Insurance and reinsurance sector CEO’s are currently in “surprisingly optimistic” mood about the prospects for their own organisations growth over the coming years, but are increasingly open to joint-ventures or strategic alliances to help them grow and at the same time still terrified of the pace of technological change.
This is according to the results of PwC’s latest and 21st Global CEO Survey, which saw 100 CEO’s from the re/insurance sector participate and give their views on what keeps them up at night.
The survey found that, despite the clear threats posed by technology and efficient capital to traditional insurance and reinsurance business models, more than 90% of insurance CEOs remain confident about their revenue prospects over the next three years.
However PwC note that despite this generally positive outlook, actual growth has failed to live up to expectations for many re/insurers in recent years.
Perhaps as a result of this and knowing that meeting targets without some impetus or change will be difficult, re/insurance CEO’s are keen to find partnerships, joint ventures and other strategic alliances that can help them to grow and hit their revenue targets.
Almost half of the CEO’s surveyed said that they plan to enter into a new strategic alliance or joint venture, to drive profitability and growth, over the next 12 months.
These could be with insurtech start-ups, established technology companies, sources of risk origination or distribution, or perhaps even with sources of efficient capacity that can be bolted on next to their own balance-sheets.
Capital markets alliances are likely to be a feature of the next few years for some traditional insurance and reinsurance firms, which find that the addition of managed balance-sheets can raise their own efficiency, lower their cost-of-capital, all the while earning them fees for the expertise they have.
Partnerships provide a mechanism to get paid for the value you bring to the risk-to-capital chain, making CEO’s extremely aware of the opportunities an alliance can bring to their businesses.
Arthur Wightman, PwC Bermuda leader and Insurance leader, commented, “Among the many reasons for the high confidence of CEOs in the insurance industry is that the anticipated disruption from incoming competitors, like InsurTech and digital platform players, hasn’t materialised like the industry initially feared. Partnership, not rivalry, with new entrants is the order of the day.”
But while many of these partnerships, alliances and JV’s will be predicated on gaining access to some kind of technology, or through a technology to access clients and consumers more directly, insurance and reinsurance CEO’s remain afraid of the pace of technological change.
The top three concerns cited by CEO’s are over-regulation, cyber risks and the pace of technological change.
In fact, 85% of re/insurance CEO’s surveyed said that the pace of technological change was a major concern.
Of course change also bring opportunity, as Wightman explains, “Substantial opportunities are on the horizon as a new generation of predictive analytics and AI transforms insurers’ ability to detect, anticipate and avert risk.”
Matthew Britten, PwC Bermuda Insurance partner, added, “The grounds for optimism among insurers include the increasing digitisation of the global economy and resulting shift in customer preferences. This opens up a range of new opportunities to both dramatically modernize processes to enhance customer interactions while reducing costs, and to meet the accelerating need to provide innovative insurance coverage against the nature of the intangible risks that are emerging as a result, such as we have already been seeing with cyber insurance.”
So technological change is driving optimism as well as pessimism it seems, which really means it’s change and potential new competition that are the difficult things to come to terms with and what poses the greatest threat, it seems.
Moving fast is also important, as the risk of being left behind while the market modernises is very real for some re/insurers, as we explained yesterday.
“The successful re/insurers are going to be those that are prepared to capitalize on these new opportunities, while those weighed down by legacy and other long-term issues are going to be challenged,” Britten continued.
While opportunities abound, fear of change could be holding re/insurers back.
More CEO’s from the re/insurance sector fear the pace of technological change than in almost any other industry, according to PwC, with the fear being a result of the traditionally slow-moving re/insurers being pushed to respond much more quickly to tech disruption to their business and operating models.
Typically, re/insurance is “accustomed to slow evolution rather than rapid transformation” PwC explains, meaning that such transformational changes can be difficult for legacy players, as the changes required to keep up with the rate of market evolution can be significant.
But the challenges faced by the insurance and reinsurance sector, in its mission to keep up with the pace of change, are signficant and wider ranging than technology alone.
“66% of insurance CEOs still report increasing pressure on their organisation to deliver business results under shorter timelines and more insurance CEOs see changes in consumer behaviour as a threat to growth (78%) than almost any other sector. So while perhaps having overestimated the impact of outside threats and short-term disruption, insurers shouldn’t be underestimating the need for longer-term transformational change into digitally-enabled, customer-focused organisations with flexible business and operating models,” PwC explains, highlighting the need for companies in the sector to be open to more transformational changes to their business models.
In the past, the influence of new competition and alternative capital has been cited as a major threat to CEO’s businesses, but now it seems change itself is seen as the main threat.
At their essence these threats are just progress and any re/insurers that fail to keep up with progress will surely consign themselves to oblivion, or at least find a swift route to becoming marginalised.
The CEO’s of these companies need to lead their businesses through the evolving market landscape cognisant that change is inevitable, the ability of their companies to get paid for their intellectual capital and expertise is paramount, and that new technology as well as new capital may drive profitable alliances that open up new revenue streams.
Whether new revenue streams can ever replace the traditional business model and revenues of the past remains to be seen and the gut feeling is that not everyone will survive these changes, as the market has to rationalise as it modernises itself.
Cost is key, of course, as Stephen O’Hearn, PwC’s Global Insurance Leader, said, “Despite their CEOs’ optimism, insurers do face some obstacles. They must become leaner to compete and achieve savings on a scale they have never attempted. Yet reducing costs alone won’t be enough to stay competitive. At the same time they must develop a seamless end-to-end digital business model, which runs from advice and origination all the way to claims, and combines the best of humans and machines in a ‘bionic’ organization.”
That’s no easy task for re/insurers, as it requires a complete transformation from what was an unwieldy, perhaps not fit for the future, human-run organisation, to a technology led and efficient operation, prepared to utilise the most effective and efficient techniques available to achieve the transfer of risk for its clients and customers.
At the core of the insurance and reinsurance market of the future will be; distribution reach or ability to originate risk, efficiency of operations and value-chain, cost-of-capital (owned or managed), technology to analyse/price/structure/value risk, and the ability to monetise expertise.
“The insurers that are successfully tackling these challenges are defined by both their technological capabilities and their readiness to continuously bring innovation into the mainstream of the business,” O’Hearn said.
Openness to change and readiness to innovate are key, but not always easy traits to embed in organisations with significant heritage.
For the CEO’s fearing change, the time to invest or set up alliances is now, but spending their way into the future won’t be easy.