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Will technology cause insurance brokers to disappear?


By Andrew Johnston | November 7, 2019

Technology offers them the opportunity to concentrate their time on the higher-value components of their offering and to focus even more intently on the value they bring to clients.

For some time now, industry practitioners have speculated how InsurTech would cause business models to evolve, from integrated carriers to distribution and product experts; from balance sheet businesses to capital-light structures, supported by third-party investors and capital markets. While much of this speculation has focused on the impact on businesses within national insurance markets, technology has the potential to alter the global balance of power between insurance companies operating in developed markets and those in emerging economies.

Ensure better customer experience

Less hindered by legacy systems, and often driven by the desire to create a better customer experience, companies in emerging markets can potentially create new, innovative solutions faster. Innovation often tackles areas that drive cost and detract from the customer experience in established markets, with key areas of focus being claims management, data analytics, business process, product development and distribution.

Technology has become infinitely replicable and disruption is easier to articulate than to implement.

Investment patterns reveal the maturation process. InsurTech investments were down about a fifth (21%) by individual transaction number in the second quarter of 2019, but the deals that did materialise were larger on average, and skewed towards later-stage investments. Risk carriers are playing less in the venture capital stages of the InsurTech life cycle, preferring to put their cash behind companies that have at least begun to walk, and preferably to feed themselves.

The model for success

The volume of InsurTech activity and hype has acted as a defibrillator on the heart of the insurance industry. The much-vaunted InsurTech ‘revolution’ has driven people across the sector to talk more positively around the application of technology, with some seeing it as the potential saviour of a broken system. This positive impact, spurred by outsiders, is now arising organically from the inside, because the industry knows its own challenges better than anyone else. InsurTech has forced insurance technology issues to the fore and companies are acting.

Success rarely has a smooth upward trajectory, and that will be the case here as well. Technology will remain fundamental (the very first commercially used IBM mainframe was deployed by an insurer) to our sector in the medium term, if not revolutionary. However, as so often happens in the technology investment sphere, seemingly impossible gains and outcomes turn out to be just that.

Just a few years ago major industry players were throwing all but the kitchen sink at the promise of a fundamental shift in paradigm but there are increasing signs of InsurTech fatigue after spending millions and gaining no first-mover advantage.

In contrast, other companies avoided this pitfall by adopting (by design or otherwise) a slow and steady approach, reaping the benefits, via buying-in proven insurance technology as a strategic vertical investment.

Embrace once proven

Technology has become infinitely replicable. Price-sensitive personal lines consumers may be here today, attracted to a flash technology, but are just as likely to be gone tomorrow. That makes early-stage InsurTech investment a real risk. Launching something that doesn’t work is a costly error. Opportunities abound to partner with, buy, adopt, or embrace one or more of the thousands of InsurTechs after they have been proven.

It turns out that disruption is easier to articulate than to implement. Partnerships have become the model for success. InsurTechs must create solutions to problems that insurance and reinsurance companies face today. The business proposition must come first and must comprise a clearly defined business technology that supports an existing process.

InsurTech’s real disruption has been achieved by deploying new technologies in ways that are more effective than their competitors’ efforts, thereby altering the sector’s dynamics in the way Direct Line did in the UK. Success begins with the same ingredients, and ultimately delivers a similar end product, but adopts a different, much more efficient sales and distribution methodology to create competitive advantage.

The value chain

Any technology which compresses the insurance value chain, allowing more direct access to capital for the consumer and creating high capacity for disintermediation, does of course have the potential to be disruptive to brokers, insurers and reinsurers alike. Doing nothing or the bare minimum seems an increasingly blinkered choice. Just as the Luddites failed in the 19th century to reverse the impact of technology by attacking weaving machines, so too will those who hope that technology will pass by the insurance industry and move into some other less threatening biosphere.

Today’s insurance business model is rooted in the industrial age notion that the key participant is the capital provider and, by extension, the risk taker. The hypothesis is that the risk taker is entitled to the majority of the reward, based on a time when capital was scarce. However, along has come technology – permeating the sector and tipping the balance of power between the providers of capital and the authors of ideas dramatically in favour of the entrepreneurs.

This is consistent with the post-industrial age which has fundamentally reordered the hierarchy of priorities; lowering the importance of (now plentiful) physical capital and raising the prominence of human capital – brainpower is not capital intensive.

In the insurance world, where technology has the potential to eliminate barriers to entry, weaponise data and create new forms of information from which to more precisely gauge risk, thereby lubricating the appetite of alternative capital, who, frankly, can afford not to engage in the brave new world? As such, could we be looking at a new insurance company structure of the future?

The broker of the future

What about the impact on brokers? There has been plenty of discussion around the threat InsurTech presents to brokers’ business models. However, technology is already playing a significant role in brokers’ service offering, and that role is only increasing.

The broker business model is all about relationships, market knowledge and understanding of the products and services one is selling, and to whom. If the brokers want to enhance their business models, they need to start seeing technology as an opportunity rather than a threat.

Technology has the power to complement, enable and support many of the core processes that underpin the broker business model. This will help brokers to free up more time which can be spent on creating new and exciting opportunities for their clients.

Technology can help improve not replace

Technology can also help to improve the efficiency of placement. It will not replace relationships in a market where its ultimate product – capital solutions – is far from commoditised. Placement efficiency is a critical but subordinate component of reinsurance brokers’ offering. Analysis, structuring, and other consulting functions are at its core. These are the differentiating service elements valued both by risk carriers and clients, and cannot easily be replaced by technology-driven disruptors.

We are already seeing technology being used to streamline the quoting process, bind multiple policies together and generally improve the client experience. Despite this, there is still a real fear among brokers that their role within the insurance value chain will be taken over by technology.

Brokers need to understand that many of these technologies still need a guiding hand and that technology will enhance their position within the insurance value chain, not diminish it. If managed properly, technologies that improve efficiency and outcomes can be game changers.

Activities such as data analysis are massively enabled when effective technology is in place. Understanding an insurance company’s capital and volatility management goals in the context of its overall business plan and vision is not a job that can be performed by an algorithm, but technology can play a sizeable role in how to achieve those goals.

The broker’s role is therefore unlikely to diminish. Instead, technology offers brokers the opportunity to concentrate their people on the higher-value components of their offering and to focus even more intently on the value they bring to clients.

*This article was published in the SIRC Supplement 2019 by Asia Insurance Review, November 2019 issue.

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Andrew Johnston
Global Head of InsurTech, Willis Re

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