Commentary

One of the key findings of PwC’s 21st Global CEO Survey is that whilst insurance continues to be one of the most disrupted sectors in the global economy and insurance CEOs are extremely concerned about the pace of technology change and cyber threats, surprisingly, they are also optimistic about their organisation’s revenue growth in the next three years.

A major US automaker was involved in three of the biggest product liability payouts of all time, the latest having been in February 2014, based on faulty ignition switches that could shut off vehicle engines during driving, disable power steering and brakes, and prevent airbags from inflating. Other large claims have been made against cigarette manufacturers for causing cancer; and medical equipment makers for leaky silicone breast implants. Whilst most of the largest product liability episodes involve public companies, and are filed in the US, claims can happen almost anywhere. In October 2017, a private US medical supply and healthcare company was hit with a product liability problem involving its disposable contact lenses shipped to Japan, Taiwan and Hong Kong, necessitating the recall of more than 31,000 boxes.

Asia is vast geographically, comprises more than 15 major jurisdictions and possesses extreme diversity in terms of the ethnicity of its population, its cultures and the varying stages of economic, social and technological development in each country, making it one of the most varied markets globally. Therefore, there are many different risks and challenges posed by the increased opportunities created by innovative and technological advances, not least in the insurance industry. A prime example of such growth is the emergence of insurtech in the Asian market.

Asian insurers are riding several positive trends, like the region’s growing middle class and their increasing demand for insurance. Over the past five years, Asian consumers contributed more than half of the global growth in life insurance premiums. Capital markets have certainly noticed: Insurance players with a significant Asian presence have an average price-to-earnings (P/E) ratio close to 20—compared to a P/E of 10 to 15 for those that don’t, according to Bloomberg. But insurance companies also face challenges. Government bond rates have fallen from more than 10% in the 1980s to 2% or less in many Asian countries, shrinking investment returns.

The diverse insurance market in Asia-Pacific sees plenty of growth opportunities and challenges pertaining to distribution and regulation. Insurers are increasingly aware of the importance of customer centricity, product and service innovation, as well as alternative business models to drive growth.

Retail insurers in Asia Pacific and around the world have a problem: their customers don’t love them, don’t appreciate them, and don’t stay with them. Because customers don’t discern much difference between insurers, companies end up competing largely on price, and that can lead to a downward spiral of cost-cutting, profit erosion, and customer churn. In a word, commoditisation.

Keeping pace with changing demographics, changing customer expectations, as well as technological advances are some of the major challenges that insurers face, and is likely to continue to be a major concern in the next 2-3 years. The recent 2017 Insurance Banana Skins survey launched by CSFI and PwC looked at the top risks that the insurers are facing. In Singapore, the top 3 risks to the insurers are all interconnected: change management, technology, and quality of management. Here’s the reason why:

Despite significant investments made insurance innovation labs have largely failed to deliver impact beyond positive initial PR stories. Why is that the case and how can it be fixed? Recent years has seen insurance industry leaders globally waking up to reality that the dream of industry being insulated from the digital revolution sweeping across many other industries was just that, a dream. With a heavy baggage of legacy IT systems and rigid corporate cultures, incumbents found themselves in a tough situation. What’s the best way to prepare for upcoming disruption without meantime hurting your existing business. Innovation labs appeared, at least initially, like a perfect answer. In-house innovation that brings the right ingredients to allow for a safe digital experimentation without causing disruption to the existing businesses. The expectation was that innovation labs would become a quasi-startups that would allow insurers to build digital and innovation capabilities to safeguard against the coming digital disruption.

Disruption is shaking the fundamentals of the insurance industry. This is true structural change, not just a cycle. New technologies, new competitors, new markets, new regulations, and changing consumer behaviours are all creating tremendous opportunities, and posing significant risk to the legacy insurance business model. To succeed in this dynamic environment, organisations are reevaluating their portfolio of business and rationalising their global footprint to strategically determine “where to play” and “how to win” in the future. One of the immediate consequences of this trend is the expected rise in deal activity in the global insurance industry.

From tracking drivers’ braking behaviour, to installing wearable devices on factory workers, to funding medical advice mobile apps, many insurance companies are trying to become more present in their customers’ lives. They know that earning greater loyalty will require interacting more with their customers and delivering more value as well. Insurers are finally paying attention to this customer-centric approach as an alternative to the traditional internal focus on products, agents, and in-year financial considerations.

2016 has been officially been declared the year of InsurTech. The marriage of insurance and technology infused with entrepreneurial energy, InsurTech is attracting significant investments from the likes of sophisticated VCs who founded the new economy players like AirBnB and Uber.

Rather than consider the many exciting, and often challenging, technology-enabled developments that lie ahead, I thought for this article I would take a slight different tack. So let’s instead take a look at the reality of our industry from the perspective of where most insurers are today, and against that backdrop, what insurers can do to change.

Disruptive innovation is amongst the most referenced but least predictable trends to impact the insurance industry in a generation and it remains a pervasive challenge for many in this regulated industry. When surveying the insurance landscape across Asia, three key trends continue to play a significant role, leading innovations in theinsurer’s value chain.

Across the diverse Asia Pacific region, a number of forces are converging to create a pressing need for insurers to innovate throughout their entire value chain: premium growth is slowing, even as new markets open; consumer demands for digital products and services are increasing; competition within, and from outside, the region is growing; and regulators are developing more complex rules to protect consumers and reduce market risks.

Customer Centricity and Technology remain the two key themes as the Insurance sector continues to seek growth amidst margin pressures, regulatory demands, and savvy customers in Asia.