A New Era for Commercial, Specialty Insurance
When people hear about property and casualty insurance, they often think of the highly-marketed personal lines brands like State Farm, Geico, Allstate, Progressive and others that dominate. The reality is that commercial lines have the edge in P&C dominance.
In the U.S. market, 2015 P&C commercial lines direct written premium (DWP) was $295B, representing 50.6 percent of the total P&C market. The Insurance Information Institute expects overall personal and commercial exposures to increase in the 4.0 percent to 4.5 percent range in 2017, but cautioned that continued soft rates in commercial lines could cause overall P&C premium growth to lag behind economic growth. These numbers reflect to a great extent the range of traditional P&C products that have been in the market for years or decades.
But disruption and change is reshaping industries and the businesses within them that use traditional P&C products. It is creating both challenges and opportunities. As a challenge, just consider insurers with personal and commercial auto. Pundits are predicting a rapid decline in personal auto premiums and questioning the viability of both personal and commercial auto due to the emergence and adoption of autonomous technologies and driverless vehicles, as well as the increasing use of alternative options (ride-sharing, public transportation, etc.).
Finding alternative growth strategies is top of mind for CEOs. Opportunities for alternative growth strategies can be captured from the disruption and change within commercial and specialty insurance. New risks, new markets, new customers, and the demand for new products and services may fill the gaps for those who are prepared.
Our new research, A New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption, highlights how changing trends in demographics, customer behaviors, technology, data and market boundaries are creating a dramatic shift from traditional commercial and specialty products to the new, post-digital age products redefining the market of the future.
New technologies, demographics, behaviors, and more will fuel the growth of new businesses and industries over the next 10 years. Many of these businesses will grow within completely new industry types, setting the stage for new insurance market expansion. Commercial and specialty insurance provides a critical role to these businesses and the economy—protecting them from failure by assuming the risks inherent in the production and delivery of goods and services.
Industry statistics for the “traditional” commercial marketplace don`t yet reflect the potential growth from these new markets that may still need traditional insurance, but also may need new types of insurance. It is a diverse group that embraces new technologies, social shifts, demographic shifts, new economies, and more, focused on narrow segments that will increasingly demand niche, personalized products and services. Many do not fit neatly within pre-defined categories of risk and products for insurance, creating opportunities for new commercial insurance products and services.
Small and medium businesses are at the forefront of this change and at the center of new business creation, business transformation and growth in the economy.
- By 2020, more than 60 percent of small businesses in the U.S. will be owned by Millennials and Gen Xers — two groups that prefer to do as much as possible digitally. Furthermore, their views, behaviors and expectations are different than those of previous generations, and will be influenced by their own personal digital experiences.
- The sharing/gig/on-demand economy is an example of the significant digitally-enabled changes in people`s behaviors and expectations that are redefining the nature of work, business models and risk profiles.
- The rapid emergence of new technologies and the explosion of data are combining to create a magnified impact. Technology and data are making it easier and more profitable to reach, underwrite and service commercial and specialty market segments. In particular, insurers can narrow and specialize various segments into new niches. In addition, the combination of technology and data is disrupting other industries, changing existing business models, and creating new businesses and risks that need new types of insurance.
- New products can be deployed on demand, and industry boundaries are blurring. Traditional insurance or new forms of insurance may be embedded in the purchase of products and services.
Insurtech is re-shaping this new digital world and disrupting the traditional insurance value chain for commercial and specialty insurance—fostering the creation of new products and new channels. They are already helping small business owners to find and purchase unique, specialty protection for a new era of business. Just consider insurtech startups like Embroker, Next Insurance, Ask Kodiak, CoverWallet, Splice, and others. Not being left behind, traditional insurers are creating innovative business models for commercial and specialty insurance like Berkshire Hathaway with biBERK for direct to small business owners; Hiscox, which offers SBI products directly from its website; or American Family, which invested in AssureStart, now part of Homesite, a direct writer of SBI.
The Domino Effect
We all likely played with dominoes in our childhood, setting them up in a row and seeing how we could orchestrate a chain reaction. Now, as adults, we are seeing and playing with dominoes at a much higher level. The domino effect, or chain reaction between events, is being played out in today`s fast-paced, ever-changing world. Every business has or will likely be impacted by a domino effect.
What is different in today`s business era, as opposed to even a decade ago, is that disruption in one industry has a much broader ripple effect that disrupts the risk landscape of multiple other industries and creates additional new risks. We are compelled to watch the chains created from inside and outside of insurance. Recognizing that this domino effect occurs is critical to developing appropriate new product plans that align to these shifts.
Just consider the following disrupted industries and then think about the disrupters and their casualties: taxis and ridesharing (Lyft, Uber); movie rentals (Blockbuster); streaming video (NetFlix); traditional retail (Sears and Macys); and online retail, enterprise systems (Siebel, Oracle); cloud platforms (Salesforce and Workday); and bookstores (Borders, Amazon). And consider the continuing impact of Amazon with their announcement of acquiring Whole Foods and the significant drop in stock prices for traditional grocers. Many analysts noted this is a game changer with massive innovative opportunities.
The transportation industry is at the front end of a massive domino-toppling event. A report from RethinkX, The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries, notes that by 2030 (within 10 years of regulatory approval of autonomous vehicles (AVs)), 95 percent of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model called “transport-as-a-service” (TaaS). The TaaS disruption will have enormous implications across the automotive industry, but also many other industries including public transportation, oil, auto repair shops, gas stations, and many others. The result is that not just one industry could be disrupted, many could be affected by just one domino—autonomous vehicles. Auto insurance is in this chain of disruption.
Commercial insurance, because it is used by all businesses to provide risk protection, is also in the chain of all those businesses affected—a decline in number of business, decline in risk products needed, and decline in revenue. It will decimate traditional business, product and revenue models, while creating new growth opportunities for those bold enough to begin preparing for it today with different, unique risk products.
Transformation + Creativity = Opportunity
Opportunity in insurance starts with transformation. New technologies will be enablers on the path to innovative ideas. As the new age of insurance unfolds, insurers must recommit to their business transformation journey and avoid falling into an operational trap or resorting to traditional thinking. In this changing insurance market, new competitors don`t play by the traditional rules of the past. Insurers need to be a part of rewriting the rules for the future, because there is less risk when you write the new rules. One of those rules is diversification. Diversification is about building new products, exploring new markets, and taking new risks. The cost of ignoring this can be brutal. Insurers that can see the change and opportunity for commercial and specialty lines will set themselves apart from those that do not.