Has commercial insurance found its legs or is it still lagging behind?

"While some might like to slap commercial insurance with the dubious title of Laggard Lines, there are plenty of reasons to believe why 2017 will prove them wrong."

If the emergence of FinTech/InsurTech and the current zeal for digital innovation have achieved one thing, they have elevated ‘laggard bashing’ to something of a sport. The commentary typically goes that, for example, banking lags behind the retail giants of the digital economy, or insurance lags behind banking, or life lags behind non-life insurance. More often than not, laggard bashing doesn’t take into account the unique characteristics of its target. Commercial lines have found themselves in the crosshairs more than once recently, with many exasperated as to why InsurTech hasn’t yet made its mark. Is this laggard bashing fair? Perhaps not.

As we know, much of the recent wave of innovation in insurance has been focused on personal lines, with many InsurTechs either enabling carriers to better engage potential and existing customers or functioning as MGAs themselves, but the market for commercial insurance is firmly in the hands of intermediaries, with the effect that insurers have even fewer touchpoints with their customers.

"The progress of InsurTech in commercial lines will depend on partnerships between incumbents and start-ups."

The complexity of commercial industries places a premium on the expertise of brokers, which goes some way in explaining why we haven’t seen a similar emergence of single-point disruptors oriented around distribution. While talk of more direct selling in commercial lines is hardly new, and some disintermediation of brokers at the smaller, more commoditised end of the SME market might already be evident, the understanding of customer needs brokers possess means it is unlikely that they will be easily side-lined. Rather, InsurTech might well provide the means for brokers to better serve their clients.

It should also be noted that InsurTech-led innovation in commercial lines runs up against the inherent complexity of both the insured industries and risks covered, with the result that it is far more likely we will see new players picking off individual parts of the value chain rather than setting out, for example, to disrupt marine insurance in its entirety. The progress of InsurTech in commercial lines, then, will depend on partnerships between incumbents and start-ups: InsurTechs will look to exploit the scale and expertise of insurers while enabling the industry to improve risk management and deliver value-added services to its customers.

So, while some might like to slap commercial insurance with the dubious title of Laggard Lines, there are plenty of reasons to believe why 2017 will prove them wrong. Three areas ripe for change come to mind immediately:

1. I predict a rIoT – shaking up insurance with the Internet of Things

This is the big one. The Internet of Things promises to fundamentally transform the insurance proposition in commercial lines: the use of data from sensors and connected devices will enable a shift away from traditional forms of statistically based risk pooling towards real-time pricing and preventive models. Although the use case for connected insurance is more compelling than in other areas of the industry, the benefits can’t be expected to materialise overnight. Rightly, insurers and their clients have concerns about the level of investment required to establish connected commercial environments, not to mention data management systems and analytic tools. Yet the value to be gained for both is so great that we can expect to see more focused efforts emerge over 2017: from enabling claims prevention and more accurate usage- and risk-based pricing to providing a platform for delivering new services, the opportunities can no longer be ignored.  Critical to the progress of commercial IoT in insurance will be strong leadership on the part of insurance executives, who will have to drive IoT initiatives from the top down and embed them organisation-wide, and business leaders whose enterprises stand to benefit.

2. Small Business, Big Changes

While InsurTechs could find it difficult to make inroads into the larger, more complex areas of commercial lines, they may well be the motors of change in small business insurance. Whether they do so as full-stack carriers, niche MGAs or enablers for incumbents to go direct, InsurTechs are well positioned to roll out the kind of simple, modular products that are easy to understand and buy. Usage-based or on-demand models would allow for greater flexibility for small businesses; for example, the ability to switch liability cover on when on a job, rather than purchasing it annually, could reduce costs for tradespeople and improve customer satisfaction. Incumbents may hesitate on this front as the potential for channel conflicts and the investment required to deliver fully digitised customer experiences pose significant obstacles.

3. The Next Frontier – Cyber Insurance

The growing market for cyber insurance represents a significant opportunity for the industry: currently worth $2bn in premium worldwide, some project cyber insurance could reach $20bn in premium in the next 10 years. As fewer than 10% of companies purchase cyber cover today, and as the threats to businesses continue to evolve in terms of their potential to inflict serious damage, those who can move quickly and persuade their customers of the value of cyber products stand to take market share. Insurers have several challenges to overcome, however, before they can fully take advantage of this opportunity. Firstly, understanding of cyber across the industry is, broadly speaking, nascent: although some larger insurers have dedicated labs creating cyber specific products, the majority lack clear strategies around cyber managed by those with a relevant technical background. Partnering with start-ups would be one way to effectively bypass the obstacles that stem from a lack of in-house cyber expertise. Insurers also need to improve how they assess cyber risk, finding a way to translate security data into insurance data that takes note of the complex and dynamic nature of the risk involved.

Expect a big focus on Commercial Lines innovation at the leading InsurTech showcase, InsurTech Rising in 16-18 October, 2017. Click here for more >>