Solving the conflict of interest in General Insurance; the state of the industry (Part I)
In my previous role at Barclays Investment Bank, I got to work with leading insurers and FinTech companies, shaping their future strategy through mergers & acquisitions (read more on my moves in and out of FIG M&A here).
What became abundantly clear was that in the thriving FinTech sector, existing business models are constantly being challenged — from banking to payments and capital markets to lending and savings.
In the insurance sector, however, change seems to come at a much slower pace and seems to be largely driven by corporate needs (capital requirements, pressure on investment yields, large loss events, et cetera), rather than the desire to improve the customer proposition.
This is despite the fact that two out of every three customers are not satisfied with their journey through buying insurance, administrating the policy or handling claims — culminating in an industry with lower customer satisfaction than even much maligned government services.*
The prevalent model, where a company benefits if it acts against the customer’s best interest (conflict of interest), is designed for failure in the long-term.
It will require a tremendous effort to overcome the inherent conflict of interest in the insurance sector and to move back to a time where protection for an uncertain outcome was regarded as a service to society rather than the constant fight between two parties.
Luckily, modern technology allows us to compare, contrast and ultimately develop more customer friendly products, where interests are truly aligned (more on this point in Part II of this blog post).
Today, the product offering in the life insurance sector is already shifting, forced by external factors. However, one might argue that a shift from traditional-guarantee based to unit-linked products, where the customer bears the investment risk, predominately helps the insurer, not the customer. At the very least though, fees paid to Asset Managers can be compared transparently and might drive costs down over time.
As a direct consequence, life insurers’ revenues move away from underwriting to fee-based income due to increasing asset management activities.
In Germany, the share of endowment insurance dropped from c.56% in 2000 to c.27% in 2015 while unit-linked and annuities & pension products rose from combined c.28% to 49% in the same period.**
In the UK, retail customers are generally considered to be more open to capital market investments. It is, therefore, no surprise that a company formerly known as “The Standard Life Assurance Company” claims to be “building a world-class investment company” — and with c.92% of their total income being fee-based in 2015, they may rightfully claim so.***
Turning to the dynamics in the General Insurance space, significant change to the centuries-old operating model have yet to come. The focus tends to be on improving operational efficiency with General Insurers increasingly looking for collaboration with InsurTech start-ups to enhance their service from distribution to claims handling.
If a business model has not changed materially over the course of several centuries, it either means that the best model was chosen outright or that the sector in question has so far successfully avoided transformation, possibly through the collective dominance of a small number of incumbents.
If the latter is the prevailing situation, one should expect to see alternative models emerge that might better cater for customers’ specific needs — it’s just a matter of time.
To date, we have seen attempts to enhance the traditional model through solutions commonly referred to as P2P insurance. Most of these firms share our belief regarding the inherent conflict of interest between customer and insurer, and have developed their own solutions to this problem, often returning excess premiums to customers, or donating them to charity.
However, if premiums are paid back in parts at the end of the year, it simply means that too much was taken from the customer in the first place.
The answer to the industries’ problems cannot be derived from a deviation of the existing actuarial model.
The second part of this blog post will describe a new approach to General Insurance, which allows us to solve the conflict of interest and finally align insurer and customer by moving from an underwriting to a credit-based approach.
Insure a Thing, a UK-based InsurTech start-up, is looking to turn General Insurance as we know it on its head. Insure a Thing was recently selected to join the next StartupBootcamp InsurTech cohort in January 2017.
Through the fellowship program, Anthemis & its eco-system support Insure a Thing in its effort to bringing change to a centuries-old business model.
*Morgan Stanley/BCG Global Consumer Survey 2014.
**Gross written premiums of direct business. GDV Statistical Yearbook 2015.
***Standard Life. Annual Report 2015.