Insurance/Insurtech Trends in North America!
Following on from last week's Regional Profile for Europe, we now move on to our Regional Profile for North America. Over the coming weeks, we will be taking you through dedicated profiles for all the world's major insurance markets, each taken from our inaugural Insurance Nexus Global Trend Map, an in-depth quantitative-qualitative account of Insurance & Insurtech trends internationally.
Our North America profile combines quantitative insights derived from our global survey, some of which we covered in our earlier post introducing our Regional Profiles, and qualitative perspectives from our two in-region commentators:
- Chicago-based Stephen Applebaum, Managing Partner at Insurance Solutions Group
- Boston-based Matthew Josefowicz, CEO at Novarica
Firstly, a quick overview of the salient stats from our survey, as they manifested themselves in North America ...
Key Stats: A Quick Recap
--- i) The External Challenges: North America
In comparison, this comes 4th globally and only makes 6th place in Europe – which, as we indicated in our Europe Profile, likely reflects some parts of the world being more exposed to disasters (and hence concomitant risks) than others. Further down the table, 'Increased competition' moves up a place, knocking 'Increased regulation' down one spot to 7th.
--- ii) The Internal Challenges: North America
Looking internally, the top challenges reflect the global trend we outlined in our earlier post on Industry Challenges, except that ‘Legacy systems’ wrests the top slot from ‘Lack of innovation capabilities’ (which, by way of comparison, comes first in Europe and Asia-Pacific).
--- iii) Insurer Priorities: North America
These are the priority areas on which North American insurers lead our other regions, out of our shortlist of 15 priority areas as presented in our earlier post on Insurer Priorities:
--- iv) North America Top Trumps
The table below is in the style of Top Trumps, with a regional score for each characteristic — we have tables for Europe and Asia-Pacific in their respective profiles too. A full explanatory key is included within the full Trend Map, which you can of course download for free whenever you like.
Today's discussion of North America falls into 5 short chapters, the first two of which we will be covering in today's post:
- Insurers’ renewed focus on their primary underwriting business in the face of low interest rates and impending Insurtech disruption
- The rise of the ‘new consumer’ and how this is changing the insurer-customer relationship
- Customer-centricity as the prime mover of distribution and product
- The impact of legacy systems and regulation on (re)insurers’ innovation and transformation efforts
- How insurers are to unlock new sources of growth in a mature market
1. In the Eye of the Insurtech Storm
North America, as we have defined it (that is, the USA and Canada), has a total population of around 350 million people, making it one of our smaller markets at less than 10% the size of Asia-Pacific. Not only are we looking at a smaller population, but it also has the biggest middle-class skew of any of the regions we deal with in the course of our Regional Profiles.
This is predominantly a market of existing customers, and the low-end market opportunity is much less substantial than in Asia-Pacific, Africa and LatAm for instance (get our dedicated profiles for all these regions by downloading the full Trend Map here).
So, while insurers in the developing world have to juggle the needs of an emerging middle class and those of the uninsured millions (often microinsurance candidates), in North America they can focus more single-mindedly on retaining and growing the custom of their existing policyholder demographics. Unsurprisingly then, North American respondents exhibited the most focus on customer loyalty of all our regions.
North American respondents exhibited the greatest focus on customer loyalty out of all our regions
This focus on the existing business has become paramount with the continued pressure (re)insurers are facing from low interest rates (admittedly, a global phenomenon), which is limiting the returns they can make on their investments and shining a spotlight on the profitability and sustainability of underwriting practices.
‘The real challenge is focusing on the underwriting itself and using data, analytics and market segmentation in order to really maximise underwriting profitability,’comments Novarica's Matthew Josefowicz.
Insurers must now contend with new market entrants, such as Insurtechs, who raise the bar for cusotomer service and lower it for price ...
Insurance has always been a cyclical industry in this sense, moving with interest rates, so insurers – at least looking at the big picture – are used to periodic readjustments. However, this time is shaping up to be different in the sense that their underwriting market is no longer being served to them on a plate in quite the same way as before. Insurers the world over must now contend with new market entrants, such as Insurtechs, who are raising the bar for customer service and lowering it for price.
"Innovative products and the market segments they support are underpinning the design of new Insurtech business models, with companies like Lemonade, Slice, TROV, Cuvva, Surify and others establishing new model footholds in the market."
Denise Garth, SVP of Strategic Marketing, Industry Relations and Innovation at Majesco
While insurers are already having to up their game in order to keep their underwriting customers, the overall turn towards Insurtech is still in its infancy and also varies considerably from region to region. So, at what stage is this customer-led disruption in North America?
The indicators we have gathered across this content series lead us to believe that North America is late – though only marginally – compared to Europe and Asia-Pacific, and we will substantiate this perspective in due course.
Looking at things at the highest level, our most telling stat is the ‘disruption score’ for North America, from our earlier Insurtech Perspectives post. Only a quarter of (re)insurers in North America indicated that they were losing market share to new entrants, whereas this figure rose to nearly half of (re)insurers in Asia-Pacific (something we explore in our forthcoming Profile for Asia-Pacific).
Whether interpreted literally or as an indication of carriers’ current mood, this implies that disruption – while certainly present – has not yet reached the fever pitch in North America that it has elsewhere, and potentially explains the lower prominence assigned to ‘Lack of innovation capabilities’ among the internal challenges for the region (see the opening section of this post, as well as our introductory post the our Regional Profiles).
Speaking primarily from a P&C/General perspective, Stephen Applebaum acknowledges that the USA market at least may be somewhat of a laggard, although he is careful to distinguish it from Canada. He places the Canadian market ahead of the USA in terms of innovation and technology adoption.
Applebaum ascribes the notional leadership of the Canadian market to a mixture of culture, infrastructure and population size (Canada having approximately 10% of the population of the USA). We also call attention to Canada’s different approach to the broker market, its different regulatory regime and its different methodologies for data exchange. All of this said though, the sorts of consumer needs insurers in each market are trying to serve are fundamentally the same.
In any case, regardless of where the North American market stands today, Applebaum believes that a huge amount will change over the coming 18 months and beyond. This is due partly to the steady globalisation of technology (Applebaum cites as an example of this the recent push by Italian Octo Telematics into the US market), partly to the size of the prize inevitably attracting takers.
This prize would appear to be more tantalisingly poised in the US than elsewhere, if indeed there is a slight lag in that market, as this makes it easier still for light-footed new entrants to outflank incumbents and capture market share. We have seen the rise of several high-profile Insurtechs in the USA, such as Lemonade on the home-owner and Insureon on the small-business side, and we note also the recent estimate that nearly half of investment money for Insurtech in 2016 went to US companies.
"You have to change your culture and embrace experimentation. We’ve set up labs around the world where we incubate innovation. It’s about embedding it through the employee base and being attuned to the customer. And it has to be top down to be effective."
Cindy Forbes, EVP & Chief Analytics Officer, Manulife Financial
If this gives the impression of a silently massing army waiting to storm the sleepy, unguarded border forts of insurance, then that is certainly a long way from the truth. Incumbent insurers in the USA are waking up to the threat of disruption in a big way. Applebaum, once again talking primarily from a P&C/ General perspective, explains the twofold consideration going through insurers’ minds:
‘The first point to remember is that, while disruptors may still represent less than 5% of the P&C insurance market today, 5% of $200billion is a significant amount of revenue lost from the traditional carriers,’ he states. ‘And the second point is that the rate of growth seems to be accelerating fairly rapidly, so that what is 5% today could very well be 25% five years from now, and that suddenly represents a material challenge to the industry. Nobody is ignoring it because they know that the adoption curve is going to look like a hockey stick.’
This recognition on the part of incumbents is finding expression in their recent Insurtech investments – so it is misleading to interpret the high investment figure we invoked earlier as signifying only what is stacked against insurers. One of the main reasons it is being driven so high is in fact because of legacy insurers trying to get in on the action.
Josefowicz, whose clients at Novarica include numerous Fortune 100 insurers, also acknowledges insurers’ growing preoccupation with Insurtech.
‘The number of insurers that have internal development funds and investment funds is skyrocketing, as everyone is trying to stay in touch with all these new developments and approaches to using technology in the industry,’ he explains.
‘I don’t think it’s that the insurers believe the companies they’re investing in are going to be the next Facebook or Snapchat but I think they do believe that these companies are going to show them the way and they’re going to be able to learn a lot from them. Not just in terms of how to engage with customers but also how to use analytics and digital channels effectively, as well as all kinds of innovative practices that are difficult for a mature company to come up with on its own.’
"The Insurtech space got crowded in the last 18 months, with significant funding for new entrants. Now the rubber's hitting the road as startups bring products to market. It should be interesting in the coming year to see who's able to navigate the world of regulations and carrier relationships, and whether they're able to do it at scale."
Ted Devine, CEO at Insureon
Get the complete profile for North America straightaway as part of the full Insurance Nexus Global Trend Map ...
2. Rise of the ‘New Consumer’
As intimated in the foregoing section, the 21st-century customer represents the ground on which Insurtechs stand to challenge insurers: by raising the bar for customer service and lowering it for price. In line with this, both Josefowicz and Applebaum identified changing customer expectations – that is, how customers want to buy insurance and interact with insurers – as a key challenge for insurers in North America.
"Insurance in the US has long been a product-driven, not a customer-driven industry. Faced with high churn and the spectre of ambitious new market entrants, insurers are finally waking up to the need to better engage and service customers. To this end, we are increasingly seeing the creation of cross-functional customer-experience teams within carriers."
Mariana Dumont, Head of New Projects at Insurance Nexus
We are witnessing what Applebaum describes as the rise of the ‘new consumer’, and he believes furthermore that this is the number one challenge facing insurers in the region:
'It’s not only the millennials and the emerging demographic groups but basically the new customers who are almost always connected digitally,’ he elaborates. ‘They have come to expect that all of their interactions will be digital.’
In our section on Marketing and Customer-Centricity, we characterised North American insurers as having a marginally less 'problematic' relationship with their customers. While the customer certainly remains a core strategic priority, respondents in this region are marginally less focused on it than in Europe and Asia-Pacific. Below are certain measures that bear this out:
- North America achieved the lowest priority score for ‘Customer Centricity’ out of all our global regions (see our earlier Insurer Priorities post)
- Chief Customer Officer was a relatively unimportant new appointment within North American companies, at least compared to the prominence attained by Chief Information Security Officer, Chief Data Officer and Chief Analytics Officer (see Services, Investments and Job Roles)
- In our regional assessment of internal challenges (see Industry Challenges), North America is the only region in which 'Lack of innovation capabilities' fails to make the top spot
At the end of our section on Marketing and Customer-Centricity, we tentatively concluded, based on this constellation of factors, that North America has been fractionally late on the current customer-led disruption of insurance compared to our other regions; if customer expectations are more easily met, then this will result both in the customer rising less high up the priorities ladder and in current levels of customer-centricity being deemed more adequate. This is of course a question of degree, as the customer is still critically important to North American insurers – as we shall see!
‘I think that in a lot of ways North American consumers are behind other advanced markets when it comes to insurance,’ comments Josefowicz. ‘For example, in the UK a large portion of small-business insurance is now bought online. Here, that’s still very much an emerging segment of the market. The heavy shift to direct auto purchase in other mature markets is evident here but not quite as developed.’
At various points in this report we have tied the current consumer-led disruption sweeping through insurance (and all consumer industries for that matter) to changes in distribution. Digital channels have given new, non-traditional players with alternative products and services access to insurers’ customer base. This added element of competition – on both price and customer service – has fundamentally changed the way customers relate to all the products they buy, and this in turn is driving change within the insurance industry.
Digital channels have given new, non-traditional players with alternative products and services access to insurers’ customer base.
In line with this view, and with our hypothesis that disruption has not yet arrived with full force in North America, we expected the distribution landscape here to be relatively more stable than elsewhere. This is indeed the impression that we have received:
- Among our three key regions, the direct digital channel appears to feature least prominently in North America
- While our respondents in all our geographies were increasing their distribution through affiliate partners, our broader research points to this channel being less well developed in North America than in, for instance, Europe and LatAm
"Digital direct is new in Canada and there’s a certain profile that it’s most suitable for. We are looking to target and attract the right customer. Then we want to capture as much data as we reasonably can along that journey so we can attract and convert customers while also understanding what’s working effectively to optimise our marketing efforts."
Michael Shostak, SVP and Chief Marketing Officer at Economical Insurance
These measures suggest that traditional channels are indeed relatively more in intact in North America than elsewhere, and this may be more the case in the USA than in Canada. Josefowicz puts this down in part to the innovator’s dilemma, whereby the need to innovate is mediated by the fear of cannibalising the existing business:
‘If all your money is coming today through the broker channel, it’s very difficult to plan for a future where that’s not true, without disrupting the present,’ he explains.
As customer behaviours continue to evolve, we expect to see growth across North America in the direct-to-customer channel. This, along with the steady growth in affiliate channels, will increase the number of channels that North American insurers must manage.
‘I think that the US will start to look more like Europe in terms of the distribution models across the different product lines,’ Josefowicz comments.
‘We don’t believe that intermediary distribution is going to disappear in North America but it is already losing its monopoly hold on the market. So what insurers are going to be dealing with is not a future where everything is direct, but a future that is much more multichannel.’
We will continue to explore how insurers in the region are reacting to the rise of the 'new consumer' in our follow-up post, which concludes our Regional Profile on North America. Remaining focal points to cover include:
- Customer-centricity as the prime mover of distribution and product
- The impact of legacy systems and regulation on carrier innovation and transformation efforts
- How insurers are to unlock new sources of growth in a mature market
After North America, we will be moving on to our dedicated profiles for Asia-Pacific, LatAm, the Middle East, Africa and Central Asia. which you can of course access, along with last week's Europe profile, by downloading the full Trend Map (it's free!).
For any inquiries relating to the Insurance Nexus Global Trend Map, this on-going content series or next year's edition, please contact:
Alexander Cherry, Head of Research & Content at Insurance Nexus (firstname.lastname@example.org)