New market realities: the shape of insurance products to come

How bad is bad?

The COVID-19 pandemic hit the insurance industry far harder than Hurricane Katrina or 9/11. Lloyds is predicting that the industry could lose up to £167 billion as it settles a huge amount of claims on policies from event and travel cancellation to business interruption.

And it‘s a double whammy with premiums dropping as claims soar: more than two in five SMEs fear they risk permanent closure because of the impact of COVID-19 and the lockdown measures.

Insurance tends to grow in line with GDP but as the economy faces recession, the industry is strapping in for a rough ride.

So, you could be forgiven for thinking that bad does indeed look very bad.

Back to the future

But the industry has been here before and it has used previous disruption to identify new opportunities for growth and to foster product innovation.

Indeed, it was in the aftermath of another famous epidemic that London began its ascent to becoming the world’s insurance capital. As the Great Plague of 1665 gave way to the Great Fire of 1666, London’s best financial brains of the time created the city’s first insurance company, specialising in fire products. While it happened in the 17th century it is a perfect encapsulation of the three stages of our COVID-19 strategy for the insurance industry: respond, recover, thrive.

That spirit of innovation continues to this day. The economic, societal and behavioural changes wrought by COVID-19 can act as a catalyst for reinvention with the development of new policies and products that are fit-for-purpose, meet emerging needs, cover new risks and enhance the value proposition.

Lockdown showed that, for the majority of organisations, homeworking works, and the vast majority of organisations now regard it as an integral part of the new normal. But homeworking creates new risks, such as cyber risks, that are probably not covered on existing policies, tied as they are to physical locations.

Selling the journey, not the plane

This is a great opportunity for insurers to collaborate with cyber security experts to deliver new products and services that offer protection, not just in terms of loss coverage but through actual harm prevention. Get security software and stress-testing consultancy embedded with your cyber risk policy.

Remember that alongside fire insurance, the other great innovation to emerge from the Great Fire of London was the fire brigade, a perfect analogy for collaborative working today as part of a protective ecosystem rather than just a commercial transaction on a policy.

Post COVID-19, products are no longer just about loss recovery. They should be about avoiding loss in the first place. Insurance is a service whose primary attraction should be that it allows us to reduce risk and manage loss.  Beyond covering losses, insurers have a great opportunity to improve their value proposition with risk advisory and loss prevention services.

Fish where the fish are

Pivoting quickly to identify hot spots is the mark of dynamic and successful players in any industry. Event insurance is a great example of this. In March we saw all major sporting events, theatre performances and concerts cancelled or postponed. No football, no golf, no Formula One, no tennis.

But the Wimbledon Lawn tennis Championship had learned from the SARS outbreak of 2003. Since then, it has purchased a pandemic insurance policy every year. That forward-thinking approach enabled Wimbledon to receive a vital major pay-out. It is likely to be a trailblazer for pandemic insurance coverage as the policy moves from being a niche to a mainstream must-have for all sports, musical and theatre events.

The disruption to the economy has sensitised us to the precariousness of our cashflow, even for those of us in what were previously considered safe jobs. Income protection policies or school fees protection are likely to be front-of-mind for many now.

Insurance-as-a-service, not as a grudge

Insurers need to identify which products are no longer right for the new market realties.

Lockdown has focused attention on the UK’s 33 million passenger cars, the vast majority of which spent months lying in driveways, garages or kerbsides for months. Many of us will be wondering why we paid premiums for a risk that we were not exposed to.

This experience could boost demand for ‘pay-as-you-go’ motor insurance based on the use of telematics, allowing coverage by the mile rather than the month.

Usage-based insurance provides the chance to offer insurance-as-a-service rather than insurance as an inflexible product. That moves the industry, and the more dynamic players, away from race-to-the bottom price competition towards genuine value proposition. In other words, from what you pay to what you get.

Uninsured risk equals innovative product opportunity

At the same time, there has been a boom in cycling – the new golden age of the bike – with the UK and devolved governments pledging vast investments to boost cycle infrastructure. Edinburgh, for example, reported a 252% rise in weekday cycling while London is predicting a tenfold rise in cyclists compared to before the pandemic. 

Apart from being an excellent example of embracing the opportunity to introduce new thinking, the cycling boom has led to calls from the industry for cyclists to pay insurance as they proliferate on roads.

The cycling boom has also drawn attention to the vexed issue of exclusions- it has emerged that only 40% of home insurance policies cover bikes away from the home. Many upper-range bikes are also likely to breach the single item limit on policies.

The profusion of exclusion

And that exclusions issue needs to be tackled as it goes right to the heart of transparency in the product and trust in the provider.

Year-on-year, policies gradually accumulate myriad exclusions for events like pandemics. This can leave customers wondering why they bother taking out the policy if it doesn’t give them protection from unforeseen crisis situations.

One of the key lessons from the pandemic, is that products must be simple and easy to understand – not 20 pages of densely-written and impenetrable jargon and legalese that nobody reads until it’s too late. Industry winners will be those who offer products with clear options, including explicit pandemic coverage in business interruption policies.

In the post COVID-19 world, customers are likely to expect pandemic coverage as standard and will expect policies, from business interruption to travel, to have covered the gaps exposed during the lockdown.

From fragile to agile

For insurers to capitalise on the opportunities for new types of policy and product, they require speed, agility and innovation. It’s also the case that, traditionally, launching a new product is a ponderous process takes considerable time with the technology component being the slowest part of all.

Any new insurance product launch will require industry smarts, intense customer focus but also digital engineering expertise. Collaboration with technology partners is likely to be a major strategy in overcoming the COVID-19 insurance gaps. Insurtechs have proven models for everything from pay-as-you-go on mobiles, last minute policies and predictive analytics to Internet of Things sensors and wearables, digital policy issuance and paperless claims processing.

The pandemic has shown that it’s vital to have fit-for-purpose, simple, effective products that meet customer expectations. Delivering that product innovation and enhanced value proposition requires your core systems to be agile and your operating model to have the ability to flex and adapt rapidly. That can’t be done on legacy systems based around data centres.

Cloud cover

But cloud enables precisely that agility to innovate at scale, responding rapidly to customer needs with the launch of new products and instant amendments to existing ones. It’s an ecosystem on which you can integrate value-added services from your third-party providers seamlessly and friction-free.

The huge data processing power of cloud allows for vastly improved analytics and hence behavioural insights needed to inform new telematic strategies and products. At the same time cloud allows automation of multiple processes ­­– from claims handling to underwriting – to streamline the new generation of products and services.

After the Great Fire of London, the insurance industry innovated with specialist policies and new services in the form of fire brigades. In the wake of the pandemic, cloud is providing the same opportunities to recover and thrive.