If you’ve been to an insurance conference during the last year, you will have, no doubt, heard someone highlighting the need for ‘uberization’ in the market.
Whilst the idea that the ‘big 3’ are going to be replaced with on demand brokers waiting at the pubs in Leadenhall Market for a client to engage them through their smart phone is rather ridiculous, the fact that the industry is ripe for innovation is obvious to many of those inside and almost all of those outside the Square Mile.
A traditional business
Looking back, the London Market has seen relatively little change for the last 200 years. Stand outside Lime Street today and you’ll see Brokers running back and forth with slip cases bulging at the seams just as it would have been 200 years ago.
Whilst this way of doing business has worked very well for the London Market up until now, the continued flood of capital in to the market and pressure on rates that this has caused is starting to bring this in to question. Given insurers’ drive to maintain their margins, this continual pressure on rates is creating the perfect storm for market disruption.
Revolution, or ‘disruption’, of the London Market
To say that the London Market has never tried to innovate would be unfair. There have been multiple evolutions of the model that have had varying levels of success. Successful examples include the Central Services Refresh Programme slowly bringing the market’s infrastructure in to the 21st century. Less successful examples include the likes of Ri3k, the digital slip case platform that failed to gain sufficient traction with brokers and underwriters. Although these innovations have definitely been a step forward they have focused on evolving the 200 year old process instead of generating a major revolutionary shift.
Revolution, or ‘disruption’, as we’ve seen in other areas of Financial Services is likely to be where this major shift comes from and where the big players in the market should be focusing their efforts and resource.
The disruption caused by the likes of Willis 360 has shown how fragile certain sections of the market are and what a new, innovative idea can do to help improve the value for the customer. As these innovations have shown, it is possible to significantly reduce the friction involved in an insurance transaction and cut down the number of players involved in the value chain at the same time.
Looking wider than Lime Street, there is a growing interest in both P2P insurance and innovative risk allocation to drive down premiums. The commonly cited US P2P carrier Lemonade is gaining strong early stage momentum, with significant funding and a number of senior hires already poached from the likes of AIG and ACE.
Although Lemonade is the first, it is unlikely to be the last and it will be very interesting to watch this model develop. For a long time, insurance has been attractive to Hedge Funds due to its status as a non-correlated asset class and given the current state of the financial markets it is likely to be highly appealing to retail investors too.
Innovation through product disruption
Others have taken a slightly different tact to disruption in insurance, focusing on product, instead of capital, innovation.
Guevara in the UK and Friendsurance in Germany have created innovative solutions that offer reduced premiums through a mix of insurance cover and pooled self-insurance. Whilst these products are currently focused purely on personal lines it is easy to see how these types of products could transcend some of the more commoditised commercial classes of business as well.
With innovation coming from a number of different channels the question for most insurance executives must be how do we respond to the threat of these new innovative competitors?
Fortunately for the large Insurers and Brokers they have a sizable advantage in the form of the regulatory barriers in the industry. Although sizable, this advantage should be seen as a head start and not an insurmountable defence.
The Solution? Focus on product design and claims
Insurers and brokers must focus on developing real innovation at the two critical points in the insurance value chain, product design and claims. It is these two areas that are coming under the fiercest attack and are likely to be where the next major ‘disruptor’ comes from.
Yes, strong policy admin and claims systems are important but in this innovative, fast-moving environment focusing on systems and process at the expense of product and claims innovation could see a number of large players caught out as they ‘fiddle whilst Rome burns’.