On Innovation in Insurance

The Thai Floods 2011; a tipping point?

In assuming the Presidency of the Insurance Institute of London, Martin South Chief Executive of Marsh follows John Nelson in launching Lloyd’s vision 2025 by setting innovation as the major theme for his stewardship of the market. They are not alone. With the market emerging from the shock losses that hit results in 2011 replaced by a period of relative calm, our leaders are beginning to refocus on the future, and they do not like what they see. The industry’s ability to meet the challenges of a changing world where the fundamental nature of risk might be shifting is a growing source of unease.

Concerns are clearly creeping in about the longer term relevance of insurance particularly to our larger corporate buyers. Meeting the expectations for value and service of an increasingly demanding audience, battered by the prolonged financial crisis and recession, is proving to be quite a headache. A sobering assessment was provided by the Economist Intelligence Unit in its risk index provided to Lloyd’s last year. Their survey of the largest global businesses painfully revealed that there was on offer only one risk transfer solution to the top five risks that these organisations identified.

The Japanese tsunami and Thai floods exposed the limitations of insurance coverage as a means to protect against interruptions of supply. The gap between the economic and insured losses suffered was significant with policy coverage found to be inadequate and misdirected in some cases. Likewise for businesses like BP, Rolls Royce, G4S and most recently Samsung, all financially impacted as a consequence of major unexpected events, insurance has not prevented or softened in any meaningful way the hit to these company’s earnings. Whilst insurance solutions are being crafted to address trade disruption, reputational damage, cyber breaches and patent infringement, the overriding perception of many risk managers is that the insurance industry is not really keeping pace with the major trends in global commerce and their attendant business requirements.

A quite bleak longer term outlook, therefore, so the need for innovation is the current rallying cry. The call to action is for brokers to develop and insurers to introduce new and enhanced products which address emerging risks that truly meet and satisfy the corporate customer needs. If only it were that simple. Whilst new product development might in time be the outcome, the more likely source of innovation will first be in the insurance industry business model. It is almost inconceivable that insurers can deliver the solutions that large commercial clients want without reinventing in some way how business is sourced, underwritten and serviced. Just how a re-shaped industry of the future will look and operate is impossible to predict but almost certainly the broader technological revolution will be fundamental to any transformation.

The internet has obviously changed forever how we communicate with each other; insurers along with most other service providers are now distributing product electronically to the end buyers, at least in the private consumer space. Beyond that insurance firms have been extremely hesitant to embrace new technologies to reengineer and improve core business capabilities. However, the alarming size of the uncharted risk exposures revealed in the Thai flood losses of 2011 could be the “tipping point”, that the academic Malcolm Gladwell would call it, which prompts fundamental industry innovation. Encouraged by the Solvency II regulators, risk modelling, and at its heart data capture and management, might now forever eclipse more traditional risk assessment techniques.

As underwriting moves from the analogue to the digital and starts to embrace data mining in a world of increasingly full information transparency, the functions of insurer, producer and corporate client become more interlinked. Already Aon’s development of GRIP, a global repository of insurance placement information, and the introduction of the market-matching platform WillPlace by Willis, each in their own different way challenge the traditional means of sourcing and servicing commercial business by allowing insurers access to client data (for a fee) beyond the transactional. Whilst these initiatives have their critics and may be far from perfect, they do nevertheless clearly signal a more collaborative process where the co-development of new products with customers and their brokers, based on joint analysis, will become more the norm.

To the extent that insurers can redesign their business model, therefore; investing in people and technology capable of assimilating and acting upon customer intelligence, then there is a path towards successfully reengaging with the large corporate client. Demanding new product innovation whilst more or less maintaining traditional market methods of working, as the debate currently resides, seems to be an exercise in wishful thinking.

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