Adapt or die, insurers told

The majority of existing insurance firms will probably go bankrupt within 20 years’ time as technology shakes up the industry and they struggle to keep pace, a commentator says.

Monday, October 31st 2016, 6:00AM

by Susan Edmunds

Michael Naylor

Michael Naylor, a senior lecturer in the school of finance at Massey University, has produced a new book considering the future of insurance in light of looming disruptive technology.

He said insurance had traditionally been a conservative industry, including in the way it used IT. But that would have to change as major disrupters such as telemetrics, big data, automatic underwriting and claims, roboadvice and the changing demands of the next generation of consumers shook insurers out of their complacency.

“No commentator has realised that when added together, the small impacts of each technology will combine to create utter disruption in the insurance industry - a perfect storm,” he said.

He said insurance was likely to be more disrupted than many other sectors because of its analytical data focus. “Other sectors, like banking, have made more adjustments already, whereas insurance has stayed fairly traditional,” he said.

Insurers of the future would have to be ready to compete with a much wider range of competitors, he said. They would find themselves having to face down disruptors from outside the industry, but most were still stuck in the mold of comparing themselves only against their insurer peers, he said.

“Who would have guessed that the PC manufacturers would create a product which would destroy incumbents in such diverse industries as telephones, diaries, and photography? Insurers need to understand the scale of the transformation needed or risk being left behind.

“In the past established insurers have been protected from new entrants by the high fixed costs of developing systems and distribution capacities,” Naylor said.

“In the new digital era, however, these barriers have disappeared, as many IT-based companies have better existing systems than insurers do, making it easier for new entrants to develop the required systems than it is for existing insurers to transform their systems.”

Incumbents would have to create new IT, data flow and decision-systems based on new management processes, he said. Many had been early adopters of computing and had developed their own systems that they were now stuck with, even though they were outdated, he said.

Naylor said while regulatory issues had so far delayed change in the insurance sector, they could not be expected to save insurers over the long term. Insurance was becoming more and more a global industry, he said.

“While regulation remains national, external disruptors will find it very easy to cross borders – on the web there are no borders,” he said. “Business as usual is not an option. Existing business units will have to be evaluated and ones which are not useful for the future need to be sold-off while they still have value.”

But he said the majority of insurers in the market faced a bleak future.

“The majority of existing firms will probably go bankrupt due to their inability to transform themselves into a client-centered model, while survivors will be so transformed that they may be unrecognisable.”

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