Insurtech: competitive threat (or opportunity) for the insurance world?

The profits of the insurance sector, to date, are “almost completely at a standstill” due to the prolonged and long period of economic difficulties.

If we look at the insurance sector in this (we all hope) final phase of the Covid-19 pandemic, almost half of the insurers globally are not making gains from the cost of capital and more than half of the companies listed on the stock exchange are below your net worth.

After years of stable returns, insurance has now become a value-destroying industry where half of the players fail to earn the return at the expected rate.

In 2020, with the outbreak of Covid, the growth of premiums slowed sharply from over 4% per year to only 1.2% with a drop in profits of 15%.

The decline in profits was particularly pronounced in the Asia Pacific region, where insurers recorded a 36% decline largely due to the difficulties in the Life business.

But the pandemic was just an unfortunate event that accelerated already existing problems: insurers were put under pressure by other factors, some of these real drivers of the sudden and rapid change that is radically transforming the market.

The first of these is represented by the Insurtech companies, over 40% of which impact on cost savings in marketing, product distribution and claims management.

Thanks to the strong push on digital, Insurtechs represent a competitive threat, which could instead become a real opportunity for traditional insurers with companies aiming to forge more and more new partnerships or to make huge investments in the technology sector to keep pace and not lose or see market share erode.

For all this it is very conceivable to foresee, for those with long-term market vision, a shift in value towards the networks of intermediaries (Agents and Brokers) who will continue to maintain relationships with customers, with insurers who risk becoming (or remain) only mere roofing providers.

It is true that many insurers have embarked on cost-saving programs, but a closer look at the new organizational models reveals that only limited improvements in productivity have been made, with no sharp impact on the main cost lines. Increasing productivity without decreasing the cost of results does not allow to win in competitiveness.

So what are some Strategic Areas to focus on in order to improve the business of the future?

It will be important for insurance companies to respond to ESG challenges, which will become increasingly important, requiring an adaptation of business models through real and real product innovation and coverage of new risks (specialty lines), in order to improve and customize customer engagement and experience.

ESG stands for Environmental, Social and Governance and refers to three central factors in measuring the sustainability of an investment. This approach derives from the concept of "Triple Bottom Line", also known as "People, Planet and Profits" (PPP), introduced in the 1990s and according to which companies should not only focus on "Profits", but on each of the three “P”, which are equally important for the sustainability of any commercial enterprise. This concept has evolved into ESG factors, which today are the cornerstone of Sustainable and Responsible Investing (SRI).

In addition to this, therefore, traditional insurers will have to push, with determination and courage, towards greater involvement with the insurtech world, adapting their business models to the requirements of an increasingly digital society, modernizing the basic technological platforms and facing decisively the imperative for increased productivity.

Covid has accelerated some trends that have permanently changed the way insurance is underwritten, distributed and managed. At the same time, some of the problems that have tested the sector in the last decade have not disappeared (indeed they have increased in some cases) and the complexity of the macroeconomic environment has not changed.

Revenue growth is limited in most regions of the world; intermediaries are gaining more value; economies of scale are proving not feasible; and productivity is still stagnant.

As a consequence of all this, the economic profit, or the profit after the cost of capital, is practically at a standstill in the insurance sector. Insurers who will be able to develop a well-defined business model and will be able to ride the new trends Insurtech accellerate by the pandemic, they will be able to move towards a path of growth, expand their performance and renew themselves through the creation of value (requested by the shareholders), ensuring over the years a strong and lasting position of industry leader. The way forward has now been traced, we need (only) the courage to undertake the journey.

Marco Contini