The combination of a wide range of powerful market forces threatens to undermine the earnings of many traditional insurers. To overcome these challenges, insurance providers need to start emulating fast-moving insurtech start-ups.

Insurance providers are facing an unprecedented range of challenges. Stagnant sales, low interest rates, rising competition, increasing customer expectations, growing regulatory requirements and widespread, technology-driven disruption of key markets, are threatening to significantly erode insurers’ revenues.

We estimate that this “perfect storm” of adverse forces could jeopardize 30 to 40 percent of the headline earnings of some traditional insurers by 2020. This is a huge threat.

How did we calculate this potential contraction in top-level earnings? Let’s break it down.

Loss of market share to new entrants: Companies new to the insurance industry, better equipped to satisfy customer demands, could erode a traditional insurer’s market share by as much as 8 percent, resulting in a drop of earnings before interest, tax, depreciation and amortization (EBITDA) of around 11 percent.

Loss of market share to progressive competitors: Established insurers, that have invested in digital technology to better meet customer needs, could cut a less responsive insurance provider’s market share by up to 5 percent. This would reduce its EBITDA by about 8 percent.

Premium reduction: A 1 percent dip in premium revenue, as a result of increased pricing pressures caused by, among other things, greater transparency in the insurance market, could knock an insurer’s EBITDA by as much as 25 percent by 2020.

Deteriorating efficiency: A half a percent year-on-year slide in efficiency due to insufficient investment in performance-enhancing digital technologies could reduce EBITDA by up to 6 percent.

Regulatory requirements: An annual 2 percent rise in regulatory costs over the next four years would cut EBITDA by around 4 percent.

These five big costs could, when combined, reduce an insurer’s EBITDA by 2020 by a staggering 54 percent. Allowing for an estimated 17 percent increase in total premium revenues, achieved by a 3 percent year-on-year rise in sales, this would result in a drop in EBITDA of 37 percent.

Such calculations are certainly not far-fetched.

Clearly, insurers need to react. They have to change radically how they conduct their businesses. Put simply, insurance companies need to become more like the many insurtech start-ups that are springing up around them. They need leaner cost structures, more flexible and agile distribution channels, and increasingly personalized digital products and services. This is a tall order. But definitely not impossible.

To transform their businesses and emulate successful insurtech start-ups, big insurers need to overcome three major obstacles:

Cumbersome organizations: Product development can take up to 12 months, as much as six times longer than at a typical start-up, and poorly integrated processes often hinder distribution.

Lackluster technology: Under-spending on technology has left many traditional insurers with poor innovation capabilities and an over-dependence on legacy IT systems.

Insufficient customer focus: Limited product differentiation, lack of personalized services and rigid distribution channels have distanced many big insurers from their customers.

In my next blog post, I’ll discuss how traditional insurers can transform their businesses to take advantage of the many challenges they face. This would enable them to not only avoid a major slump in EBITDA but instead more than double their headline earnings.

Until then, take a look at these links. I think you’ll find them useful.

The Digital Insurer: Creating a connected future

Technology Vision for Insurance 2016

Harnessing the insurance data and analytics exhaust stream

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