Q/A: Technological and Digital Disruption in the Insurance Market

In the past 12 months, we have seen a material change for insurance start-ups and innovators. 2021 was defined by record levels of investment and general excitement around the industry, but 2022 was a more challenging environment due to increasing uncertainty, conflict, climate change, and economic conditions.

Despite the challenging conditions, the consensus view remains that the insurance industry will continue to embrace change, digitise operational processes, and enable transformation via the use of technology.

To better understand the current market, we conducted a Q/A with Clearwater’s Insurance Solutions Specialist Chris Watts. Chris helps insurers across Northern Europe identify pain points in their current operating model and educates them on how technology can solve many problems and add value to their operations.

Q: Based on the current market backdrop, what are your thoughts on the current insurance value chain?

A: The insurance value chain has a lot of moving parts. Every team involved has their own goals and objectives, which can create a complex environment with competition for resources and capital – both of which can be scarce. To ensure success, insurers need to have a comprehensive view of their value chain and manage it with the right technology and processes.

Technology and digital innovation can significantly impact the value chain and provide insurers with new opportunities across many areas. Insurers tend to focus on their core operating areas around product, distribution, claims, and operations. However, they should not ignore the potential benefits available to back-office functions such as risk/capital management and their investment portfolios – generally the largest assets on the balance sheet.

A growing area that insurers are exploring relates to data sharing strategies. These strategies are intended to reduce costs and develop innovative new products, services, and distribution channels across the value chain.

Q: What other changes are you seeing in the insurance market?

A: One area where we are seeing changes is in the channels of distribution. Another area is where businesses are adapting or developing policy administration software and related tools. Many of these new tools are the result of genuine product innovation. One example of innovative technology is in embedded insurance products, which are extending customer journeys for non-insurance players.

From a thematic perspective, we might think about disruptors differently depending on the area. For example, we could look at how car manufactures are expanding their scope to enhance the customer journey. This is different from the InsurTech industry, where businesses are segmented to focus on specific areas of the value chain.

Traditional players are trying to take on the role of disruptor, and they are looking for a ‘standard’ playbook or approach to improve their chances of success. However, this is where the crux of the challenge lies: disruption is often based on unique requirements, strategies, and goals. There is no one-size-fits-all solution to becoming a successful disruptor.

Some of the main factors that can influence a journey to transformation include capital structure and current position, long and short-term strategic objectives, and ownership. By taking an individualistic approach and creating a new path forward, firms have the opportunity build a solution to meet the specific needs that they are addressing.

Q: What are the key drivers and external influences impacting insurers?

A: ESG is influencing how insurers consider their assets and liabilities. We are seeing a growing appetite to understand climate change impact, and to discover actions to mitigate the impact. What is particularly interesting to some stakeholders is that this is occurring within the UK, European, Bermudan, and US markets, which can lead to some unique challenges, but also opportunities within those markets.

We are also seeing firms recognize the limitations of solely relying on 3^rd party data. They are seeking alternative options to support relevant KRIs and KPIs.

Consolidation has been bolstered by cheap finance over the past decade, however, cost pressures now significantly affect the outlook. When combined with higher rates versus lower valuations, the outlook for mergers and acquisitions is unclear.

All these external influences, and more, are affecting the strategic decision-making process. Significant changes are happening, and insurers need to keep up with the changes or risk behind left behind and replaced.

Q: What are your key takeaways heading into 2023?

A: In the insurance industry, pricing remains competitive. There are some new entrants into the market that could be a threat — however, we are continuing to see more collaboration rather than displacement.

Expect to see valuations offer even more consolidation opportunities. Keep in mind that tech-based entrants will require support from the community, which could affect strategic planning.

On the asset management side, we’re seeing that capital allocation processes are competitive. Regulatory reform is an opportunity, but likely to be considered against other areas of change for insurers to deploy capital.

Overall, there is a heightened need to deliver compelling investment cases that are multi-faceted and support insurers. This can help asset managers achieve strategic objectives that are broader than just investments.

Interested in learning more?

You can see Chris speak in the upcoming webinar, Unifying the Investment and Accounting Functions, where he will discuss strategies for aligning the investment and accounting functions of a business.