Insurance 2020: Turning change into opportunity
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www.pwc.com/insurance
Insurance 2020:
Turning change
into opportunity
Insurers who anticipate and
plan for change can create
their own future
January 2012
Contents Introduction 01 The key STEEP drivers 02 Implications for the future of your business 12 How to design your business strategy 16 to face the future Giving you the edge 19 Contacts 20
Introduction
The future may be hard to predict, but need not be hard to prepare for. Insurers are grappling with the
tough new business, investment and regulatory environments that are emerging from the financial crisis.
The industry, however, also faces far broader challenges. Demographic shifts, the rise in power of the
emerging markets and changing customer behaviour will all help shape the sector’s longer term future.
Insurers who can anticipate and plan for change can create their own future. Others who are ‘fast
followers’ will need to be agile enough to recognise the leaders and adopt similar strategies. The ‘survivors’
are likely to be focused on short-term performance. Which one are you?
In this report we take a two-stage
approach (see Figure 1) to help you 11. nalysis of the key market
A
drivers. We have conducted 22. Implications for insurers’ business
models. Our second stage is an
address this key question and to extensive research to develop a ‘inside-out’ business design analysis,
develop a strategy to exploit the set of future scenarios. We have which evaluates the impact of these
opportunities the future holds: based our research on an ‘outside- different scenarios on developed and
in’ scenario planning analysis emerging market insurers’ strategies.
that takes into account the impact We also consider the changes
of global social, technological, you could make to your business
environmental, economic and design to avoid risks and maximise
political factors (STEEP) across three opportunities. The business design
major insurance industry sectors framework can help you to exploit
– personal, commercial and life, the data and insights in this study,
annuity and retirement. We take into and tailor them to your specific
consideration more than 30 different strategic direction and unique
drivers that could potentially impact capabilities.
insurance, globally. (We describe in
this document the drivers, but due to
space limitations do not cover each
one in depth.)
Figure 1: Scenario planning based business design
Factors & Industry
Mega trends Sectors Scenarios Strategies Design levers
Drivers impacts
What Social, What mega trends How do these What are the What are the key Given their strategic What design levers
Technological, can be inferred from factors, drivers, primary dimensions industry impacts intent and core should companies
Environmental, the STEEP factors and mega trends and macro- that arise out of capabilities, what use to execute
Economic, and and drivers? change by the scenarios that can the three sectors of strategies can their strategies to
Political (STEEP) three insurance be mapped from insurance? develop and exploit the uncertain
factors and its sectors – personal the ‘outside-in’ emerging market and fast changing
component drivers lines, commercial analysis? insurance players future?
impact the future? lines, individual adopt to prepare for
life, annuities and the future?
retirement?
“Outside-in” Scenario Planning Analysis
“Inside-out” 3D Business Design Analysis
Source: PwC analysis
PwC Insurance 2020: Turning change into opportunity, January 2012 1
The key STEEP drivers
We have explored the five STEEP
Figure 2: STEEP drivers and factors
drivers to identify 32 factors that we
believe will have an impact on the
insurance industry (see Figure 2). STEEP
Social Economic
factors have an impact on all sectors of
Customer Behaviours Demographic Shifts Urbanisation
insurance – personal, commercial and
– Social Networking – Dynamics of the New Growth Opportunities
individual life, annuities and retirement Middle Class
– Customer Expectations Fiscal Pressure
– but not all changes will affect insurers – New Family Structure Inflation/Deflation
– Risk Awareness
positively. Economic growth, for – Dependency Ratio Risks Sharing & Transfer
– Health
example, in the short to medium term – Aging Social Security & Benefits
Talent Drain
will be stronger in emerging economies. Distributor Shift
Stakeholder Trust
Forward-looking insurers in developed Corporate Social Responsibility
Partnerships
countries, however, can still grow
in their local markets by exploiting
socio-demographic and technological Technology Political
trends, while at the same time targeting Information & Analysis Regulatory Reform
emerging markets for growth. Similarly, Devices & Sensors Environmental Geo-political Risk
insurers from emerging economies have Software & Applications Climate Change & Catastrophes Rise of State-Directed
Capitalism
an opportunity to reshape insurance Medical Advances Sustainability
Terrorism
products for their local markets while Pollution
Tax Treatment
expanding on the global stage to build
Sharia Compliance (Takaful)
their technical expertise.
Source: PwC analysis
Although no one can predict exactly
what STEEP changes will occur in the
next decade, we believe five key mega- • Social: The balance of power is • E
conomic: The rise of economic and
trends will influence the insurance shifting towards customers. political power in emerging markets.
sector. There are many more to consider
(review the scenarios described in • T
echnological: Advances in software • P
olitical: Harmonisation,
Figure 3) and with our research in place and hardware that transform ‘big standardisation and globalisation
we are happy to walk you through them, data’ into actionable insights. of the insurance market.
but in this publication we will focus on: • Environmental: The rise of
more sophisticated risk models
and risk transfer to address the
increasing severity and frequency of
catastrophic events.
2 PwC Insurance 2020: Turning change into opportunity, January 2012
Figure 3: STEEP Drivers: The range of possible scenarios you face
Our detailed analysis of over 30 key STEEP drivers has enabled us to determine a range of possible macro-scenarios that the insurance industry faces.
These macro-scenarios underpin the implications we have drawn for the future shape of the insurance sector.
Regressive Combination of factors Progressive
1 2 3 4 5
Social Customers Distribution disruption in Distribution disruption Distribution destruction, Distribution destruction,
predominantly seeking which multiple channels where integrated multi- where customers buy where self-forming
face-to-face interactions compete for customer channel interaction is directly from carriers. groups of customers
with intermediaries. interaction. the norm. negotiate bulk purchases
from carriers.
Technological Insurers face increased Insurers continue to Sophisticated Sophisticated Sophisticated
data overload, quality manage information information analytics information analytics, information analytics
and privacy issues, and overload and ever- becomes the new sources of progresses to a point
cyber threats, resulting increasing sophistication key determinant information (from where no more useful
in a regression to ‘gut- of analytical techniques of competitive mobile sensors), information can be
driven’ decision-making. that require ongoing differentiation, which and underwriting extracted and all key
investment to keep pace underwriting talent talent become the decision-making has
with competitors. key determinant been automated;
of competitive competition shifts
differentiation. to prevention and
productivity gains.
Environmental With catastrophic Insurers will continue Insurers will continue Catastrophe modelling Advanced early warning
events on the rise to rely on catastrophe to rely on catastrophe gets more sophisticated technologies and new
models, but regulatory models and sell and uses advanced, early risk transfer/sharing
to accurately predict restrictions will prevent innovative catastrophe warning technologies to mechanisms with public
them, insurers will exit them from restructuring insurance products and private enterprises
innovative risk transfer/ through securitisation catastrophe-prone areas. reduce human and
sharing deals. and reinsurance. property loss from
catastrophic events.
Economic The world moves Emerging market As developed market New emerging market Truly global markets
from globalisation to insurers grow in scale insurers enter emerging insurers move into with products that are
regionalisation and and importance, and markets, margins in developed markets able to integrate multiple
insurers operate in and limit opportunities for these markets decline. and become global parts of the value chain,
developed market businesses. regardless of location.
to narrow boundaries. insurers.
Political Governments in both Emerging markets erect Majority of regulations Emerging markets and The regulatory climate
developed and emerging more onerous regulations focused on banks, and developed markets improves with greater
markets enforce equally than developed markets’ insurers in developed and enact less burdensome harmonisation across
burdensome regulations emerging markets are able regulations and emerging countries (and within
on insurers decreasing and limiting control to get away with minimal markets relax their states in large countries).
of developed market regulatory changes to regulations to ease the Regulatory harmonisation
insurers. pricing, coverage, rates entry and control of leads to standardisation
and reserves. developed market insurers across products and
into emerging markets. practices.
Source: PwC analysis
These changes will substantially impact buying power of virtual communities.
Social: The balance the insurance sector: The growth of social networking – one
of power is shifting • M
ore and more insurance will be
of the fastest ever global adoptions –
will help shift the balance of power
towards customers ‘bought’ by customers as opposed to
towards customers. In just six years
being ‘sold’ by agents destroying the
since its launch, for example, Facebook
New and ongoing social trends will age old wisdom of ‘Insurance is sold
has attracted over 800 million users.3
shake up traditional business patterns in and not bought’. This fundamental
As consumers become even more
the insurance industry, resulting in an shift will force insurers and agents
comfortable with social networks several
increase in consumer power: to re-examine their roles in the
scenarios are likely to develop:
insurance value chain and become
Customer expectations: Customers
more relevant to the end-customer • P
eople exchange more personal
(consumers and businesses) are
(consumer or business). information and start building
increasingly demanding simplicity,
networks of trusted friends, family
transparency and speed in their • C
ustomer expectations of simplicity
and acquaintances, shifting the
transactions with businesses, including and transparency will foster
balance of trust from insurance
insurance agents/advisers and carriers. innovations in product/service
agents and advisers to online
The relentless march of online and design and delivery. Leading insurers
communities.
mobile technology is continuing to fuel will get better at targeting customers
this change in customer expectations. and customising product and service • O
nline social networks wielding
attributes to meet their specific substantial purchasing power become
In a recent survey of US consumers,
needs, amassing greater customer new group insurance channels,
more than 32% of all respondents – and
surplus. benefiting from information-driven
50% of those aged 18 to 25 – said they
online intermediaries.
prefer to work directly with insurance • M
obility and speed of service
carriers.1 This ‘push’ towards direct demanded by customers will • E
ventually, online social networks
interaction will continue across both translate into investments in mobile become pooling mechanisms
personal lines and individual life and interactive technologies for for self-insurance, changing the
insurance sectors. In addition, the online multimedia content creation and role of insurers at a primary level
world is also becoming increasingly distribution as well as transactional from product manufacturers to
mobile as smartphone and tablet use capabilities across multiple administration service providers.
increases and fuels the demand for digital platforms.
localised information, available
Social networks: The rapid adoption
anytime, anywhere. By 2014, for 1 Source: Coverhound: Car Insurance shoppers still
and fast evolution of social networks will
example, the number of mobile prefer to deal with local agents over direct carriers,
continue to empower both consumers January 2011
internet users is expected to overtake 2 Source: mashable.com: mobile by the numbers
and businesses to communicate more
desktop internet users.2 (infographic), March 2011
transparently and to harness the 3 Source: Facebook statistics, November 2011
4 PwC Insurance 2020: Turning change into opportunity, January 2012
To harness the ‘big data’ trend, global
Technological: investment in advanced analytical
Advances in software techniques is increasing in order to
develop the capabilities to process large
and hardware are volumes of unstructured and multimedia
transforming ‘big data’ data, such as continuous real-time video,
life blogging and social chatter. These
From distribution into actionable insights advances will lead to software – and
dominance to As the insurance industry reaps
eventually hardware – that can translate
‘big data’ into actionable insights.
distribution productivity gains from the most recent
wave of automation, new technologies Advances in Artificial Intelligence
destruction are significantly enhancing operational techniques, such as machine learning,
efficiencies, increasing revenue natural language understanding
Historically, the insurance opportunities and improving the and intelligent decision-making will
sector has been dominated by customer experience. The important allow insurers to advance from using
intermediaries who have played the new technological developments for the technology for transaction processing
role of understanding consumer and insurance industry are: to decision-making. Today, analytical
business needs, and then matching techniques are used for making ad hoc
and tailoring insurance products and • The growth in smartphones
decisions using structured data.
solutions to their needs. Internet, and tablets, coupled with cloud
mobility and social networking computing, which provide constant By 2020, the use of unstructured data
have changed the game over the access to the internet. (e.g. social media, devices, video and
past decade and have created a new audio) will complement structured
• The explosion of computing
generation of customers who demand data, allowing insurers to make strategic
power and storage, enabling the
simplicity, speed and convenience forward-looking decisions.
accumulation and analysis of
in their interactions. These trends extremely large amounts of data. From a reactive to a preventative
will accelerate, leading to a situation business model: Commercial insurers
where customers will be more willing • The growth in active sensors and
are already using connected devices
to buy ‘direct’ using their online devices connected to the internet.
and sensors to develop risk and loss
and offline ‘trust’ network of friends Big data: The growth of internet management and improve productivity,
and family to guide their choice. connected devices and sensors, which but we also envision life and health
This will result in a fundamental are projected to reach 50 billion insurers using them as well.
redefinition of the role of advice and by 2020,4 will have a significant
the disappearance of distributors as a By 2020, a number of biotechnologies
impact on the availability of real-time
sales channel. will be available at the nanoscale,
information – a trend often referred to
providing the ability to embed devices
• 45% expect ‘distribution as ‘big data’. Insurers who can exploit
and sensors unobtrusively within the
destruction’ where customers buy this information for better pricing,
human body. The nanotechnology drug
direct and even form groups to underwriting and loss control will have
delivery market is expected to grow at a
negotiate bulk purchases direct. a distinct competitive advantage
CAGR of 21.7% between 2009 and 2014,
over their peers.
and reach almost $16bn by 2014.5 Such
Source: PwC Research from more than 150
C-suite executives polled at a presentation of the
nanotechnologies have the potential to
Future of Insurance to the International Insurance dramatically improve health outcomes
Society (IIS), June 2011.
through enhanced monitoring and
preventive control of chronic disease.
4 Source: CISCO, The internet of things: How the
next evolution of the internet is changing everything,
April 2011
5 Source: Companies and Markets, Nanotechnology in
Healthcare: Market outlook for applications, tools and
materials, January 2010
PwC Insurance 2020: Turning change into opportunity, January 2012 5
The medical service and treatment
model is evolving towards the
customisation of healthcare; the
resultant decrease in morbidity and
mortality will have a profound impact on
life and health insurers. Consumers will
eventually use personalised medicine
to create highly customised healthcare
solutions that actively change the
body’s biochemistry in response to From a structured data/tactical
risks and conditions that are unique to
each person. We anticipate that these decision-making/reactive business
medical advances will flatten the cost model to an unstructured data/strategic
curve as mortality and morbidity rates
dramatically improve. Some of these decision-making/preventive model
advances can also reduce litigation costs
as medical product manufacturers can Historically, the insurance sector has used, primarily, internal data in a structured
provide detailed evidence on the efficacy format to make tactical and operational decisions around which customers to
of their drugs. target, how to price the risk, how to estimate the losses, etc. However, in the next
decade the industry will increasingly use large amounts of real-time sensor data,
Commercial insurers have always
unstructured data from social networks, and multimedia data such as text, voice
focused on loss control and risk
and video. As sophisticated artificial intelligence techniques evolve, insurers will
management, but that trend will deepen
start using this unstructured data for forward-looking strategic decisions such as,
and expand into other lines of insurance.
which product or solution is most suited for a client given their current and future
Personal and life carriers will be able
situation, which emerging countries to enter as well as when and how proactively
to move from passively identifying
to manage customer experience to enhance retention of the most profitable
and pricing risk and reactively paying
customers. Insurers who are able to use real-time ‘big data’ and advanced
claims to proactively using ‘big data’
forward-looking simulation techniques will establish a significant
and actionable insights to reduce losses
competitive advantage.
and better manage risk. For life and
health insurers as well as annuity and
• In a recent survey, 49% expect new sources and techniques in the use of data
retirement income providers, monitoring
analytics to be the key competitive differentiator.
devices could significantly extend life
expectancies and increase the number Source: PwC Research from more than 150 C-suite executives polled at a presentation of the Future of
of years of active retirement life. Insurance to the International Insurance Society (IIS), June 2011.
6 PwC Insurance 2020: Turning change into opportunity, January 2012
continued fossil fuel use, pollution
Environmental: will remain a significant health Increased severity
The severity and issue, threatening the well-being of and frequency of
populations in both developed and
frequency of developing countries. Life and health catastrophic events
catastrophic events insurers will need to closely monitor overwhelming
trends in atmospheric pollution in
is increasing order to acurately assess risk in insurers vs technology
The severity and frequency of
different regions. and risk transfer
catastrophic events, both natural and Environmental measures will help easing the pain
man-made, have been increasing over mitigate the most serious consequences.
the past 20 years. Between 1990 and Renewable energy sources are projected
Historically, the insurance sector has
2009, hurricanes and tropical storms to account for 23% of electricity by
been good at developing catastrophic
accounted for 45.2% of total catastrophe 2035.9 Increased consumer investment in
losses,6 and the rate and intensity of models that capture known high
sustainable solutions (e.g. solar panels)
these storms is predicted to increase with will gradually create new modelling and severity/low frequency events (e.g.
global climate change. A large portion pricing risks for Property & Casualty earthquakes, tsunamis, etc). However,
of claims’ payouts result from business (P&C) insurers. most of these models perform poorly
interruption coverage losses – in the when it comes to unknown ‘Black
Managing these types of risks will Swan’ events. Over the next decade
Chilean earthquake, for example, over
require insurers to be more sophisticated the insurance sector could be
50% of claims were filed for business
in their risk modelling and innovative
interruptions and extra expenses.7 overwhelmed with uncorrelated
in structuring risk-sharing and risk
catastrophic events reducing capacity
In addition to catastrophic events, transfer deals. Catastrophe modelling
and raising prices. Alternatively,
insurers must also consider man-made will become more sophisticated and use
degradation of the environment. new sensing and monitoring
advanced, early warning technologies
Increasing energy consumption and to underwrite in specific, catastrophe- technology, together with risk
associated atmospheric pollution prone areas. Insurers who fail to keep transfer mechanisms, could cushion
will directly impact carriers’ risk pace with this increasing sophistication insurers and reinsurers against
exposure. The US Energy Information might be forced to exit markets in certain abnormal losses.
Administration, for example, predicts coverage areas, such as those prone to
world energy consumption will grow flooding or forest fire.
by 49% between 2007 and 2035.8 With
6 Source: Insurance Matters: Information for policymakers, Catastrophes:
Insurance Issues, June 2011
7 Source: Insuring Florida, Catastrophes: Insurance issues, October 2011
8 Source: US Energy Information Administration, World energy use projected
to grow 49 percent between 2007 and 2035; Rapid growth projected for
renewables, but fossil fuels continue to provide most of the world’s energy
under current policies, Press Release May 2010
9 Source: US Energy Information Administration, International Energy PwC Insurance 2020: Turning change into opportunity, January 2012 7
Outlook, September 2011
Economic: The rise
of emerging market
economic and
political power
The increasing attractiveness of the
emerging markets, combined with
uncertain growth in the developed world
and stricter regulatory guidelines will
make carriers re-evaluate their strategic
goals towards developing countries.
The E6 countries’ (China, India,
Brazil, Russia, Indonesia and Mexico)
proportion of global GDP has been
increasing over the past 20 years, and the
liquidity and debt crunch precipitated
by the financial crisis of 2008 continues
• In the developed world, the old • Government infrastructure
to affect developed economies far more
outnumber the young. In emerging investment, population growth,
than emerging ones. It is estimated that
markets (except China) the working new businesses and wealth creation
the E6 will contribute 47% of Global
age population will continue are driving growth in construction,
GDP growth between 2006 and 2020,
to outnumber the dependent land development, energy and
while the G6 will contribute less than
population, and thereby result in transportation sectors, all of
24% during the same period (Figure 4).10
more productive growth. which are creating a greater need
A number of factors are contributing for insurance.
• The rise of the middle class in
to the ongoing shift from a world
emerging markets is fuelling
dominated by developed markets to a
increased consumption, which is
world in which the majority of growth is
leading to impressive small
in emerging markets:
business growth.
10 Source: Economic Intelligence Unit, Foresight 2020
8 PwC Insurance 2020: Turning change into opportunity, January 2012The uneven distribution of economic
The rise of economic growth between the developed and
influence and power emerging markets creates different
scenarios for insurance industry
of emerging market competitive dynamics:
countries and • T
he insurance industry as a whole
emerging market could become more globalised as
countries harmonise regulations,
insurers standardise practices and distribute
products across borders (see
Over the past couple of decades the ‘Political’ on page 10). This could
world’s economies have become more lead to greater market share for
interdependent and this trend is likely global insurers, as well as economies
to continue. However, the power of scale and scope that drive the
and influence of the US, Europe and globalisation of the insurance
other OECD nations will wane as the value chain.
emerging markets continue to grow as
well as become the engine for global • C
onversely, twin-track growth
growth. As consumption in these and the loss of the developed
countries increases, the insurance world’s authority in the wake
market will grow, resulting in big of the financial crisis could result
opportunities for emerging market in greater protectionism by
insurers. The developed market countries or regions.
slowdown, due to the financial crisis, • I n-between these two extremes,
will accelerate this shift in power developed market insurers could
towards emerging market economies increase their attempts to find
and emerging market insurers. In a growth in emerging markets,
recent survey conducted by PwC: and or emerging market players
could expand into developed markets
• 30% believe new emerging for know-how and talent.
market insurers will move
into the developed world to
become global insurers.
• 28% foresee truly global markets.
Source: PwC Research from more than 150
C-suite executives polled at a presentation of the
Future of Insurance to the International Insurance
Society (IIS), June 2011.
Figure 4: E6 vs. G6 Contribution to global growth (2006–2020)
G6 Contribution to Global E6 Contribution to Global E6 vs G6 Contribution
Growth (%) Growth (%) to Global Growth (%)
29.1%
US China
UK India
23.6%
Germany Brazil
France Russia
47.3%
Canada Indonesia
Japan Mexico
0 5 10 15 20 0 5 10 15 20 25 30 ■ E6 ■ G6 ■ Other Countries
Source: Economic Intelligence Unit, Foresight 2020
PwC Insurance 2020: Turning change into opportunity, January 2012 9The developed market slowdown, due to the financial crisis,
will accelerate this shift in power towards emerging market
economies and emerging market insurers.
Outside the regulatory arena there are Terrorism. Over the past 30 years, there
Political: several additional political trends for has been an increase in terrorist attacks
Harmonisation, insurers to consider: around the world. Terrorists currently
attack global supply chains once
standardisation and Pressure on the solvency of social
every four days on average.13 Carriers
security and welfare programmes
globalisation of the throughout the world will increase
will have increased exposure as the
frequency of major attacks increases. In
insurance market because of rising dependency ratios.
addition, terrorist attacks often impact
Dependency ratios (defined as the ratio
multiple product lines (e.g. commercial
We see a range of potential outcomes of the number of persons aged under
property, business interruption, workers
from a regulatory perspective. 18 or over 64 to the number of persons
compensation, life and benefits), which
The financial crisis has enhanced between these ages) are expected to
are often modelled independently. As a
communication and dialogue between increase by an average of 14% in the G6
consequence, the potential losses from
and among the US, EU and emerging between 2000 and 2025.11 Using current
so-called ‘uncorrelated’ risk factors
market regulators: projections, the US Social Security Trust
could be large, requiring substantial
Fund will be depleted in 2037 and Social
• If regulators are successful at industrywide or state-provided capital
Security will be able to pay only 78 cents
negotiating and harmonising global to insure losses beyond a certain level.
in the dollar.12
insurance regulations, this could Further detailed modelling is required
lead to greater standardisation of Consumers lacking faith in the solvency to understand the capacity requirements
products and policies, and promote of social security programmes will for terrorism coverage.
more globalisation of the insurance begin to focus on providing their own
Geopolitical instability. Resource
value chain. savings for retirement, as governments
scarcity around the world is magnifying
pare back benefits. This will create
• On the other hand, regulators could the risks of geopolitical instability,
new opportunities for life and annuity
continue to develop new but different as evidenced by the current political
insurers, although governments under
(and potentially onerous) regulations upheaval in the oil-producing nations
financial pressure are likely to seek ways
in each market. of the Middle East and North Africa,
to reduce spending while increasing tax
or the ‘Arab Spring’. This has caused
• In-between these two extremes, it revenue. The preferential tax treatment
resource-consuming nations to reassess
is possible that emerging markets of life, annuity and retirement policies
their energy policies. We anticipate that
will prevent developed market may be viewed as an easy target for
the potential for fewer despotic regimes
players from entering their markets revenue generation. Insurers will
in the Middle East and technological
or put limits on their activities. (An need to adapt nimbly in order to
solutions to resource scarcity will lower
alternative intermediate scenario is weather these changes.
geopolitical risk over the next ten years.
that emerging markets encourage
developed market entry by
removing restrictions and easing
regulatory burdens.)
11 Source: Alliance for Health & the Future, The Dependency Ratio, Issue Brief Vol 2, Number 1
12 Source: Centre for Retirement Research at Boston College, The Social Security Fix-it Book
13 Source: Terrorists attack global supply chains every four days. SupplyChain Digital, April 2011
10 PwC Insurance 2020: Turning change into opportunity, January 2012Harmonisation and standardisation of insurance regulation,
products and practices
Over the past couple of decades the world’s economies have become more interdependent and this trend is likely to continue.
However, the power and influence of the US, Europe and other OECD nations will wane as the emerging markets continue
to grow as well as become the engine for global growth. As consumption in these countries increases, the insurance market
will grow, resulting in big opportunities for emerging market insurers. The developed market slowdown, due to the financial
crisis, will accelerate this shift in power towards emerging market economies and emerging market insurers. In a recent survey
conducted by PwC:
• 30% believe new emerging market insurers will move into the developed world to become global insurers.
• 28% foresee truly global markets.
Source: PwC Research from more than 150 C-suite executives polled at a presentation of the Future of Insurance to the International Insurance Society (IIS), June 2011.
PwC Insurance 2020: Turning change into opportunity, January 2012 11Implications for the future
of your business
We have analysed the STEEP factors and • Decreasing profitability. The • G
reater loss control. In the
drivers for each of the three insurance increased number of megacities immediate term, insurers will use
industry sectors. While some drivers, being built in areas prone to natural advances in telematics primarily
such as direct purchase, are common, disaster could result in catastrophic to price mileage-based insurance.
their impact could be greater in one losses. With no opportunities for But, in the medium term, they will
sector (e.g. personal lines) than in others diversification, this could result use telematics to proactively control
(e.g. commercial lines). Also, some in highly volatile earnings and losses and manage risk, which should
sectors will have additional drivers, such decreasing profitability for insurers. substantially enhance operating
as health advances and their impact on profitability. Over time, this
• Automated underwriting. As
life and disability insurance. competitive advantage will disappear
personal lines insurers expand
as automotive safety features
globally, ageing underwriting
and advanced analytics become
resources in the developed world
Personal lines and lack of underwriting skills in
commonplace.
We believe personal lines insurance will emerging markets will lead to severe Projecting future scenarios on a global
change in four fundamental ways: talent shortage. However, insurers scale with countries growing at different
who are able to recruit or retain rates, insurance sectors at different
• Greater commoditisation. Price top underwriters and use their stages of maturity, and insurance carriers
transparency, dis-intermediated knowledge to build sophisticated with different strategies and capabilities
direct purchase and virtual social predictive modelling should be is a challenging task. Rather than detail
community-led bulk purchase will able to gain greater market share. all different combinations of scenarios
all lead to greater commoditisation Automated underwriting, more coming out of the 32 drivers, we
of personal lines insurance. In the standard in the developed world, highlight here some key scenarios from
immediate term, insurers in some will be increasingly adopted in the perspective of illustrative insurance
emerging and underdeveloped the emerging markets as the carriers and their strategies. Scenario A
markets will be able to generate good globalisation of the personal lines highlights the story of a hypothetical
margins. As personal lines insurance sector continues. personal lines insurer and how it ‘Creates
becomes more global over time, its own future’ by expanding globally.
however, these margins will vanish in
a price-based, competitive world.
12 PwC Insurance 2020: Turning change into opportunity, January 2012Scenario A
In March 2012, the CEO of PL Insurer came out of a three-day strategy session
determined to shape the company’s future. PL Insurer, operating in more than
25 countries across the globe, was struggling to cope with tectonic social changes
in consumer attitudes and behaviours. An increasing number of customers were
migrating online, while use of mobile technology and social networks (including
in the emerging market countries) was increasing rapidly. The agency-based
distribution model that the company employed in 18 out of the 25 countries was
being challenged by the adoption of innovative usage-based business models and
telematics by the competition, as well as by increased capital requirements and
regulatory oversight across the world. The CEO was determined to reinvigorate
his global growth and innovation strategy, redefine the experience that consumers
and agents shared with PL Insurer, and to build an insight-driven business model
that would revolutionise decision-making across the organisation.
On 3 April 2020, as the CEO of PL Insurer is flying back to New York from
Shanghai, he reflects on the past eight years since the pivotal historic meeting with
his senior management in 2012. In that intervening period PL Insurer has become
the largest global P&C insurer, now operating in 150 countries, with a combined
ratio that is the envy of the industry. Over the past five years, profitability has been
steadily climbing and the company has a war chest of cash to acquire companies.
The regional distribution and operational model adopted by PL Insurer to serve
its six global regions acts as a hub to share best practices, increase efficiency
where possible through automation and centralisation as well as enhance
effectiveness by devolving decision-making to the regional or country level.
The SocInsurance global subsidiary is the fastest growing subsidiary of
PL Insurer, offering personal insurance to social networking affinity groups.
The advanced analytical and underwriting capability that SocInsurance has built
allows it to select targeted segments and tailor its products, based on their social
affinity. The patented interpretive underwriting engine offers PL Insurer a distinct
competitive advantage over its competition, which will continue for at least three
more years. The CEO is pleased that the steps he took to ‘Create the Future’ in
2012 have paid off so handsomely.
PwC Insurance 2020: Turning change into opportunity, January 2012 13Commercial lines Scenario B Individual life,
We expect commercial lines to
RegCo Insurer, is a regional annuities and
commercial insurer, focused on
experience the following significant
commercial lines insurance. In 2012, retirement
changes over the next decade:
large global commercial insurers, Environmental factors, urbanisation
• Virtual business affinity groups. capable of serving clients globally as and changing customer behaviours will
Social networking among small well as regionally, were challenging all greatly affect the life, annuities and
business owners will create virtual RegCo’s business. These competitors retirement sectors. These sectors will
business affinity groups that pool were operating at a combined ratio also experience significant changes in
their risks and retain greater that was hard for a regional player response to global demographic shifts
predictable layers of risk. Greater like RegCo to match. RegCo can offer over the next decade:
availability of information and more customised risk management
increased price transparency will solutions to its commercial clients, • New products for seniors.
facilitate this trend. but at a cost that adversely impacts An ageing population in most
its combined ratio, making it less developed countries will result
• Automated underwriting. Current
profitable. As RegCo started planning in new growth opportunities in
trends in automation of quoting
for its future, it decided to reinvent drawdown or retirement income
and underwriting functions for
itself by following other regional products, long-term care products
commercial insurance will continue
commercial insurers and move from and longevity insurance. While the
as insurers try to match underwriting
being a product manufacturer to a risk growth opportunities for managing
capacity with the complexity of
management solution provider. retirement portfolios before and
application inflow. The talent
after retirement is huge, insurers will
premium, especially underwriting By 2020, RegCo is flourishing and face intense competition from other
talent, will have a much greater has become one of the top 20 risk financial service providers, including
impact on commercial insurance than management solution providers. banks, wealth managers and asset
on personal insurance. Starting in 2012, RegCo progressively managers.
• B
usiness model transformation. withdrew from the product
manufacturing business and instead • Insurers step onto government
Real-time data from sensors and
partnered with brokers, reinsurance turf. The increasing dependency
devices will continue to transform
carriers and commercial lines carriers, ratio in most developed countries
the commercial insurance business
to transfer its customers’ risks. RegCo (and China) will increasingly strain
model. Commercial insurance will
built a leading risk management government support for the elderly
increasingly focus on providing
solution that utilised embedded and sick, leading to prolonged
standardised products and value-
sensors and devices to monitor employment and/or a reduction in
added services that involve working
commercial risks in real-time and the standard of living. This could
with the clients to proactively avoid
thereby control losses. Adopting a open up the opportunity for insurers
or reduce losses and manage risks.
fee-based solution and value-share to form public and/or private
In addition, risks are becoming more
business model, RegCo was able to partnerships to offer value-added
complex, offering the opportunity to
demonstrate the huge reductions solutions in response to a political
harness improved data analytics to
in losses its solutions could provide challenge.
develop new risk transfer markets.
and took a share of those savings. • B
etter risk management.
Similar to the scenario we discussed Its ‘fast follower’ strategy adopted in Greater availability of medical
earlier, the following Scenario B 2012 allowed it to flourish in the risk and behavioural data, along with
highlights the story of a hypothetical management space while some of its personalised medicine, will continue
regional commercial lines insurer and competitors were acquired, or went to drive greater sophistication in,
its success in adopting a ‘Fast Follower’, bankrupt. and automation of, underwriting
‘niche player’ strategy.
and provide the opportunity to better
manage risk and to expand
the boundaries of insurability.
• T
ailored products. For group
benefits, the responsibility for
protection and retirement savings
will continue to shift towards
the individual. This will result in
increasing voluntary coverage, as
well as worksite marketing.
Current trends in automation of quoting and underwriting functions for commercial
insurance will continue as insurers try to match underwriting capacity with the
complexity of application inflow.
14 PwC Insurance 2020: Turning change into opportunity, January 2012Changing cost structures. Insurers
Scenario C Some changes affect who fully exploit the potential offered
LifeCo is a global life, annuities and
everyone by the internet to transform their
cost structures will be able to scale
retirement (LAR) carrier operating in In addition to these sector specific themselves exponentially and leverage
the US, Europe and Australia. In 2012, factors, all insurers will be effected by their people, operations and technology
the low interest rate environment had the shift towards a global interconnected infrastructure globally:
decreased profitability and LifeCo’s model, automated and assisted decision-
legacy technology made it difficult • I nsurance distribution has
making, based on data and insights and
to adapt to the changing needs of its traditionally relied on a commission-
changes in the industry cost structure:
customers. LifeCo’s executive team was based variable cost model for sales;
faced with customers’ ongoing desire Globalisation and interconnectivity the route to increased sales was to
for simplicity, transparency and speed of risks. Apart from reinsurers and some ‘put more feet on the street’. With
as well as solutions to help them lead commercial line insurers, most others increasing investment in direct
healthier lifestyles. Other challenges have typically operated at the local or online channels, cost structures are
included data aggregation and value national level, and have been primarily moving towards a larger upfront fixed
extraction, staying ahead of medical involved in measuring risk exposures cost, but a lower ongoing variable
advances and developing products to and determining the premium that cost (provided you achieve the
accommodate longer lifespans and they need to charge customers to insure desired scale).
working years. Gaining approval from their risk. However, given the scale of
• O
ver the past two decades, insurers
the Board, LifeCo’s CEO embarked change implied by the STEEP trends, we
have invested heavily in operations
on a strategy to provide an industry- believe that more insurers will be forced
and technology, incurring largely
leading customer experience, develop to think globally. In the future, insurers
fixed costs to build IT infrastructures
an organisation focused on business will be more involved in deciding
capable of dealing with their
intelligence and create products and which geographies, products, customer
estimated customer base. Now, as
partnerships to reinvigorate LifeCo’s segments and channels will offer their
more and more applications migrate
growth across the globe. desired level of growth, profitability
to the ‘cloud’, information is available
and risk appetite.
Preparing for 2020’s first board anywhere, anytime and at very little
meeting, LifeCo’s CEO is proud of what Automated and assisted decision- cost. If you have more standardised
his executive team has accomplished. making. Following the automation and streamlined processes you
The strategy he implemented has made of transactional systems and the can use the cloud to move to a low
LifeCo profitable again, with one of automation of interactions with variable transaction cost model that
the lowest operating expense ratios in customers, we are entering a new scales exponentially.
the industry for the past three years. era of automating decision-making.
• W
ith the right talent and proper
By developing a personalised customer Extensive internal and external data, as
use of information and analytics in
portal while providing binding well as new artificial intelligence-based
underwriting, a greater number of
quotes in a matter of minutes, LifeCo techniques will expand the scope of
transactions can be automated. This
has become the first choice among assisted and automated decision-making
will allow the application of superior
agents and consumers. Hiring an of insurers across a variety of functions.
underwriting insight to a greater
experienced business intelligence (BI) These include identification of markets/
number of your transactions,
leader was one of the best decisions segments to enter or grow, customer
helping overcome the looming
the CEO made. Reporting directly to segmentation, risk selection, advice
talent gap as the current generation
the CEO, the BI leader enabled the engines that assist agents/advisers or
of underwriters approach
consistent flow of insightful, fact-based end-consumers, claims triaging, and
retirement age.
information, helping the executive proactive preventive loss prevention
team make the right decisions, and management.
faster. Utilising this information and
partnering with a medical device
company providing biotechnology to
monitor health, LifeCo developed low-
priced, consumer-specific, localised
products offering discounts in later
years for consumers living healthy
lifestyles. LifeCo developed novel long-
term care products for the increasing
elderly population and also entered
the Takaful market as it expanded into
the Middle East. As LifeCo’s product
breadth grew, the company expanded
its distribution channels by working
with local carriers and brokers in other
countries to expand its global footprint.
As the CEO adds the finishing
touches to his board presentation,
he realises that LifeCo has become
a true innovator in the industry and
he looks forward to conveying that
story to the board.
PwC Insurance 2020: Turning change into opportunity, January 2012 15How to design your business
strategy to face the future
There is no prescriptive solution In addition, the actions
about how you should prepare your that insurers choose to take will Create your future:
business for the future scenarios we depend not only on their national or Innovators
have described. regional markets, but also on their
strategic intent, core capabilities, Insurers who want to reshape the
While STEEP drivers impact all insurers
availability of talent, capital and future through innovation. Whether
globally, they have different levels of
organisational culture. these innovators are in emerging or
impact within each region and country.
developed markets, their focus will be
We have, however, identified four
on R&D, new product innovation and
broad strategic directions that
analytical decision-making techniques.
developed market and emerging
(See Figure 5 for an Innovator’s primary
market insurers could take, based on
areas of focus.) In light of the limited
their specific situations:
growth opportunities in developed
countries for traditional insurance
products, developed market insurers
will focus on creating value-added loss
control and risk management services.
Figure 5: Create your future - innovators and expansionists
This diagram shows the areas of primary focus for an innovator and an expansionist. As both look to reshape their business,
much emphasis is placed on front-office activity to disaggregate and re-engineer the value chain. Leaders in these areas will
need to be cognisant of the drivers of change and their implications; they’ll need to understand the potential impact on the
business and also how the business is likely to respond. As change will impact functional teams simultaneously, strong
communication, coordination and alignment of thinking will be required to succeed.
Front-office Middle-office Back-office
Growth strategy Innovation Operations UW & Risk Management
Marketing Sales & Distribution Technology Finance Capital Management
Channels Products & Services Information Asset & Liability Human Resources
■ Primary areas of focus
Source: PwC analysis
16 PwC Insurance 2020: Turning change into opportunity, January 2012Information-based services will be the
key innovation in developed markets, Create your future: Create your future:
using new sources of unstructured real- Expansionists Fast followers
time information to draw operational
and strategic insights. Insurers can use Carriers who want to reshape the Carriers who do not want to be the
these insights to underwrite and price future through expansion. They will first, but are adept at following the
risk, as well as reduce losses and manage be growth seekers and not necessarily leaders and establishing a strong
risk. In emerging markets, traditional innovators of new products and services. presence. Fast followers focus on
insurance products will need to be These carriers will focus on leveraging scaling capabilities across a broad
adapted to suit local needs (e.g. their capabilities (e.g. customer market. They are good at sensing new
micro-insurance or alternative understanding, product portfolio, innovations and market opportunities,
distribution channels). capital, diverse talent, Takaful) into and are agile enough organisationally to
adjacent and similar markets around the follow and establish a lasting presence.
globe. (See Figure 5 for primary areas of
As Figure 6 shows, the primary focus of
focus.) Expansion can come from moving
activity for fast followers lies away from
into new geographies, targeting new
the front office, demanding agility in
customer segments for existing products,
operations, technology, information
and/or introducing new distribution
and the back office to respond to
channels to reach customer segments.
new business models and create
operational excellence.
Figure 6: Create your future - fast followers and survivors
Front-office Middle-office Back-office
Growth strategy Innovation Operations UW & Risk Management
Marketing Sales & Distribution Technology Finance Capital Management
Channels Products & Services Information Asset & Liability Human Resources
■ Primary areas of focus
Source: PwC analysis
PwC Insurance 2020: Turning change into opportunity, January 2012 17Create your future: What do you want
Survivors to be?
Carriers who are focused on short- Each of the above strategies is not
term performance and survival. necessarily superior or inferior to
These carriers wait for a majority of the others. In a conservative industry
the industry to adopt new ideas and like insurance, there will be more
practices before adopting them. They survivors and fewer fast followers,
tend to be organisationally hierarchical expansionists and innovators. However,
and slow to respond, but can be having a clear strategic direction about
operationally resilient and efficient. ‘what you want to be’ will be critical
in determining how you design your
business to manage the risks and exploit
the opportunities that come your way.
What’s on your mind?
Figures 5 and 6 show the functions engaged in implementing and embedding a new business strategy. Your perspective on
change will be shaped by where you sit in the business. Here we’ve highlighted just a few considerations for the executive
team when formulating a new strategy:
CEO Who do you task with shaping the response to all this change?
Who will drive innovation to anticipate and respond to a changing market?
How do you decide which markets, countries and customer segments to target?
How do you prioritise your investments, and build the capabilities to survive and exploit the
changing market?
CRO How well is risk management embedded in your organisation and will you be comfortable with the risk
assessments on new products, services and distribution channels?
How can you be better prepared to anticipate and prepare for extreme ‘Black Swan’ events?
CFO What will be the impact on your message to the market?
How can you manage the capital and balance sheet structure of your company under changing regulatory,
market and rating agency expectations?
CMO How do you transform your organisation into a customer-centric organisation that is capable of marketing
and tailoring products to your consumers’ changing attitudes and behaviours?
CTO How do you ensure the organisation is not only aware of the emerging technology trends, but is also actively
involved in experimenting with new technologies as they come to market?
CIO How do you ensure that you build an information advantage enabled by rich, insightful data, fully supported
by a cost-effective technology platform?
Head of How are you ensuring that you can select and price risk appropriately, based on your risk appetite?
Actuarial
Head of Can you exploit new sources of information to improve better risk selection and pricing?
Underwriting
Head of Can you transform your organisation from paying claims to actively managing the losses based on real-time
Claims data and loss management techniques?
Head of HR How do you ensure that you continuously attract and retain the right talent within the organisation –
especially when the talent has to be culturally aware, multidisciplinary and global?
18 PwC Insurance 2020: Turning change into opportunity, January 2012Giving you the edge
Whether you are a personal, commercial, individual life and annuities, group benefits, or retirement
provider, you will see fundamental changes to your business models, value chain and how you acquire,
retain and train your highly skilled talent over the next decade.
Irrespective of whether you are a developed market, emerging market, or global insurer, you need to
anticipate these changes and prepare for growth.
PwC has developed and facilitated three types of workshops to help clients plan for the future:
Fiercest Competitor Future Positioning Global growth strategy
workshop series By utilising our detailed and
multifaceted approach to planning
Fiercest Competitor is a rich, fast- PwC works with insurance clients to
international growth, insurers can
paced experience that challenges identify the business drivers key to their
implement a well-planned and
leadership teams to imagine what could business and market positioning across
executable strategy. When expanding
significantly disrupt their sectors, and the five STEEP categories and then helps
internationally, insurers should consider
then think about how they can drive that the client rate those drivers against what
the unique profile of specific territories
disruption to elevate their businesses to they feel are important. After assessing
relative to their unique capabilities and
a higher level of competitiveness. We will the impact of each driver on business
positioning. Our proprietary frameworks
help you create your worst competitor functions, PwC will help clients make
and tools, including Growth Radar™,
nightmare, so you can identify your changes to their business design to avoid
Growth Navigator™, and Growth
organisation’s weaknesses and where risks and exploit future opportunities
Pursuits™ help insurers define
you need to modify its approach. This while equipping them to Act, Prepare
and execute their international
session helps you explore what plans and Monitor:
growth strategies.
you need to put in place to future proof
• P
repare: Determine ‘no regret’
your business and identify who is best
moves to be completed in the
placed to deliver.
near-term.
• A
ct: Start those activities that have a
longer lead time.
• M
onitor: Identify future signposts
to act at a later time.
This paper covers only a little of the picture and there is much
more to share and discuss. To find out how PwC can help you
understand what’s beneath the surface and support you in
the creation of your future, please contact the team listed
on the next page.
PwC Insurance 2020: Turning change into opportunity, January 2012 19You can also read
