This article was republished with permission from Insurance Day.
by Mark Watson, Argo Group
As our industry undergoes its long-overdue transformation to digital products, distribution, sales, delivery and customer service, mastery of technology will continue to grow as the great competitive advantage.
It is an advantage insurtech companies have in their DNA. Most legacy insurers predict the loss of at least some of their business to the rapidly growing community of insurtech competitors. Even those arming themselves to compete aggressively with the newcomers worry increasing margin pressure may be the hurdle faced by all – including insurtechs.
As such, specialty insurance – where scale is smaller but margins sometimes higher than in personal lines – may be a desirable target for these capital-rich entrants, especially the so-called fintech unicorns with their $1bn-plus balance sheets. Let us consider the likelihood.
The initial target of almost all insurtech start-ups has been the lone policyholder. With their talent for building simple, inviting interfaces, these online entities make shopping for insurance as simple as booking a hotel room.
At least they try to. Their mastery of data has allowed them to automate the processes of customer outreach, data gathering, risk analysis and product delivery. They are doing all that with impressive speed; online services offering policies for motor, home, life, marine, travel, health, pets and bicycles now appear almost weekly.
Yet no matter how tidy the user interface, the core product of an online insurtech player is a many-headed beast. To be generally applicable to a wide audience, each policy has to feature a long list of exclusions and subjectivities. And to be universally accessible on the internet, each policy must adhere to a complex set of regulatory requirements that vary by jurisdiction.
In these two regards, insurtech businesses are no different from legacy carriers. Insurtech investors may be counting on legislators to revise their regulations, having seen in Uber’s case how quickly rules can change under consumer pressure. But while they wait they may be forced to look for better margins in niche corners of the industry and specialty insurance could be one of them.
Time and talent
The traditional barrier blocking new entrants into specialty insurance has been the complexity of the risk. Specialty is an area where those risks vary widely from region to region, industry to industry, client to client. It takes a huge investment of time and talent to be able to understand the peculiarities of any specialty business, whether it be running a growing city, operating a coal mine underground or moving cargo around the world.
That need for specific expertise has set specialty underwriters apart, allowing us to create value for our clients and get paid fairly for it. But this is no time to rest on any so-called laurel. The coming quantum leaps in machine learning and other forms of artificial intelligence may in time allow software to replicate the judgment of veteran underwriters, but insurtechs cannot build that software in isolation.
Therein lies the opportunity. Today’s specialty insurers do not have to sit back and wait to see how the advantages play out in niche specialty markets. Instead, they can welcome the changes and help lead that transformation.
A number of consultancies, PwC among them, have pointed out co-operation and collaboration with insurtechs is the logical path for legacy insurers. Value chain disaggregation is increasing, particularly in distribution. Partnering with digital distribution insurtechs will allow traditional carriers to look to new markets and launch new products.
In 2015 McKinsey & Company suggested to be ready to take the path of collaboration, insurers must acquire new skills in a number of key areas, five of which appeal to me as critical for specialty insurers. The first is excellence in digital analytics, ensuring data from both internal and external sources is gathered in real time, then used to inform decision-making. Second is strategy; in particular, a digital strategy that can take advantage of new tools without undermining broader business objectives. Customer-centricity is the third area (although, in my mind, of primary importance), because digital tools are only useful if they help create enduring value for the customer. Process improvements are fourth, with all steps that do not help build customer value removed from any process before automation begins. And cultural change is fifth, with selection, recruitment, team design and corporate structure all tweaked to promote and support digital excellence.
Without question, all future scenarios in the development of the insurance industry will be digital scenarios. Where specialty is concerned, the emerging opportunities, in my opinion, will be best exploited by a partnership, not by an insurtech hoping on its own to digitise the kind of domain expertise that sets specialty insurers apart.
The burning question is: which specialty company will choose to partner up first? I think it will be a company with limited bureaucracy. A company with an entrepreneurial spirit. A company with a mindset of risk tolerance, an openness to experimentation and failure and a willingness to adopt agile software development as a fundamental operational approach.
My bets are on one of the smaller or medium-sized specialty insurers with flexible top-level leadership that supports people as they create something brand new and, by default, edgier and riskier than traditional products. Combine those qualities with the raw digital expertise and entrepreneurial confidence of an insurtech and you have the future of specialty insurance.
Mark Watson is president and chief executive of Argo Group