As we have argued in the first two articles of this series, the UK motor insurance market is stuck in an inefficient model, putting customers at a significant financial disadvantage. On the distribution front the UK market has changed significantly in recent years, but the inefficiencies remain; notably the comparatively high level of premium, the costs of claims and the provisioning mechanisms. And that is not surprising: In a robust system, where everyone’s profitability depends on commissions and inducements, it is hard for one party to decide to break that mould and become, some would say, more ethical and customer focused. Alone, it would be suicidal, but it is possible collectively? Or does change have to be triggered by an outsider or the regulators, which could force current insurers to make potentially risky choices?
Could evolutionary digitalization lead to a holistic transformation? Some technological enhancements will doubtlessly appear, in the First Notification of Loss (FNOL) process, for example, connecting different tools like chat bots, artificial intelligence, and video inspection. Some block chain systems already exist and are helping to reduce both the claims handling costs and the indemnity spend significantly. These developments can certainly improve the customer experience, but what proportion of the cost savings will be passed on to the end customer? Obviously, some people still push the idea that digital and technological changes could transform the market; for example, if the bundling of insurance by car manufacturers becomes widespread, if carpooling increases significantly, if self-driving cars take a large market share, or if insurance-as-you-go matures sufficiently. With so many “ifs” circulating for some time now, we believe that it is unlikely that intrinsic digital changes may fully transform the insurance side of things – not, at least, in the near future.
Could disruption be triggered by the internet giants? It is tempting to think that internet giants like Google or Facebook have both the digital skills as well as the customer insights and numbers, and therefore the aggregating power to run an efficient PMI business. However, as we have seen earlier, the attractiveness in the business case of underwriting currently lies in the relationships between the insurers, the claims and the accounting side; not really an aggregator role, it seems.
Could an “Uber for car insurance” disrupt the PMI market in the years to come? We have seen emerging (and then disappearing) new “mutual” and “P2P” digital insurance concepts. As they tend to pay out the surpluses individually at the end of year to the insured and do not fully carry out the central role of risk mutualisation, they so far have had a hard time making significant forays into the market, yet alone survive. But one never knows…
Will regulation be the trigger for change? In its business plan for 2017/2018, the FCA includes a topic entitled: “Conduct a review of pricing practices in general insurance”. Given their professionalism and skill, they will naturally untangle the entire construct. Of course, there will be the usual debate about transparency, competition, customer value and fair pricing, but comparable situations in asset/wealth management have been tackled head on and resulted in major change.
In a nutshell, we believe that in the short term, the only trigger is likely to be the regulatory one. The FCA has already brought disruption to other markets and won’t hesitate to do so again. As such, PMI market participants will have two or three years to prepare for the changes to come. But what can or should be done in the meantime?
A preparation for regulatory changed can include several core initiatives:
Fundamentally, PMI market participants need to take a view on the likelihood of a major regulatory change and model potential regulatory scenarios. For the calculation of business cases, it is very useful to benchmark to a much more regulated market like Germany, or France with its insurance association DARVA. Besides modeling and setting up possible transition paths, however, there are various immediate measurements to get fit for change: When commissions and inducements are restricted, market intelligence and efficiency will play an even bigger role. Insurers thus will have to bring their IT and data landscapes up to speed, in order to provide informed services at lower costs. More specifically, it is worth evaluating shared service platforms for claims, connecting insurers, appraisers, and repair networks for an automated clearing of claims. No matter how – Better be prepared.