A Look Inside the Crystal Ball

Once a hallmark of staid uniformity, the insurance industry now finds itself at the precipice of transformation. Enablers including technology, data and new sources of capital are helping nudge the industry forward, while derailers including fraud, cybercrime and legacy systems are pushing back against the speed of change. The unknowable direction and magnitude of forces such as medical science, regulation, public policy and the macroeconomy are amplifying uncertainty, further obscuring the future.

In the face of all this uncertainty, I foolishly agreed to make some predictions about what the future of the industry might look like. These predictions consider possible scenarios in which these enabling, derailing and unknowable forces interact, and the responses the industry might develop in those scenarios. Ultimately, history will almost certainly prove my prognostic capabilities to be sorely lacking, but the good thing about the future is that it is in the future. So, I will take this opportunity to stretch my imagination, throw some darts against the wall and name-drop enough buzzwords to make even the most shameless business consultant blush.

Prediction #1: The Robots Are Coming

You can call it artificial intelligence (AI). You can call it machine learning (ML). You can call it cognitive computing. You can call it robotic process automation (RPA). You can even call it Maurice (although that would be weird). The simple fact is we are in the age of the robots, and I, for one, welcome our new robot overlords. The way in which work gets done in the industry is on the verge of upheaval. I predict much of the front-, middle- and back-office work of today will become automated or move to a technology-enabled self-service model. This doesn’t mean all sales agents, underwriters, actuaries, customer service representatives and claims specialists are headed for the unemployment line—but they should prepare to adapt.

When electronic spreadsheets were introduced, I’m sure more than a few actuaries worried the end was nigh for the profession. After all, a spreadsheet could do the calculations actuaries were doing all at once (just press F9 and voilà!). But the actuarial profession quickly evolved, and rather than being made irrelevant by spreadsheets, actuaries became the masters of the spreadsheet. In fact, spreadsheets became an indispensable tool that in turn made actuaries even more indispensable. Actuaries moved beyond triple-checking each of their individual commutation table calculations to higher-value activities like developing new products, advancing stochastic risk modeling capabilities and even (occasionally) talking to other humans.

Given the exponential growth in processing speeds and performance, it may not seem fair to compare the spreadsheets of the 1970s with the advanced platforms of today. Current technology is moving even faster, and the derailers of cybercrime and legacy systems may make it even more difficult for established companies and traditional professions to compete in the post-robot world. But no matter how “intelligent” the technology of the future gets—and no matter what the latest post-apocalyptic Hollywood movies make you believe—at the end of the day, our relationship with technology is symbiotic. While the robots automate the tasks that can be automated, humans can focus on more stimulating higher-order functions like creativity, critical thinking, communication and compassion.

Prediction #2: Bundle Up

In many markets around the world, bundled products have been a growing trend for many years. The United States has seen a rise in the popularity of products that include various combinations of life, disability, critical illness and long-term care coverage.¹ I predict the future will see this trend become super-charged. Products will be designed to meet all of a consumer’s protection needs including mortality, longevity, morbidity, property and liability, while also supporting their holistic needs like physical, mental and emotional wellness. These future products will flex and evolve their benefits and coverage features along with the consumer’s life stage and needs. They will be priced more dynamically to recognize, incentivize and reward beneficial behaviors that leverage advances in quantified self-monitoring technologies.² Despite well-founded concerns around derailers such as fraud, moral hazard and adverse selection, insurers will continue to experiment with “on-demand” products that provide limited-time coverage for specific events such as driving, skiing or foreign travel. In short, the protection product of the future will protect what I want, when I want, how I want.

Demographic changes will drive much of the demand for these many-in-one product innovations. Millennial and post-millennial workers have a very different view of ownership and employment than prior generations. This creates different needs. For example, it may be more desirable to get protection as an Uber rider than as an automobile owner. Similarly, a loosening of the historically paternalistic relationship between an employer and its employees will lead to an increasing need for financial protection for contract workers and the self-employed.

Societies also are rapidly aging. Some say there will soon be more grandparents than grandchildren³ in the world, and that Japan sells more adult diapers than diapers for babies.⁴ As global population pyramids invert, we will see an unprecedented strain on the protection needs and dependency burdens of society. It will be up to the insurance company of the future to provide financial savings and protection across multiple generations while delivering price/benefit transparency.

Prediction #3: Reinsurance Reinvigorated

Apart from a brief, largely unheralded stint as a checker at Shop-N-Save, most of my career has been spent in the reinsurance industry. As such, it would be fair for you to call this prediction a bit of wishful thinking, but I think both the global demand for and supply of reinsurance (or similar risk transfer vehicles) will increase significantly in the coming years.

On the supply side, although there is still considerable concentration in the global reinsurance marketplace, smaller regional and local reinsurers have expanded their footprints. Capital in support of large in-force transactions also has grown as myriad new entrants—including investment banks, private equity firms, asset managers and other nonrated entities—have entered the market. There have even been a few venture capital-backed ReinsurTech startups exploring the market in different ways.⁵

On the demand side, direct carriers increasingly are looking for expertise and reinsurance support for new distribution, product and risk selection innovations including accelerated underwriting programs in North America. As reinsurance companies continue to build out capabilities and service offerings even more broadly across the value chain, they will in turn drive more demand for reinsurance as their remuneration of choice. And as fear and uncertainty around medical trends, cyber risks, the credit cycle, extreme weather events and other natural disasters grow,⁶ companies likely will become increasingly willing to unload this risk to reinsurers or other third-party providers of capital.

Prediction #4: Everyone Becomes a Content Company

In 1895, John Deere, the green and yellow plow company, started publishing The Furrow, a magazine that catered to farmers looking to learn about the newest agricultural tips and tricks while also being entertained with stories, photographs and interviews about rural life. Almost 125 years later, The Furrow is still going strong, delivering quality content its readers have come to expect while also leveraging the best of modern web design. The Furrow’s art director (yes, John Deere employs an art director), described the approach behind the magazine’s success: “Even the most technical subject has to have a human story behind it. We’ve always been able to convince management that the content shouldn’t be about John Deere equipment. We’ve stuck to that over time.”⁷ I predict the successful insurers of the future will have a similarly unfailing commitment to delivering engaging, informative and entertaining content for their respective target markets.

It is said that insurance is sold, not bought. The reason is simple: because insurance is not. Back in ye olden days of the mid-2010s and prior, a kitchen-table insurance sale relied on the credibility, knowledge and trustworthiness of the insurance salesperson. As the industry is dragged kicking and screaming into the internet age, the trusted adviser will need to be replicated by trusted advice that delivers a similar level of credibility, knowledge and trustworthiness. That advice will be provided using modern content strategies including blogs, video, infographics, testimonials and social media. The content should educate consumers on how insurance products work to solve their particular protection needs, while also entertaining them and engaging them with things other than insurance in a way that seems authentic and builds trust. For smaller or newer companies (and for established companies looking to remain relevant), digital content is exciting because it is nearly infinitely scalable. An InsurTech CEO whose company had focused its early days exclusively on developing excellent content told me that “content is the great equalizer” because it “makes small companies look big.”

Before wrapping up this prediction, let me be clear about one thing: I am not predicting the demise of the traditional insurance agent. I believe there are plenty of situations where the complexity of the financial need or the comfort level of the applicant will necessitate the expertise of a trusted human adviser. And even a traditional adviser-facilitated sale can be improved with a well-executed content strategy. However, I predict online channels will come to serve a wide swath of sales for life, health and general insurance, and excellence at online content will be paramount in facilitating these sales.

Prediction #5: The Blood Strikes Back (or the Deceleration of Acceleration)

The U.S. life insurance industry has been obsessed recently with the acceleration of the risk-selection process. New data sources are being utilized and new algorithms are being adopted to replace traditional underwriting rules engines. Most important, we have seen a dramatic increase in the face amount at which fluid testing is required to reduce the time, cost and (literal) pain historically involved in getting a policy issued. This strategy seems to be a win-win-win for customers, agents and insurance companies—if we assume that mortality expectations and pricing levels can be held in check. However, we know what happens when we assume. As much rigor and science is being brought to bear in developing these programs, the inconvenient truth is blood testing still has very high protective value, and when given the choice if there is a difference in price, many consumers would rather give blood than money. This is why I predict the industry will take a step or two back toward a full underwriting paradigm.

The primary derailer in this equation is adverse selection. Individual life insurance is an asymmetric market where the buyers know much more about their risk profiles than the insurance company does.⁸ And this trend is only getting worse as privacy regulations become stricter and as the accessibility, sensitivity and specificity of personalized medical and genetic information gets better. I expect many of you to be skeptical and say that young customers of the future simply won’t accept a traditional underwriting process, and you may be right. But as long as lower-cost blood-tested products are offered in the same competitive marketplace, the margins on accelerated programs will be squeezed, or worse.

Prediction #6: Wide Beats Deep (and Then Goes Deep)

From its origins in the English-friendly societies of the 1600s to the large U.S. mutual insurance companies of the 20th century, insurance has been, generally, a vertically integrated industry. An insurance company’s actuaries developed the products, its career agency force sold the policies, its underwriters assessed an applicant’s risk, its home office staff handled post-issue customer service and its claims representatives analyzed and paid claims. Nearly every supporting function of that value chain was tightly integrated. In-house traders and asset managers managed investments. Medical exams, including x-rays, could be completed at home office medical facilities by home office doctors and nurses. In some cases, urine samples could be analyzed at insurance companies’ home office laboratories (these samples are referred to as “home office samples” to this day because the word “urine” is, frankly, kind of icky). I have even heard a possibly apocryphal tale of a large Northeastern mutual company whose in-house carpenters once made all the furniture for the home office headquarters at the in-house woodshop. (Even if that one isn’t true, it is far too good of an example not to include.)

Those days of vertical integration are behind us, supplanted by an extended era of specialization targeted at squeezing out redundancy and cost inefficiencies across the value chain and bringing in specialized domain expertise that individual companies can’t afford to build on their own. Actuarial consulting firms stepped in to assist with product pricing, reserving, risk management and other technical actuarial functions. Independent agents began to supplement career distribution. Third-party administrators and underwriters took over responsibility for policy administration and underwriting. Third-party laboratories took over analyzing fluid samples.

Much of this breaking apart of the traditional value chain is here to stay. I don’t think it will ever again prove to be economical for individual companies to go back to analyzing fluids or building their own furniture, for example. But I predict we will see an increasing amount of re-verticalization in the future. In the past, efficiency gains and access to expert knowledge could be achieved by offloading functions to third-party specialists, but efficiencies and expertise in the future may be acquired by re-insourcing those functions while leveraging enabling technologies like AI, ML, RPA and perhaps even Maurice. Similarly, as companies seek to provide an increasingly digital customer journey, they will need to have control over middle-office and back-office functions to capture data and change processes to optimize the end-to-end customer experience.

As we look even further into the future, the concept of a linear value chain may ultimately seem quaint. The companies or partnerships that emerge as winners on the back of this wave of verticalization will find themselves in an incredibly strong position with large customer bases, huge amounts of data, world-class technology capabilities and proprietary insights into biometric risk and consumer behavior. The endgame, it seems, will be controlled by a small cadre of giant companies that will control both the width and depth of the industry value chain.

Prediction 7: It’s (Still) the Customer, Stupid

Political consultant James Carville famously simplified the 1992 campaign strategy of the then-unheralded Arkansas Governor Bill Clinton to a few short slogans that were intended to focus the message of the campaign squarely on the needs of the voter. One of these slogans was: “It’s the economy, stupid.” Similarly, the companies that are successful in whatever form the insurance industry takes in the future will need to continue having a laser-focus on the needs of the consumer. No matter how much “wiz-bang” technology permeates our lives, the need for financial protection against uncertainty will persist. And regardless of how risk is mitigated, assumed or shared, insurance at its core always will be a product and an industry founded on trust. And trust is the greatest enabler of all.

Copyright © 2019 by the Society of Actuaries, Schaumburg, Illinois.