12 Feb Embracing change, planning to be disrupted

The word “disruption” has become widely used to describe new and innovative businesses.

It is often used incorrectly; not every new or innovative idea constitutes disruption.  But there are many examples of true disruption occurring, increasingly to the detriment of large incumbent organisations.

One good example is the M-Pesa app.  Developed by a Kenyan student in 2007, it allowed Vodafone to effectively become the biggest retail bank in Kenya last year.  M-Pesa (pesa is money in Swahili) built on the existing but small-scale practice of sending airtime credits via mobile phone to make a payment.  Evolving this into an app that can send funds electronically now allows Vodafone to process 6bn transactions a year, 529 every second, more than Barclays which is Kenya’s largest bank.  Only in 2017 did the Kenya Bankers Association decide to consider developing their own app.

A disruptive technology that will almost certainly impact the UK insurance sector is blockchain.  It has some obvious applications for insurance.  Speeding up client acquisition through decentralized client validation could significantly reduce the cost of performing the know your customer and personal data collection function.  The concept of the “smart contract” also has significant potential; transactions are visible to all parties in real time, so the terms of the contract are clear, changes can be tracked, payment easily verified and other transactions, such as refunds, are all captured in one place.

The Financial Times reported in September 2017 that the shipping container giant, Maersk, was already testing a blockchain contract system with XL Catlin and MS Amlin.  It was reported that the initiative would allow Maersk’s data to be automatically incorporated into contracts in real time.  The head of risk at Maersk commented that insurance contracts are “far too tedious and frictional”, and that the changes were long overdue.

This is an example of a private blockchain network, a system that has defined users who each have specified permissions.  While it requires users to bring their information formats into line, it is a process that is occurring anyway in the Lloyd’s and London markets generally.  The blockchain network is highly scalable and could, according to Maersk’s head of risk, reduce expense ratios by up to 70%.  The scalability of blockchain and its ability to process large numbers of individual contracts through one private network makes it an interesting opportunity for MGAs.  However, blockchain’s adoption by the Lloyd’s and London market is in its early stages; it would have to be more extensively used before it represents a viable way for MGAs to interact with underwriters.

But not all in the insurance sector are embracing disruption.  Some areas seem to be relatively immune.  The UK life insurance sector has seen very little real innovation in recent times.  While applicants now typically enter their personal information electronically, it is still subject to manual review, long waits for decisions and an uncertain outcome in relation to both the premium and endorsements to cover.  The cumbersome processes may be one cause of the very low rate of take-up.

These legacy processes seem to fly in the face of a changing reality and rapid evolution in the health profile of the global population.  According to the UK’s National Health Service, obesity levels had almost doubled in the 20 years to 2015 and 63% of the adult population was either overweight or obese.  Levels of diabetes had increased by 65% in the decade to December 2015, and years of life expectancy increases were observed to have reversed by the Institute and Faculty of Actuaries. They reported that the average life expectancy of a 65 year old in the UK had dropped between 2013 and 2016 by 3% for women and 4% for men.  While these reversals to longevity may not continue, it is clear that there is an increasing need for simple products which are easily accessible to consumers and that do not exclude a rising percentage of the population.

There are signs that the sector is responding.  Non-standard life policies are more widely available.  They tend to be expensive however, and sometimes contain onerous conditions; they do not fulfil the aim of simple cover for all.  That objective may have been achieved by Compass, an MGA, whose product is a non-underwritten life product available to anyone.  Underwritten by AmTrust Syndicate 44, it uses the simple but effective concept of placing a moratorium on pre-existing health issues going three years back and two years forward.  It could be viewed as a genuinely disruptive product, one that requires no medical questionnaire regardless of the applicant’s medical circumstances.  While the applicant is not covered for one cause of claim, they are covered for all others, and at a price that varies only on age, not medical factors.

The UK’s insurance sector is not always recognised for innovative solutions, but there are signs that this may be changing.  It has never been more important for companies to be prepared to engage with change and to plan for disruption.

Ortho Barnes – Chairman, Compass Underwriting