insurance re-imagined key trends driving innovation and ... · insurance re-imagined key trends...

Insurance Re-imagined Key trends driving innovation and disruption in Insurance

Insurance Re-imagined |Key trends driving innovation in Insurance

02

If you want to understand how Insurance will be disrupted over the next 5 years, you should start by looking outside of Insurance at the wider economic value chain.Donal Lehane, Partner, Consulting


03

IntroductionFinancial services globally has undergone dramatic change in the last five years largely driven by regulatory reform. Over the next five years financial services will not just change but be dramatically disrupted, primarily by greater customer empowerment and technology driven innovation1.

Why should we pay attention to innovation and disruption?Post-Lehman the Insurance industry was focused on capital adequacy and risk management. Recently, it’s become increasingly common to read and hear about ‘innovation and disruption’ 2,3. Deloitte believe it’s important to challenge, understand and critique this trend rather than simply follow the herd. Important questions that we address include: Why are we seeing this innovation now? Is it a fad? What impact will it have on Irish insurers, their customers and employees? Are there upside opportunities as well as risks? What should you do next to protect and grow your business?

This paper will outline the key trends driving innovation and disruption in Insurance across the customer, technology, people and regulatory domains.

In future papers in this series we will share our insights into the specific challenges, opportunities and novel business models impacting the Insurance value chain.

• Spotlight on disruptive technologies and trends eg. Digital, IoT, Robotic Process Automation (RPA), Blockchain, Cyber, Big data and Analytics, Talent, Artificial Intelligence (AI)

• Insight into how start-ups are being innovative and disrupting the industry

• Evaluation of new business models emerging across the value chain

• Articulate how to position yourself to respond to the threats and opportunities disruption affords

Our ambition

Our intention with this thought leadership series is to kick start the conversation across the Industry and in particular:

• Articulate that disruption poses a fantastic opportunity to grow your business, better serve your customers and provide exciting career opportunities for your people as Insurance is on the verge of a new era, which is driven by greater customer empowerment and technology led innovation.

• Encourage you to raise this agenda with your leadership teams. Instigate your own analysis, ask questions from your people, understand how your business prepares to mitigate the risks from disruption and exploit the opportunities we will raise today.

• For our part, we want to play a pivotal role in facilitating and shaping those conversations both one to one and across the industry. We are committed to supporting our clients on how best to understand and navigate these waves of disruption.

Introduction


04

1. Digital is empowering the customerThe customer is at the heart of an increasingly connected but disrupted world. In the previous 5 years, we have seen the emergence of digital-savvy consumers who are growing increasingly comfortable researching and purchasing products and services using digital channels. Furthermore they have the expectation to be able to do this at a time and place of their convenience with the option of self-service and/or access to a customer service representative as and when required. Whilst this empowerment is not age sensitive per se, it’s clear that the digitally native consumers of tomorrow (so called Gen Z) will demand nothing less than a complete end to end digital experience4.Globally, we see a number of related trends in the customer space:

• A shift from physical to digital (social) networks.

• From ownership to access of assets; creating opportunities for micro-entrepreneurship and the emergence of a so called shared economy, Peer to Peer (P2P) or Customer to Customer (C2C) models.

• Price and value conscious customers especially millennials are attracted to novel business models especially when simplicity, personalisation and social values are prominent in the value proposition and marketing.

To counter these advances, Insurers continue to operate against significant local socio-demographic headwinds including:

• Despite a growth in disposable income, we continue to see significant levels of household debt versus our EU peers (note: Ireland has the third highest level of household debt-to-income in Europe, coming behind Denmark and the Netherlands)5.

• Savings gap – people working longer and shift from DB to DC pensions. For many reasons c53% of the workforce don’t have a personal or occupational pension which represents a significant social challenge for the industry6.

2. Technology is democratising innovationWe are seeing a trend for more grass roots innovation in InsureTech, triggered by poor customer experience and a general frustration with what many customers perceive to be a “broken” business model. What has changed over the last 10 years is that entrepreneurs with modest capital, can now access the shared technology (as a service), tools and human resources to quickly develop digital products and services and market them to global audiences through digital market places and platforms. This trend is likely to grow as more and more people from emerging markets gain access to the internet and mobile technologies. The popularity of crowdsourcing and community events like hackathons and bootcamps is further facilitating this trend.

Technology is democratising innovation & empowering the customerJohn Kilbride, Director, Consulting

What are the key trends driving innovation and disruption in Insurance?


05

3. The emergence of exponential technologies is accelerating the pace of disruptionIf customer empowerment is driving much of the innovation, then technology is the engine. Specifically an exponential improvement in the performance/price ratio of technology has resulted in a coming of age of disruptive technologies which are proving to be game changers right across the economic value-chain (think AI, 3D printing, drones, robotics, and neuroscience/genomics)2, 7. These economies of scale create ‘tipping points’ where it becomes economically viable to offer premium financial services to a greater portion of the population, while at the same time opening up the industry to new players.

Exponential technologies will enable Insurers to:

• Better address customer needs and expectations (mobile, predictive analytics, behavioral science, artificial intelligence).

• Generate new revenue streams and facilitate better customer engagement (Internet of Things, big data and analytics).

• Reduce costs and risks (digitisation of process, robotics, blockchain, cyber).

We will illustrate real Insurance use-cases of how start-ups and insurers are deploying exponential technologies such as IoT, blockchain, robotics to enabling new business models later in this series.

4. Innovation (and competition) is coming from outside the traditional value-chainOur research suggests that to understand innovation there is limited value in first looking “inward” at your market (including your key competitors), either you’re the market leader and your competition are following you or they will be offering a different ‘flavour’ of what you offer your customers. It is not unusual for disruption and competition to emanate from outside the traditional value chain (or from other sectors of the economy altogether). So it’s not surprising that it’s technology start-ups that are driving innovation, which to date has challenged if not disrupted the insurance value-chain.

Private investment in InsureTech has exploded since 2010 but still lags behind other segments like Payments and Lending (comprising c10% of the total Fintech investment over the past 5 years). Nevertheless, we have seen an x30 fold increase in annual investment

capital directed into InsureTech in the last 6 years, circa 50% of which has been channeled towards Health (and wellness)8.Not surprisingly the lion-share of that investment is on front end customer engagement, where ‘friction’ is highest but also the capital light stage of the value chain9.

Some examples of where we see competition coming from include10:

• Established technology firms with strong brands and excellent data analytics capabilities who may seek to disintermediate incumbent broker relationships.

• Cross selling by Banks and Investment managers looking to evolve away from traditional product centric silos and put customers 360 needs at the centre of their value propositions, perhaps leveraging successful on-line banking propositions.

• Future business models may involve bundling or embedding insurance within the cost of the original asset at source, potentially leading to further disintermediation of the insurance value –chain e.g. upstream OEM in Motor.

5. Growing importance of the ecosystem and networksStart-ups can be characterised as being agile of mind with an open-source mindset, and are well suited to tap the power of wider developer community and crowdsource insight in order to deliver Minimum Viable Products in very short development cycles. Incumbents are often not blessed with such agility, in fact their scale and governance, critical to their

Competition & disruption is

coming from outside the value-chain

Donal Lehane, Partner, Consulting


06

success to this point, can often constrain or even smother innovation before it takes shoot. To protect, survive, and grow their business, incumbents need to know when to acquire, partner and/ or build capability, and when to exit. The challenge to attract and develop digital capability internally is not insignificant. Deloitte research shows Insurers have to overcome the existing bias and poor perception that Science, Technology, Engineering and Mathematics (STEM) graduates have for Insurance as a career destination11. Furthermore Ireland suffers from a lack of ICT professional (9th out of 22 countries) although has above the EU average for STEM graduates, (ranking 5 out of 22 countries)12. Linked to talent is the challenge around culture, specifically how to nurture twin cultures of innovation alongside the Solvency II aligned enterprise risk management.

We have seen several Insurers develop a deliberate strategy to look outward to the ecosystem to identify and nurture talent and innovation; including allocating investment funds, running hackathons, bootcamps and accelerator programs, all of which not only nurture innovation but also serve as valuable PR and branding exercises.

“We live in a disrupted world. You have to disrupt yourself or others will do it for you”Steve Forbes


07

6. Policy makers and watchdogs have difficult choices to make...Deloitte research in the UK shows that customers may be willing to trade personal data: data that reveals private information about themselves, their preferences and behaviors, their family, health and wealth, however trade is the operative word. First they expect something in return: an incentive, a discount, an offer, engagement – some inducement to trade 13. Second, they expect the data to be secure and protected. Trust is not easily given but it’s easily lost. Digitisation comes with some downside risks. As Insurers look to layer digital technology over legacy IT architectures and the volume of data explodes through the IoT, the risk of cyber-crime becomes increasingly

acute14. Upcoming data protection regulation will impose further obligations on Insurers to protect consumers’ right to privacy and also their right to be forgotten15.

Our government needs to incentivise and promote Ireland as an innovation hub through creative policies in the areas of research & development, tax and education, as well as the removal of certain disincentives16. How European regulators will respond remains to be seen, many may opt to take the ‘wait and see’ approach. We encourage the regulator to strike a balance between nurturing innovation in a heavily regulated and competitive environment whilst still protecting customer interests in its policymaking.

Horizon 1 Horizon 2 Horizon 3

IoT - Connected& Data Analytics

Digitisation

Medicine/Science & Health

Autonomous/driverless vehicles

Mobile/Internet

Robotics

Talent & Workplace

Social/P2PSharing Economy

Artificial Intelligence/Machine learning

Blockchain - smart

contracts

Cyber

CustomerEmpowerment

Cum

ulat

ive

Impa

ct

Figure 1. Over the next 10 years the cumulative effect of these disruptive forces will re-shape the Insurance Industry in Ireland

Time


08

ConclusionThose elements of the customers’ life that are most important; family, health, career, wealth, leisure time, are increasingly interconnected by digital technology. Up to this point, disruption has felt itself most obviously in the digitisation of media and more recently in the travel and tourism sectors. However the waves of disruption are spreading out across the economy from energy to manufacturing, distribution, logistics and retail. We are seeing new business models and new businesses emerge which will require new financial products and services17, 18. Those new business models and the market leaders in Insurance innovation are the subject of future articles in this series.


09

Insurers have a choice; adapt, survive, grow or exitJohn Kilbride, Director, Consulting

So the lessons are clear, ignoring the disruption agenda is not an option for insurers. As the customer and businesses they serve are themselves undergoing phenomenal disruption, which will shrink traditional risk pools (think smart cities, homes, cars), as well as drive new customer expectations and requirements from financial services providers. Customers are seeking an omni channel experience including the ability to ‘jump on and off’ across various channels as required. They expect clear, simple and personalised offerings and possibly a degree of education to demystify what are still complex products and services to most consumers, especially in the Life, Pension and Investment space. Disruptive technologies will supplement existing methods and enable Insurers to better address customer needs and expectations, to generate new products and revenue streams and reduce costs and manage risks. One way or the other, it’s an exciting time for the Insurance industry and it’s just possible that in 10 years’ time we won’t recognise the re-imagined industry.


10

References1. Waves of Disruption. The Future of Ireland’s Financial Services Sector. Deloitte Consulting. 20152. Exponential Organisations Why new organisations are ten times better, faster, and cheaper than yours (and what you can do about it). Salim Ismail with Michael S Malone, Yuri Van Geest. Singularity University. 20143. Future Trends: A Seismic Shift Underway. How People, Technology and Market Boundary Trends are Shifting the Insurance Industry4. Competitive Strategy In The Age Of The Customer. David M. Cooperstein. Forrester. 2013 http://solutions.forrester.com/Global/FileLib/Reports/Competitive_ Strategy_In_The_Age_Of_The_Customer.pdf5. Household Credit Market Report H1 2016. Central Bank of Ireland. http://centralbank.ie/publications/Documents/Household%20Credit%20 Market%20Report%202016H1.pdf6. CSO QNHS pension report. CSO statistical release, 30 May 2016 http://www.cso.ie/en/releasesandpublications/er/q-penp/ qnhsmoduleonpensionsq42015/7. Industries of the future. Alec Ross. 20168. Insurance Tech Startup Funding Hits $2.65B In 2015 As Deal Activity Heats Up. CB Insights, January 2016 https://www.cbinsights.com/blog/insurance-tech-startup-funding-2015/9. Unpublished Deloitte research into 100+ InsureTech companies. 2016.10. The Future of Financial Services, How disruptive innovations are reshaping the way financial services are structured, provisioned and consumed. WEF & Deloitte. June 2015 http://www3.weforum.org/docs/WEF_The_future__of_financial_services. pdf11. Putting the nectar in the sector. Making insurance careers more attractive. Deloitte.201512. Digital Single Economy. Feb 2016. https://ec.europa.eu/digital-single-market/en/scoreboard/ireland13. Insurance disrupted. General insurance in a connected world. Deloitte UK. 2015 http://www2.deloitte.com/content/dam/Deloitte/uk/Documents/ financial-services/deloitte-uk-insurance-disrupted.pdf14. Global Cyber Executive Briefing - Insurance. Deloitte. 2015 http://www2.deloitte.com/be/en/pages/risk/articles/insurance.html15. European General Data Protection Regulation Agreed – Headline Changes. Arthur Cox. Feb 2016 http://www.arthurcox.com/wp-content/uploads/2016/02/European- General-Data-Protection-Regulation-Agreed-%E2%80%93Headline- Changes.pdf16. IFS 2020. A strategy for Ireland’s International Financial Services sector 2015-2020 http://www.finance.gov.ie/sites/default/files/IFS2020.pdf17. The 7 Colours of digital innovation. Rick Huckstep. Insurance Thought Leadership. March 2016 http://insurancethoughtleadership.com/the-7-colours-of-digital- innovation/18. Insurers on the brink. Disrupt or be disrupted. Deloitte centre for financial services. 2016 https://www2.deloitte.com/content/dam/Deloitte/ us/Documents/financial-services/us-fsi-insurance-industry-outlook.pdf


11

DublinDeloitteDeloitte & Touche HouseEarlsfort TerraceDublin 2T: +353 1 417 2200F: +353 1 417 2300

CorkDeloitteNo.6 Lapp’s QuayCorkT: +353 21 490 7000F: +353 21 490 7001

LimerickDeloitteDeloitte & Touche HouseCharlotte QuayLimerick T: +353 61 435500F: +353 61 418310

GalwayDeloitteGalway Financial Services CentreMoneenageisha RoadGalwayT: +353 91 706000F: +353 91 706099

BelfastDeloitte N.I. Limited19 Bedford StreetBelfast,BT2 7EJBelfast, Northern IrelandT: +44 (0)28 9032 2861F: +44 (0)28 9023 4786

deloitte.com/ie

Offices

Donal LehanePartner, ConsultingTel: + 353 1 417 2807E: [email protected]

Ciara Regan Partner, Audit T: +353 1 417 4856 E: [email protected]

David Conway Partner, Deloitte Digital T: +353 1 417 2853 E: [email protected]

Key contacts:

Contributors:

Karen KennedySenior Consultant, ConsultingTel: + 353 1 407 4732E: [email protected]

Author:

John KilbrideDirector, Consulting T: +353 1 417 2485 E: [email protected]

Caroline TwomeySenior Manager, AuditTel: + 353 1 417 8615E: [email protected]

Contacts:

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

At Deloitte, we make an impact that matters for our clients, our people, our profession, and in the wider society by delivering the solutions and insights they need to address their most complex business challenges. As one of the largest global professional services and consulting networks, with over 220,000 professionals in more than 150 countries, we bring world-class capabilities and high-quality services to our clients. In Ireland, Deloitte has over 2,000 people providing audit, tax, consulting, and corporate finance services to public and private clients spanning multiple industries. Our people have the leadership capabilities, experience, and insight to collaborate with clients so they can move forward with confidence.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2016 Deloitte. All rights reserved