Middle market insurers: Prepare to meet new realities
From technology to emerging risks, change is constant
INSIGHT ARTICLE |
RSM recently conducted an online discussion with several dozen executives from middle market companies located nationwide to explore perceived opportunities and threats to achieving their organization’s growth goals. While qualitative in nature, the conversation identified issues with which most insurance executives can identify—labor issues, the impact of technology, harnessing the power of data, and political and macroeconomic issues, including regulation, among others. Sound familiar? And guess what? None of the participants were from the insurance industry.
While much about the insurance industry is unique, we can learn from both those outside our industry and from those insurers who are on the frontlines of change.
In general, insurers entered 2017 in stronger financial shape than they have been in years. But, like other industries, they are confronting a rapidly evolving marketplace where shifting demographic trends and customer preferences are driving the need to reevaluate old product strategies and delivery models. And insurers also need to keep an eye on where new technologies are creating new competitors and disruptions in the market. Middle market insurance companies need to adapt quickly and decisively to these new realities.
“Our customers don’t want to talk on the phone to a salesman as much and prefer email or the ability to order online.”
Sound familiar? While that comment came from a ceramics design and manufacturing firm, it clearly resonates for those of us in the insurance industry. Companies like GEICO and Esurance have leveraged huge investments in technology and advertising to gain market share, often at the expense of middle market competitors. How? First, by understanding and capitalizing on customer preferences. It’s clear Generation X and millennial consumers are less likely to shop through agents or other traditional distribution channels. They prefer the ease and speed of comparing rates and making purchases online. They also like the convenience of online document delivery, and they especially like having proof of insurance readily available on their smartphones. In addition, these consumers are embracing online claims services where a photo of damages can be submitted instead of having to take their damaged car to a claims center or waiting for a representative to visit them. Even baby boomers are increasingly utilizing these options.
Not only are these companies changing the game when it comes to customer service, they are also using technology to change how they price and design their insurance products. Think about auto policies. Traditionally, they have been underwritten based on a combination of demographic patterns and personal driving and accident history. Now, many customers are electing to have devices in their cars which allow the insurer to track personal driving habits and customize product pricing. Insurers are also using big data to more narrowly target product offerings.
For many middle market insurers, this presents the daunting challenge of playing technological catchup against deep-pocket competitors who may be ahead of them on the technology curve. How can middle market firms better enable clients to access information they want in the manner they want it, when they want? To thrive, middle market insurers need to do more than simply mimic what competitors are doing. They have to develop creative new strategies that differentiate them from their competitors.
Understand emerging technological risks
As an industry, insurance companies have done reasonably well analyzing historical loss patterns and extrapolating that information to consider future risks. In a rapidly changing world, though, extrapolating the past is no longer enough. Insurers must also anticipate the future. Consider cyberrisk. Even going beyond the challenges associated with providing cyberrisk insurance to businesses, which is a huge topic in itself, new cyberrisk issues are entering the picture daily.
Self-driving cars, for example, are close to being a reality. How do automotive insurers address that challenge? A driver’s age and other demographic and driving history information that played a key role in setting rates may become moot when drivers switch from being vehicle operators to being passengers. Auto insurance will likely switch to being primarily product liability insurance. While insurers are well-versed in the intricacies of underwriting and managing auto policies, how many have real experience with product liability offerings? Obviously, this will mark a huge shift for insurers who wish to continue to compete in the auto insurance sector.
The internet of things, which includes a wide variety of personal and household devices connecting to the web, also raises new risks that property and casualty insurers will need to address. If a homeowner is hacked via a smart TV, Fitbit or other online device, what is the insurer’s exposure regarding identity theft losses? Home security systems now often also operate online, meaning they, too, are subject to hacking. What if a cybercriminal were to access a connected thermostat and turn off the heat in a home in winter, resulting in frozen pipes? These frequently discussed examples are just the tip of the virtual iceberg, but represent the potential issues facing insurers.
Saying good-bye to the past
“We are looking at ways in which we can target the end consumer directly, trying to answer the question of how we can compete directly in the business-to-consumer space.”
While this was a comment from a middle market retail business leader who joined our online chat, it could have been any one of RSM’s middle market insurance clients. Insurance is an industry with strong traditions, but new, disruptive strategies mean middle market insurers have to examine, and perhaps abandon, models that no longer meet customer preferences. As you may be experiencing, for most products, in-person sales through traditional agent models are less effective or at least must be augmented with online sales options. The good news? Moving toward online sales means most insurers can reach beyond traditional geographical boundaries. If you’ve always been a local or regional player, now may be the time to attack a larger market or market segment.
Insurers are also re-evaluating attitudes toward policy renewals. In the past, many considered renewals to be almost automatic. But brand loyalty is increasingly a thing of the past. Consumers can now easily compare rates and other product attributes online and can replace coverages with the click of a mouse (or, increasingly, with a tap of their smartphone screen). To retain customers, competition can’t end at the sale. Insurers need to constantly compete for their business—on price and on service.
Finally, never underestimate the power of social media in influencing customer decisions.
New skills for a new age
As insurers grapple with new issues like using big data to better understand and react to their markets, using nontraditional investments in their portfolios to improve yields, or leveraging the power of social media to expand their marketing reach and transform their relationships with customers, they also must reach out to new types of talent to help transform their business models. A major concern to companies we chatted with was the tightening, competitive labor force, along with the lack of employees with the necessary technical skills. Attracting top data, finance or social media talent will likely mean re-evaluating recruiting, human resources and compensation practices. For many, outsourcing some of these tasks maybe offer the best alternative.
Insurers may also need to reconsider who they want in leadership roles. While traditionally CEOs and other top managers have come up through the ranks, is someone with only your company’s perspective the right fit if what you need is transformational change?
New demographics call for creativity
As insurance companies know, traditional insurance buying patterns have changed. Younger consumers are marrying later, buying homes later and defining security differently. Couples dependent on both incomes think differently about products like life and long-term care insurance than the nuclear family of the 1950s and 1960s. Some consumers are looking at the rate of return provided by traditional asset-accumulation long-term care products and find it wanting. Other options, such as long-term care products coupled with a death benefit rider may provide a better fit. Life insurance products will need to continue to evolve, adapting to new social norms by considering more dynamic and personalized pricing options, such as healthy living incentives. We’ve seen consumers grow increasingly suspicious of annuities, which may drive an appetite for new, guaranteed income options.
One way insurers have found to address the need for creative approaches to product development, product delivery and technological advances has been through mergers and acquisitions. No doubt this trend will continue as middle market firms strive to compete in this new global marketplace.
Socio-political factors represent uncertainty for most
While the potential impact of some of these market factors are viewed by most companies as issues over which they may have some control, numerous macroeconomic factors are generating uncertainty. Interest rate increases, exchange rate increases, the strength of the U.S. economy, tax reform, health care reform, regulatory changes, trade policy changes and similar concerns make planning difficult. Making your voice heard through government representatives, including regulators and industry trade associations, will be critical.
As a business advisor to the industry, RSM is represented on many insurance industry regulatory panels, and we have strong representation in Washington through our Washington National Tax office. We’ll continue to provide updates and perspectives on what we might expect as this year of potentially unprecedented change unfolds.
Middle market companies’ visions are not changing in the next one to five years; however, their strategies for achieving their visions remain fluid. Times of rapid change in any industry are always linked with heightened risks with greater possible rewards. Insurers with the vision to seize the advantages of a rapidly evolving industry will do well.