Don Allerston is a strategic business thinker and friend of Chemistry. In the midst of the COVD-19 pandemic, we asked him to share his predictions for the insurance industry in the coming year.
Q: What do you see as the key trends to look out for in insurance in 2020?
A: A few months ago, I would have pointed to a continuation of effort designed to influence and meet elevated regulation standards. That and a collective ‘scratching of the head’ when it comes to meeting end-consumer expectations. They were the industry’s hot potatoes.
But right now, with COVID-19 wreaking havoc on a global scale, I suspect attention has been refocussed. Balance sheet strength and the disproportionate challenges to new business flows, claims volumes and lapses/retention will have shifted the dial. With revenues threatened, current business models will show themselves to be exposed and vulnerable. Like a lot of industries, stability will be the focus right now. Those with restricted distribution channel access and product lines will be feeling particularly uneasy.
But it’s not just the manufacturers that will be looking over their shoulders. Less sophisticated broker and adviser businesses will be counting the cost of inward looking attitudes and an absence of investment. Anecdotally, business valuations had already taken a slide in the wake of the regulator’s thematic review of conduct and culture. But added to the mix now comes the pressure on new business and trail commission lines, threatened by the spectre of economic uncertainty. One of the biggest areas of complaint from customers is that they never see their adviser or broker. So when you’re dealing with an intangible product – one that costs a lot of money, that you’ve forgotten what it does and that you hope never to use – well, it’s easy to see why life risk products, in particular, are the first to get the chop at times of financial hardship.
And finally, let’s spare a thought for reinsurers – the businesses that help absorb claims costs and provide capital for insurance manufacturers to operate. They too will be squirming as the downturn in manufacturer performance extends to them. An over exposure to certain product lines (and mix), consumer trust of the brands they support, and capital strength will highlight particular areas of economic risk to their own balance sheets.
Q: How will insurance businesses adapt to meet these trends?
A: Without wanting to appear too glib, with some difficulty. There’s so much to consider: from cultural bias to technology platforming and ethics. It’s a question of doing the right thing by the consumer whilst balancing the interests of the broader shareholder and stakeholder groups – reinsurers, financial strength ratings houses and the regulator for example. And therein lies the pinch.
In my opinion, there are too many organisations wedded to dated wisdoms. In fairness, there is too much at stake for them not to be. Much will be made of a defensive stance. But selling to too few customers via an over dependency on powerful yet fragmented distribution channels and loss-making product lines make it the perfect storm in many ways. Neither are they helped by New Zealand’s ‘she’ll be right’ philosophical bedrock. Add to that the combined pressures of regulation, good customer outcomes and a locked down New Zealand and you have a petri dish of challenges that will test the industry’s resilience.
The answer? For one, I’d argue that there are too many players in the market. The cost overhead contained within these businesses places too much pressure on fair pricing models. New Zealand is a small market after all – there’s only so far you can go with scale efficiency in this context before investment return and pay-back calculations no longer make sense.
For broader strategic reasons, I can see some of the players taking this opportunity to divest components of their insurance portfolios. Others may retreat from the market altogether over the next few years. At the margins, one or two others may be staring uncomfortably into solvency challenges. Consolidation and down-scaling look to be another obvious bet given current economic indicators. Finally, profit warnings and operational pressures will force insurers to disappoint shareholders when it comes to dividend payments. The FMA, RBNZ and MBIE will be watching carefully. Now is the time to be delivering consumer confidence in New Zealand’s insurance market and do the right thing, not undermine it.
At the same time, I see a contraction in the breadth of cover across certain product lines. Disability insurances will make for low hanging fruit. For years, reinsurers have tried hard to mitigate their losses believing liabilities to be significantly under priced. But the ‘arms race’ behaviour brought about by insurers, themselves desperate to satisfy a demanding, if not sometimes unrealistic, distribution audience, has stymied such efforts. Not anymore. The regulator has already stepped in across the ditch. Reinsurers will not risk operating two-tier trans-Tasman standards. The collective ‘putting down of feet’ will force manufacturers to re-think and hopefully, re-educate their New Zealand distribution partnerships. The scene is set for change should appetites, and courage, follow.
And finally, eco-sytem type digital platforms should re-emerge as a focus for investment. There’s never been a better time to re-think the model and act on it. For the incumbents, the challenge to this will be a combination of internal governance practice, ego, culture and access to capital. In this regard, new entrants may feel imbued with a sense of optimism, unencumbered by legacy systems, long-standing relationships or fixed attitudes.
I hope I’m proven wrong, but I see many established insurers struggling to make the necessary transition well given the complexity of their operating models and industry accounting standards. The arguments will rage – is now the time for transformation? Or are we talking cautious incrementalism? Move too slow and insurers will be accused of being apathetic. Too quick and they risk being targeted as naïve.
Q: How will this affect the way we market products and services to consumers?
A: Financial services products beyond traditional banking are complex, dull and intangible by most persons’ standards. They’re often a distress purchase. I suspect we’ll see the continued rise of the customer experience model with marketing functions securing an opportunity to raise their game in an industry where they’ve struggled versus a dominant, ‘squeaky wheel’ sales machine. In turn, this could unlock the foundations for sustainable, well-designed product lines and brand positioning that better meet the needs of consumers and their wallets. Let’s not forget, the profile of New Zealand is changing and with it comes opportunity to grow and meet fresh appetites. From red to blue ocean as the theory goes.
Currently, product design is an amalgam of the emotional, a perception that you need to cover absolutely everything, points scoring and an all-consuming desire to keep distribution partners happy. But it needn’t be this way. There are alternatives for those courageous enough to try. For example, a passion of mine would see consumers given choice through well-conceived and curated eco-systems. Such a system would facilitate fit-for-purpose routes to market as well as neighbouring, non-financial services products and discounts, e.g. smart home peripherals like phone/voice enabled security systems. Yes this requires investment. But whoever takes on the challenge will onboard a significant and sustainable competitive advantage.
Q: If you were to put money on one thing that will transform the business, what would it be?
A: Stakeholder collaboration. Transformation (or incrementalism) isn’t a binary problem for the industry. And yet in some quarters it can often feel like that – analogue versus digital advice solutions being just one example. Stakeholder collaboration offers the industry a pathway forward. It will help remove a divisive position of ‘winners versus losers’ and replace it with a more progressive and optimistic agenda forged by those in and outside of the industry working together, unencumbered. A careful look toward what’s happened in other jurisdictions such as the UK, Asia and Australia allied to technological innovation in territories such as Asia, the US and Israel can combine to promise an exciting future.
Underpinning this critique is a recognition that these institutions do much good in our society. Risk management has a very important role to play. Just the same, and for the arguments put forward here, a post COVID-19 world must surely accelerate a necessary change of mindset. The landscape is set for the industry to evolve if it’s to deliver good customer outcomes, operate sustainably and remain relevant for a diverse, 21st century New Zealand.