes insurance digital marketing and acquisition
in the next wave
analytical models
• Bifurcation of channels — high-value
Millennials and Generation Z will The most successful agents in advisory and high-efficiency digital
drive the evolution of distribution personal and small commercial lines • Increased risk of channel conflict and
models in the most mature markets. will function more like risk advisors, cannibalization of existing business
They will have extremely high providing business and financial
• Risk of disintermediation by digital
expectations for seamless digital advice, especially as the line blurs
agencies with clearer value propositions
experiences (whether from insurers between business and personal
and superior experiences
or agents), but also expect easy assets and activities.
access to personalized support. • Preparation for subscription models
based on increased digital engagement
8 billion
number of embedded, or point-of-sale, policies sold in
China in the first five years of a joint venture between a
leading insurer, media company and ecommerce player
Source: Reuters
1.5 million
number of agents affiliated with the joint venture,
many of them recruited and trained via AI
Source: The Economist
24 NextWave Insurance: personal lines and small commercial05
Envisioning the next wave: 10 market scenarios
Weaponizing data
and competing on
experience, tech
giants reinvent the
insurance model
Leaders both compete and collaborate.
Laggards negotiate and lose share.
For years, it’s been predicted that the But the tech giants’ substantial
world’s largest and most successful advantages remain. They have more
technology brands and platforms would consumer data and are much better at
enter the insurance market. The complex monetizing insights and personalizing
regulatory environment and the high interactions. They enjoy significantly
turnover and low profitability of new higher levels of consumer trust (even
business remain a high barrier to entry for after recent data privacy controversies)
nontraditional competitors (including both than insurers and stronger customer
InsurTechs and established tech firms). relationships. These platforms enjoy
Thus, they will likely engage insurers high engagement levels where
with regulatory experience, seasoned insurance purchases could be easily
books, years of data and nationwide added as a feature within existing
claim networks. Some are already shopping experiences.
experimenting with alliances, such as
Amazon and a leading insurer.
25 NextWave Insurance: personal lines and small commercial05. Weaponizing data and competing on experience, tech giants reinvent
the insurance model
The market entry of tech giants
seems inevitable. The main
insurers may be able to market their
branded products, while smaller Impact and value
questions are what form it will take
and when it will happen. We see
ample reason to believe that soon
insurers may need to white-label
certain products to be sold through
embedded channels. Other carriers
for customers:
— in one to three years — one or may provide advanced skills (such as • Personalized and intuitive experiences
more tech giants will place big bets, specialized underwriting) or a claims from brands they trust
including substantial partnerships network that tech giants don’t have
• Simplified business relationships with
with top national insurance brands. or can’t easily develop.
clear and personalized value for different
Insurance leaders are more likely to
segments
collaborate than compete directly. Laggards, regional carriers and weak
That’s because the ability of tech brands won’t be very attractive to • Increased price transparency
giants to generate high volumes of tech giants, who will expect their • Increased customization and flexibility to
customer traffic and create superior partners to be nimble and have niche scale coverages up or down as necessary
customer experiences will be process expertise, national reach,
extremely difficult (if not impossible) brand recognition and specialized
for incumbents to match. Some large technology.
Implications and
How this changes insurance possibilities for
in the next wave
Big tech’s broad data sets, Frequent interactions provide
insurers:
based on billions of business- natural sales opportunities for • New business-model options —
to-consumer and business-to- insurance purchases. Because of ecosystem collaborations, white-labeling,
business interactions, provide a their ability to use AI within the specialty services
strong foundation for acquisition, context of existing platforms,
underwriting, product creation, tech giants can launch and scale
• Rising importance of national and global
reach and brand recognition
cross-selling and claims insurance-as-a-service models and
settlement. Indeed, tech firms may subscription-based products offering • Increased engagement through more
use AI to redefine underwriting. clear price transparency and high frequent interactions
Rather than, for example, degrees of personalization. For • Insurance embedded into other
providing a workers’ compensation instance, they can easily launch transactions and broader relationships
rating based on number of small business portals and apps to with tech firms
employees and class codes, AI- meet multiple needs, from legal and
driven models could correlate security services to business travel
multiple metrics to determine to insurance.
employee activity and risk levels.
37%
European consumers who would
switch their insurer if it didn’t
offer up-to-date technology
Source: Fujitsu
26 NextWave Insurance: personal lines and small commercial06
Envisioning the next wave: 10 market scenarios
The auto insurance
market dramatically
contracts as driverless
vehicles and ride-sharing
eliminate risk
Leaders embrace the future and diversify their offerings.
Laggards dismiss the technologies as immature and put
their long-term survival in jeopardy.
The enormous potential negative impact to vanish, the bottom line is clear: a huge
on future P&C revenue streams from ride- chunk of revenue is going away, and
sharing and driverless autos has largely insurers need a plan to replace it — soon.
been viewed as a problem for the next
generation of insurance executives. The Contingency plans may include new
best time to make contingency plans for types of insurance products that cover
change is now. autonomous vehicles, ride-sharing
services and ride-sharing passengers.
Yes, the hype cycle may overstate how Insurers should also account for
soon and how much of the revenue will the period when driver-assisted and
disappear. And yes, ride-sharing fell off driverless vehicles share the roads. For
post-COVID-19 — with volume decreases of instance, policyholders with fleet-based
up to 60%, by some estimates. Though some insurance may have more data to prove
R&D investments for autonomous vehicles that accident liability lies with drivers
were put on hold, widespread adoption still of traditional autos, which could lead to
appears inevitable, if slightly delayed. more claims payouts for legacy insurers.
Given reduced commuting, usage-based
However, there is little room to doubt the auto policies become the norm. It’s not
long-term impact. Whether it takes 10 or a matter of “if,” but rather “how fast”
15 years for 25% or 75% of auto premiums consumers adopt them.
27 NextWave Insurance: personal lines and small commercial06. The auto insurance market dramatically contracts as driverless vehicles and
ride-sharing eliminate risk
Impact and value
Insurers’ product innovation Leaders will engage with
capabilities will be severely tested. autonomous vehicle manufacturers
customers:
They will need to rapidly adjust and ride-sharing platforms to
premiums based on vehicle safety provide real-time risk insights
for
features, fewer claims arising from that direct cars and trucks where
distracted driving, hybrid products riders need them and along the • Convenient, safe and on-demand
that cover a mix of vehicles for most efficient and safest routes. transportation
a household or business, and The upside is particularly high
coverage for both ride-sharing for commercial insurers that can • Freedom from the costs of vehicle
drivers and passengers. Many provide fleet management and ownership, including insurance premiums
insurers have already begun to tracking, proactive maintenance • New needs for non-owner personal injury
shift their focus to homeowners and other supplementary services. protection and commercial coverage for
and renters products. In the Laggards will ride the trend ride-share providers
future, these products may serve downward, insuring the ever-
as the primary risk coverage with diminishing number of vehicles
a multitude of endorsements that driven by humans.
cover a broader range of risks and Implications and
possibilities for
potential services.
How this changes insurance insurers:
in the next wave • Emergence of usage-based insurance
as the norm, with policies tailored to
While the frequency of auto claims Car ownership goes the way of distances, routes and driving behavior
will plummet, it is likely that the horse-drawn carriage ownership • Gradual, then dramatic, reductions
severity and complexity of claims and becomes a historical curiosity in traditional automotive policies and
will increase. Over time, with more before the end of the 21st century, claims
usage data and precise analytics, though much litigation and
the assignment of claims liability legislation will occur before liability
• Significant growth in commercial fleet-
based policies
will be simplified. Some carriers standards are defined.
will exit the auto business and seek • High likelihood of consolidation, radical
to shore up premiums through downsizing or reinvention of product
additional products and services. portfolios for carriers losing up to 50% of
their revenues
12.5%
loss of US auto insurance premiums by 2035
Source: Stevens Institute of Technology
30 billion–83 billion
number of person trips provided by ride-hailing
services by 2030
Source: Goldman Sachs, Princeton University
28 NextWave Insurance: personal lines and small commercial07
Envisioning the next wave: 10 market scenarios
Cyber risks
present a
hundred-
billion-dollar
opportunity
and a trillion-
dollar threat
Leaders take a proactive approach to personal
and commercial cyber risk protection.
Laggards play a limited, reactive role after their
customers suffer losses.
The industry’s historical strength in To seize the upside, insurers have a great deal
understanding and quantifying risk is being of work to do in framing the risk, quantifying
severely tested as the annual number of the potential losses and designing products
adversely affected consumers reaches into with sufficient protections.
the hundreds of millions and the amount
of damages adds up to billions of dollars. Citizens, businesses and communities
And as many organizations are operating around the world are woefully under-
remotely amid the pandemic, there are protected from cyber risks. The stakes will
more weaknesses and pathways for cyber only rise as hackers take aim at everything
criminals to exploit. from connected vehicles and smart homes
to nuclear power plants and defense
Of course, optimists see billions of dollars in systems. Insurers must lead the way
premium growth and ask whether revenue forward by developing the most effective
from cyber policies can replace the loss techniques — from proactive monitoring
of premiums in traditional lines. A related to incident response — to fight cyber
question: how can insurers grow their threats. In protecting their own assets
top lines by helping consumers and small and systems, insurers can build trust and
businesses with privacy and security services? confidence with consumers.
29 NextWave Insurance: personal lines and small commercial07. Cyber risks present a hundred-billion-dollar opportunity and a trillion-dollar threat
Leaders adopt the strongest
possible defenses to protect
Laggards never develop the
expertise to understand and price
Impact and value
themselves and gain full visibility
into their risk concentration. They
also expand offerings by patrolling
cyber risks and protective services
at scale. They even fall short in
patching vulnerabilities in their own
for customers:
the dark web for policyholder data systems. In the worst-case scenario, • Assistance in protecting against common
and conducting personal security a catastrophic cyber incident could hacking, identity theft and data breaches
audits. In commercial lines, leaders bankrupt an insurance company. • Stronger protections against reputational
help businesses protect themselves risk, data loss and financial hits
against reputational risk and
• Clearer products and coverages through
negligence claims. They develop
dedicated cyber policies
new products and preventive
services to help protect small • Reduced threat of litigation and claims of
businesses with remote workers. negligence
• Greatly improved control of personal data
How this changes insurance
and privacy
in the next wave:
Many in the industry believe a than they realize. Emerging Implications and
cyber catastrophe is inevitable.
Consider a simultaneous hack
privacy regulations could be a
trial lawyer’s dream and require possibilities for
of all driverless vehicles, the
shutdown of a crucial financial
institution, or the broad infiltration
massive remediation of legacy
systems similar to Y2K. insurers:
of a technology platform. In such Insurers must also redefine • Demonstrated leadership in establishing
an event, the damages will be coverages and reset premium best practices for cybersecurity, starting
incalculable and one or more levels in line with actual risks with their own systems
insurers could become insolvent (rather than simply to capture • Clear visibility into cyber risk
almost overnight. revenue). Small businesses will concentration, including potential for
be challenged to afford properly catastrophic events
Lack of visibility into cyber risk priced cyber insurance. Insurers
concentrations is a nearer-term must be bold and think beyond
• Higher revenues through new offerings
for threat awareness, prevention and
threat. With cyber coverages traditional boundaries as they
customer self-protection
present in many existing policies expand their purpose to include
(e.g., business interruption), some cyber loss prevention. • Clearer lines of responsibilities defined
insurers may be more vulnerable for commercial lines
to litigation and claims payouts
$8 billion–$9 billion
estimated cyber crime premiums by 2020
Source: Munich Re
$6 trillion
economic impact of cybercrime by 2021
Source: Cybersecurity Ventures
30 NextWave Insurance: personal lines and small commercial08
Envisioning the next wave: 10 market scenarios
The ecosystem
expands: cloud
models and new
connections
enable radical
innovation
Leaders optimize their value chain with creative
alliances, new capabilities and smart bundles.
Laggards move slowly into the cloud ecosystem
and offer underwhelming customer experiences.
As carriers move to cloud-based platforms, Our dialogue with industry stakeholders
open application program interfaces and analysis of the financial performance
(APIs), and InsurTech integration their of various insurers lead us to conclude that
traditional proprietary processes are open one or two small commercial carriers could
for reconsideration. Add in the pressure for capture a large, even dominant, market
profitable growth and the evolving nature share — up to 30%, compared to 5%–6% today.
of risk, and you have an environment where They will do so by bringing economies of
insurers must find new and more visible scale, pricing sophistication and marketing
ways to deliver value. Ecosystems, which analytics to personal lines and combining
entail multiple companies partnering to offer these with a seamless and intuitive customer
specialized but complementary services experience that is enabled by their ecosystem
in mutually beneficial ways, are one way relationships. The small commercial business
for insurers to expand the value of their environment offers a plethora of innovation
offerings. opportunities that combine broader business
services with the protection of insurance
products and services.
31 NextWave Insurance: personal lines and small commercial08. The ecosystem expands: cloud models and new connections enable radical innovation
Leaders capture market share by
defining their role in the ecosystem
Laggards will be those firms that
can’t find a niche, don’t open
Impact and value
relative to other types of entities
(e.g., sharing platforms, social media,
InsurTechs, data providers, customer
themselves up to the broader
capabilities of the ecosystem, or
miss out on the right alliances.
for customers:
• Innovative and satisfying end-to-end
associations, business services). They cling to the thinking that
experiences
By connecting with InsurTechs, they can (or should) do everything
leaders can rapidly add innovative themselves or that the cloud is too • Highly tailored insurance products and
technologies and enhance business risky a place to do business. services embedded in everyday activities
processes and customer experiences. • Simplified, concierge-like business
They have the advantage of being relationships for related services
able to lead the way through the
industry’s regulatory complexity.
• Increased ability to connect with
trusted companies that anticipate
their unique needs
How this changes insurance
in the next wave
Implications and
Insurers move their infrastructure
to the cloud and open their
Incumbents increasingly seek
niches, following the lead of possibilities for
insurers:
core process APIs. In addition InsurTechs in specializing in
to InsurTechs, insurers engage functions (e.g., underwriting,
with home builders, office distribution, claims) or micro-
supply stores, automotive and segments (e.g., dental practices, • Expanding and disaggregating value
appliance manufacturers, credit first-time millennial homeowners). chain focused on customers’ needs
card companies, travel agencies, Every link in the value chain
• Broader systemic risk and complexity as
and other consumer-facing is constantly evaluated, with
insurers contract with a greater number
companies to leverage data and executives asking whether it’s
of vendors
provide offerings that complement better to buy or build and what
their traditional strengths. The services can be sold into the • Increased stress on technology and risk
ecosystems take many forms: marketplace. management capabilities, especially for
strategic partnerships, alliances, small and midsize insurers
mergers and acquisitions (M&A), • Increased market share and retention
joint ventures. through partnerships and add-on and
wraparound services
76%
global insurance executives who
view partnerships and ecosystems as
determinants of competitive advantage
Source: Swiss Re
52%
incumbent insurers that view InsurTechs
as potential partners
Source: Majesco
32 NextWave Insurance: personal lines and small commercial09
Envisioning the next wave: 10 market scenarios
The subscription
revolution arrives:
insurance becomes
deeply woven
into consumers’
everyday lives
Leaders drive growth with insurance
on demand and convenience at scale.
Laggards fail to anticipate consumer
needs related to life events and lifestyles.
As the subscription revolution comes to Recent EY research confirms that
insurance and other financial services insurance subscriptions are attractive to
sectors, senior leaders should consider many consumers and businesses because
the large potential opportunity. Indeed, of their easy and convenient bundling of
compared to other financial services holistic services, many of which will be
firms, which generate fees largely based provided by ecosystem partners.
on transactions, insurers already operate
somewhat like a subscription, with regular Even better news: our research
payments and auto-renewals; insurers indicates that consumers will pay a
just need to engage consumers more fee for subscriptions.
frequently and creatively.
33 NextWave Insurance: personal lines and small commercial09. The subscription revolution arrives: insurance becomes deeply
woven into consumers’ everyday lives
The secret sauce for subscriptions
in insurance is linking services
needs. The top performers may
develop “financial operating Impact and value
and engaging customers around
key life events (e.g., starting a
new household or downsizing
system” platforms that serve as a
single hub for all critical information
and tools. They will make it as easy
for customers:
for retirement) or emerging to adjust policies (e.g., adding or • Increased sense of control and financial
lifestyles (e.g., urban gig workers, removing family members from wellness
recreational farmers, world policies or additional locations to
travelers) and complex financial commercial policies) as it is to add
• Easier access to the protection they need
— when, where and how they need it
decisions (e.g., launching or features on streaming services on
expanding a business). As such, leading apps. • Guidance and support for all types of
subscription models are largely customers in the channels they prefer
about customer centricity — that is, Meanwhile, laggards will remain to use
offering products and services that product-centric in their thinking
• Increased convenience of concierge
reflect the way people really live and approach. They will be most
services and bundles
and businesses actually operate. vulnerable to losing customers
to the financial offerings of tech • Increased brand loyalty and confidence that
Leaders will reorient the giants or InsurTechs, which are companies are focused on their interests
fundamental value proposition poised to lead the charge in the
— and all offerings — for direct subscription revolution.
alignment to customer lifestyle Implications and
How this changes insurance possibilities for
in the next wave insurers:
Based on a consumer’s lifestyle, to key life events or lifestyles. • Stronger relationships by focusing on
subscriptions are clearly and Consumers will gain access to what really matters to consumers
transparently priced, with a fixed personalized robo-advisor portals
fee linked to specific products and apps that help them make
• Increased relevance and engagement
through expanded service offerings and
and services. More personalized better financial decisions, find
richer value propositions aligned to key
offerings and additional features answers to their questions, and
life events
are available based on the data access appropriate coverage and
consumers share and the insights guidance (including from human • Superior competitive positioning
insurers produce with AI. advisors) as their needs change. based on deeper and more data-driven
Insurers will be more proactive customer relationships
Insurers will serve as concierges in customer outreach and • Emphasis on enhanced services rather
in connecting consumers to emphasize value-adding services than basic transactions
complementary service providers (e.g., planning) as subscriptions
(e.g., accountants, mortgage become their primary customer • Improved margins driven by appropriate
lenders, travel agencies) aligned acquisition strategy. and simple consumer access
5%
increase in consumer demand from the offer of
subscription models, even accounting for fees
Source: EY NextWave Consumer Financial Services
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