Insurers face new threats as impact of coronavirus challenges tech stacks and complicates customer contracts.
While the shock of the pandemic is being felt across all industries, insurers are grappling not only with the need to revamp legacy technology, but the potential loss of trust from customers who rely on them for support as the lockdown disrupts their livelihoods.
“It’s quite ironic that it had to take a pandemic before banks and insurers realised they need to embrace digital and digital delivery to their customers and to their employees,” says Andries Smit, CEO at savings company Upside, and former managing director at Aviva’s Global Digital Factory.
Now watching from the outside, Smit says the historical culture of “investor theatre" at large insurers is now harming them, referring to the practice of executives gesturing towards digitisation without making any fundamental changes.
“All the CEOs would talk about ‘Yes, we’re going to the cloud and digital is important’ – you go back five years where the whole wave of that kind of talk started. Nobody would be foolish enough to stand on those big stages and not use those cliched words. But actually behind the scenes, few got into the nuts and bolts of it.
“I really hope and pray there are executives in these organisations that are now using [the pandemic] as a catalyst. This should be the moment when they get the boards to give them the money for their cloud programs, give them the money for their backend improvement, give them the money to up their security,” he says.
But insurers find themselves at a difficult crossroads. Like every other industry, they have had to quickly adapt to remote working, testing the strength of their digital processes. Meanwhile, they are facing the worst pay-out of their lifetimes; the Association of British Insurers (ABI) expects customer pay-outs to exceed £1.2bn, while Lloyds of London alone is expecting to pay out at least £2.4bn globally due to the pandemic, the Guardian reported. For insurers facing unprecedented pay-outs, tinkering with backend tech procedures may not seem to be a priority.
“In the short time, the first priority will of course be the business continuity aspects and what we will see is a lot of cost cutting,” says Vijaya Mohan, senior business consultant, Expleo Group.
“There will be more of a focus on critical functions and interestingly, remote working is something that the industry has never seen on such a scale before and that’s brought on various challenges in terms of security and actual productivity of employees.”
Smit also fears insurers will veer away from long-term investments, neglecting necessary tech changes that could save them in the future.
“Now more than ever, [insurers] understand why you need to have fresh and new tech. Yet, they’re all going to slice their change portfolios. That is the first thing a non-technical leadership team does, which is completely counterintuitive. Now is the time to invest, fix it to get ready. I don’t necessarily buy that cash is tight, because for all these financial services companies, cash is not the issue …. It’s a system condition unfortunately in these large organisations that now when they should be investing, they’re not and won’t,” he says.
Tim Hardcastle, CEO of software as a service (SaaS) provider Instanda and former chief information officer (CIO) at Hiscox, has similar convictions. He says there are two main considerations boards take when considering a shift in their way of working.
“One is actually a psychological factor. I think there’s a psychological mindset issue around the executives. Are they comfortable? Do they feel confident that the technology that they’re going to move to or choose is reliable enough, credible for them to choose as an option? And the secondary consideration is: what is the cost of doing that and the risk of either replacing or working alongside legacy systems?” he says.
According to Hardcastle, the pandemic may have finally shifted the psychological element.
“What has happened to the insurance industry over the past few months is literally every executive on the planet has had to suddenly reorientate themselves around a fundamentally new way of working.”
Despite a psychological shift towards a willingness to change standard procedures, the risk of altering old ways of doing things remains. In many ways, it is more present than ever. Hardcastle says he empathises with insurers that have built their systems over a long period of time and find themselves stuck, unable to make a quick change.
According to research by PWC, roughly 70 percent of insurers’ IT budgets goes towards maintaining legacy technology, which has stopped them from being able to keep up with the rapid tech changes of the past decade. This inability to change is now negatively impacting the way insurers interact with customers, says Mohan.
Tech hurdles will likely lead to a loss of new sales, but reinsurance policies will protect the largest insurers, says Smit. Reinsurance agreements typically transfer the financial burden of claims from insurers and into the capital markets.
Insurtechs at risk
While large insurers may be saved by reinsurance agreements and access to working capital, smaller players – especially insurtechs – face a different fate.
According to Mohan, the fate of an insurtech will depend on its place in the insurance value chain. For example, companies involved in digital distribution will see an uptick in demand from traditional insurers, for whom they’ve suddenly become a necessity. He also believes full stack insurtechs such as Lemonade will be safe, as they’ve been digital from inception.
But startups and smaller insurtechs may be short of capital. Mohan predicts consolidation and some fallout.
Smit adds that in many cases, the success of insurtechs rests on traditional insurers.
“[Insurers] are going to cut their change funding and cut their innovation funding, and therefore the oxygen line, the bloodline for insurtechs is going to be constricted,” he says.
Insurance is also one of the latest fields of financial services to be disrupted by tech firms.
“The insurtechs really only came out of the woodwork in the last two years … it’s such a slow burn and they don’t really make the news until something significant has happened. And in my view, you’re starting to see traction and therefore you’re getting visibility. All of that said, I really don’t hope it now causes an issue where the whole thing collapses, but I do think you’ll see less insurtechs getting funding and support,” says Smit.
He adds that large insurers will put innovation hubs and sandboxes on hold, likely for one or two years at the very least.
During a Bright Talk webinar on May 19, Lloyd’s head of innovation, Trevor Maynard, explained that while positioned as an opportunity for start-ups, the Lab is currently more suited for scale-ups.
“For the coronavirus theme it felt wrong to restrict [the Lab] to [scale-ups] because it’s such a new thing people are reacting to that we definitely wanted to hear about earlier stage ideas as well. So from that side of things it’s open to all, but we find that scale-ups often fit very well with the managing agents and that’s why it works well,” he said.
“I’d still like to find a way of having earlier stages in the Lab though. That’s on my list, but we just possibly need to find a slightly different format.”
Maynard said commercial value is the key aspect that needs to be seen from scale-ups or start-ups.
“We did not want to be innovation theatre at any point.”
As the insurance sector faces fundamental shifts in technology, the nature of its business is also changing drastically, and faces flack for its approach to pay-outs of business interruption claims.
The UK’s Financial Conduct Authority (FCA) announced on May 1 that it would seek legal clarity on business interruption claims, following backlash from businesses impacted by the pandemic. In the UK, small businesses and hospitality market participants banded together as Hospitality Insurance Group Action (HIGA), announcing a lawsuit against the insurance industry to account for coronavirus business interruption pay-outs.
However Hardcastle defends the industry, pointing out the difficult situation insurers find themselves in.
“When it comes to something like this, to put the insurance industry in the spotlight and say they’re being unreasonable I think is also unjustified because we’re in the middle of something that globally has never been experienced,” he says.
While governments around the world have implemented a variety of measures to help mitigate the damage caused by the pandemic, the insurance industry has not seen similar government assistance, says Hardcastle. Sonia Campbell, partner at Mischon de Reya – the litigation law firm advising HIGA – told bobsguide she did not find such intervention likely.
“We think the government would be unlikely to intervene on the basis that a number of ministers have expressed the view that most businesses chose not to buy specific cover for pandemics – and therefore seems reluctant to force insurers to cover the business interruption losses now being claimed,” she said in an email.
Hardcastle says he can sympathise with customers, but that insurers are in a difficult position.
“It’s widespread. I think the insurance industry has been pilloried a bit unfairly, expected to respond without question or on a widespread basis to a pandemic that has never been seen before.”
He believes the average customer may lose trust in the industry as a result.
“The industry is working hard to change that perception. Equally there are companies within the insurance space that do deserve that reputation because they do fight tooth and nail not to pay claims. That's why I think increasingly, more and more companies recognise that the best way to create customer loyalty and give great customer experiences is to be really efficient, and to be really sensitive and slick in the claims experience.”
For some, amendments to claims are long overdue. Smit says himself and others within the industry have been canvassing for years to simplify contracts by removing exclusions and jargon.
“The moment something like this happens, we’re just going to take two years back. I expect with travel insurance, even things like home insurance, medical insurance definitely – you’re going to see exclusions increase. You’re going to see payments increase, you’ll see an impact on pricing. I really hope I’m wrong; I hope there’s a bold and brave insurer that proves me wrong and does what’s best for customers, but it’s highly unlikely. I think we’re in for a pretty unhappy place,” he says.
Coronavirus is often spoken of as a black swan event, but this is not the first time insurers have grappled with a pandemic. When Severe Acute Respiratory Syndrome (Sars) swept through East Asia in the early 2000s, insurers were already considering the possibility of a future outbreak and its impact on their industry.
“The insurance industry is well-tuned to dealing with the localised catastrophes, but the fact is that [coronavirus has] had a global impact and moreover affected economies of entire nations,” says Mohan. He believes Sars may have been a warning sign, but that it could not have prepared the industry for the global nature of the current pandemic.
Hardcastle agrees, saying that Sars did not trigger significant warning signals for the majority of insurers. He does however find that the industry has improved its ability to assess data for risk modelling purposes since the outbreak.
“When Sars broke, global pandemics were on everybody’s risk radars and we had monthly meetings where you needed to confirm things. It’s just the short-termism in large organisations being it’s highly unlikely to happen in the next month, so I’ll put it off another month and another month,” says Smit.
“I can see both sides of the coin…I honestly think that insurers – and this is not unique to them – have to rise and take their share of the blame. But there are many other organisations that need to do the same. Nobody was prepared for this, not a single industry. So it’s harsh to single out the insurers, but it’s not harsh to blame them for their share of the situation.”
Whether or not all insurers will survive the pandemic fallout is yet to be seen. But according to Smit, large insurers need to save themselves.
“It’s commendable how much the government has done already and I don’t think they should be stepping in and rescuing large organisations. That’s their job; large organisations get paid, and paid very damn well, to be prepared, to have the balance sheet, to have the operations to do it so if the chickens have come home to roost they’ve got to step up to the plate. They can’t be bailed out.”