NextWave Insurance: Large Commercial And Reinsurance - EY
NextWave Insurance:large commercialand reinsuranceHow insurers can redefine the possibleon the journey to 2030
A message fromthe EY Insuranceleadership teamIsabelle SantenacGlobalInsurance LeaderThe time has come for one of the oldest industries onthe planet to reinvent itself. The large commercial andreinsurance sector has struggled with sluggish growthand flat margins for too long.In an era of technology transformation and data-driven disruption, our sector hasbeen held back by operational inefficiencies and outdated systems. Recent events inthe global economy — including the COVID-19 pandemic — have only underscored theneed for a highly relevant and high-performing insurance industry. Now, more thanever, insurers must find new ways to fulfill their critical purpose.In addition to demonstrating their social purpose, large commercial insurers andreinsurers must realign their organizations and update their offerings so they canbetter meet the needs of 21st-century businesses. More flexible, usage-basedpolicies, stronger preventive services and more robust protections against new andevolving threats — such as pandemics, climate change and cyber crime — must be topEd MajkowskiAmericas InsuranceAdvisory Leaderpriorities. Insurers must also focus on ongoing digital transformations toward moreefficient operations and better customer experiences.We believe — and illustrate on the pages that follow — that such steps canunlock dramatic growth and greatly enhance the financial performance of largecommercial insurers and reinsurers around the world. The catch? They must beable to undertake profound change across the business — strategically, tactically,and organizationally.Peter ManchesterEMEIAInsurance LeaderA 350-year-old industry doesn’t have to be old-fashioned. Indeed, it can — andmust — be made new again. If reinvention seems a daunting challenge in light ofglobal lockdowns, consider the industry’s history. From the Age of Explorationto the Space Age, insurers have risen to the unique business and economicchallenges of every era. Indeed, they have played an integral role in making theimpossible possible — and can do so again.Despite the unprecedented challenges of COVID-19, we are bullish on the future oflarge commercial insurance and reinsurance.Grant PetersAsia-PacificInsurance Leader2 NextWave Insurance: large commercial and reinsurance
About EY NextWaveThe EY NextWave vision represents the EY perspective on the most powerfultrends and forces shaping the industry’s future. The process brings togetherstrategic EY thought leaders, industry and functional professionals andtechnologists, as well as outside experts and academics. In collaborativeideation workshops, these groups help clients envision a brighter futureand map out the road ahead.3 NextWave Insurance: large commercial and reinsurance
Table of contents4Letter from the leadership. 2About EY NextWave. 3Executive summary. 5Framing the next wave: forces and factors shaping the marketMarket profile and projections: 2020 vs. 2030 . . 7The customer of the future. 14The shift from a linear value chain to a dynamic value exchange. 16Envisioning the next wave: what’s ahead on the journey to 2030Seven future business models. 19Ten high-impact market scenarios. 28Leading the next wave: imperatives for insurers and reinsurersSix steps to taking part in the trillion-dollar market opportunity. 34Key terms . . 38Authors and contributors. 39 NextWave Insurance: large commercial and reinsurance
Executive summaryThe large commercial and reinsurance industry finds itselfsimultaneously at serious risk of disruption and on the precipiceof critical transformation. While the upside is compelling, anumber of challenging fundamentals must be addressed ifcommercial insurers are to seize the opportunities: The impact of the COVID-19 outbreak threatens reserves,highlights the need for new protections, and underscores theunsustainability of current cost structures. Customers want less friction in the buying process, moretransparency, higher-value outcomes, and the kinds ofstreamlined and intuitive experiences that are the normwith other suppliers and sectors. Today, intangible assets — such as intellectual property(IP), patents, brands and reputations, networks andvirtual operations — generate far more business valuethan tangible assets. This profound shift, which hasoccurred during the last 20 years, requires insurersto offer new products and protections. Younger workers think of insurance as dull and outdated, ifthey think of it all. New types of employment and workingrelationships, including those in the “gig economy,” requireinsurers to rethink their approach.The bottom line: the tech-driven disruption that has occurredin media, retail, transportation, and other sectors is coming tolarge commercial insurance — and coming soon.If the situation sounds grim, there is reason to believe thatthe industry’s best days lie ahead. From our extensive globalresearch into current market conditions and future trends, weconclude that an unprecedented growth and profitability spikeis within reach. Once the industry navigates through theimmediate impact of the coronavirus, considerable opportunitywill present itself, and insurers will accelerate the transition toloss prevention and risk advisory services critical to theirfuture success.5 NextWave Insurance: large commercial and reinsuranceBy 2030, if the largecommercial insurance andreinsurance market takesthe necessary actions,it will experience: 600 billionin revenue growth25%–35%improvements in combined operating ratiosSee “Market profile and projections,”page 7, for more details on thesenumbers and our methodology.The large commercialinsurance and reinsuranceindustry is on the verge of anunprecedented growth andprofitability spike — in spite ofthe coronavirus pandemic.
Executive summaryThere is a large caveat, however: thesegains will only be realized if the industry,which has changed less than most othersectors, becomes much more dynamic andagile. The necessary changes and relatedmarket developments are described in thefollowing sections of this report.This evolution is contingent on pervasive technology enhancementsand a commitment to use data more extensively and intelligently.Advanced connectivity — including standardized and transparent dataflows and integrated technology — is critical. Such connections enablecompanies to deliver tailored services that customers want (e.g., lossprevention) and align incentives for all stakeholders.One major vector of change will be the emergence of a fullyconnected value exchange that replaces the traditional linear valuechain. Core transactions and relationships will evolve as stakeholderroles become more specialized. Integrated technology and real-timedata will enable direct interactions and fluid collaborations, withoutold constraints. The right stakeholders can play the right roles for theright deals. In the aftermath of the COVID-19 pandemic, the evolutionto a more strategically aligned and synergistic value exchange hasbecome imperative. See “From value chain to value exchange,”page 16Of course, firms that cling to existing models and the old ways ofworking will be at risk of being acquired or seeing their businessesshrink organically. Those that make the right bold decisions andchange effectively will translate opportunity into results. See “10high-impact market scenarios,” page 28Eliminating these unnecessary inefficiencies presents great innovationand growth opportunities. New business models will emerge to meetspecific customer needs and serve distinct market niches. See “Sevenfuture business models,” page 19The large commercial insurance and reinsurance sector is enteringa time of turbulence. Whether it’s also a period of breakthroughinnovation and sustained growth is a question very much in the handsof market participants.Growth in the next decade is dependenton more pervasive connectivitybetween market participants and moreintelligent use of data.6 NextWave Insurance: large commercial and reinsurance
2020large commercialglobal market profileThe large commercial insurance and reinsurance business market is complex andever-evolving, which helps to explain the many external challenges and internalbarriers that have kept it in low-growth mode for the last decade. The scope andimpact of these challenges are highlighted on the following pages.Gross written premiums:Average five-year market ratios:Approximate total:Combined: 1 trillion 65% of the global non-life tion:Retrocession:Administrative expense: 750 billion 200 billion 20 billion60%–70%15%–35%5%–25%Source: Industry databases, EY analysisNotes: GWP estimates for large commercial insurance and reinsurance include coverages for companies with at least 250 million in annual revenue/turnover ormore than 5,000 employees, as well as specialty risks, delegated authority agreements (DAAs)1, reinsurance business, and self-insurance. Estimated ranges cover all large commercial industry participants. Estimated ranges reflect the typical ratios for insurance business, reinsurance business, and DAAs. The loss ratio includes incurred claims, reserves, and loss adjustment expenses. The acquisition ratio includes commissions, profit sharing, and contingencyfor independent agents/brokers. The administrative expense ratio includes all operating costs.1See page 38 for definition7 NextWave Insurance: large commercial and reinsurance
2020 large commercial global market profileExternal and market challengesMismatched product offerings:Today, there are relatively few policy optionsfor intangible assets (including intellectualproperty, brands, networks, data, andcustomer relationships), which comprisea large majority of company asset bases.Insurers offer limited coverage for whatcompanies most need to protect, leadingto unmet and underserved exposures.The mainstreaming ofalternative capital:The oversupply and convergence of capitalhave led to shifts in capital sourcing.Alternative sources continue to expandand underpin more and different lines ofbusiness. As traditional and alternativesources converge, capital seeks the mostefficient route to market and challenges theviability of traditional line-of-business andorganizational structures.Competitive pressures and shifts:Though the growth has been slow until veryrecently, the market has seen a markedrise of disruptive new entrants — such asDAAs, InsurTechs, and other startups. Theintensifying battle for control of the valuechain and increasing merger and acquisition(M&A) activity are also reshaping thecompetitive landscape.Although InsurTechs have gained significanttraction, tech giants loom on the sidelines,causing justifiable concern among industryexecutives. They have multiple optionsfor entering the market (e.g., establishingplatforms and exchanges, offering embeddedproducts), though significant regulatorybarriers remain. Tech giants are likely toadopt acquisition and partnership strategies,meaning that some incumbents will beintimately involved in future disruptions.8 NextWave Insurance: large commercial and reinsuranceShare of average business valuecomprised of intangible assets:2019:1985: 80%32%Average number of new productclasses in the last 30 years: 5Source: EY analysisSource: Swiss Re, ForbesAlternative capital’s share of totalreinsurance capital:2018:2014:17%11%Source: Aon BenfieldCAGR, nalreinsurancecapital:0%Source: Aon BenfieldCAGR in GWP underwritten by DAAs inLloyd’s market, 2014—18:Number and value of insurance deals 1 billion, 2014—17:15%66Source: EY analysisSource: EY Insurance M&A ReportPortion of Lloyd’s GWP underwrittenthrough DAAs: 40%Source: Lloyd’s
2020 large commercial global market profileExternal and market challengesGeopolitical uncertainty:From climate change and pandemics, toBrexit and turbulent domestic politicsin nations around the world, to warand terrorism, to global trade tensions,commercial insurers must be ready foralmost anything.Average number of annual events in UScausing more than 1 billion in damages:151980—2015: 52016—18:Source: The EconomistNew risks — and theassociated opportunities:Cyber catastrophes and moresevere natural disasters may poseexistential threats for some insurers.Nanotechnology, new energy sources(e.g., fracking), and pandemicsare other new risks on insurers’radars. Given the need for increasedprotection, insurers best able toquantify the risk have the best chanceto seize the upside potential.Regulatory pressures:As regulators expand their oversight,insurers struggle to keep up and the costof compliance rises. The regulatory focusis broad, incorporating the full value chain,including finance and good governance.New requirements for fair pricing and datasecurity will necessitate technology upgradesand process changes. Fragmented andoverlapping jurisdictions create additionalcosts and complexity.In contrast, the US large commercial marketis relatively deregulated and offers moreflexibility in pricing and other matters. It isalso worth noting that regulators themselveswill evolve, and in some markets becomeequally or more digitally enabled than theinsurers they oversee.9 NextWave Insurance: large commercial and reinsuranceCyber insurance across global markets,2016—19:Combined global insurance lossesfrom natural disasters, 2017—18:2x 219 billionIncrease in premiums4xIncrease in claimsvolumesSource: AM BestIncrease in the size of the complianceand risk functions, 2016—19:25%Source: EY analysisSource: Swiss Re
2020 large commercial global market profileInternal barriers and constraintsThere are internal challenges across the business, including legacy technology, manual processes and hierarchical cultures.Workforce and culture:Technology:Data:A poorly articulated social purpose and anout-of-date image contribute to the industry’sstruggles to attract and retain the righttalent, including in-demand data science,analytics, and data modeling professionals.Insurers are also looking to hire digital-firststrategists and workers experienced withAgile techniques, as well as to build morediverse and inclusive workforces. Insurersmust equip their people and teams forremote working, and adapt their culturesaccordingly. Both offshore and onshoreoperations should have well-defined and fullyLimited investment, fragmented technologyenvironments, and outdated systemsstifle innovation, operational agility, datasharing, and process efficiency; lack oftrading and placement platforms and techintegration generally cause higher costs.Although many believe core technologyupgrades produce only limited return oninvestment, they are usually required forfirms to deploy advanced digital capabilities.These are critical to new product offeringsand programs. An alternative for somecompanies is to build new platforms besidelegacy systems so they can launch newproducts more quickly and efficiently.Historically, insurers have collected lotsof data, but analyzed very little of it andstruggled to generate valuable insights fromit. They lag behind other sectors in thisregard. The lack of connectivity and inabilityto use risk data more effectively inhibits thedevelopment of high-value services, a hugeopportunity for many market participants.Millennials who see insurance as anappealing industry:Average spend on application and solutiondevelopment as percentage of total IT spend:Proportion of corporate data currentlyused for analytics:4% 20%27%Source: The HartfordSource: EY analysisSource: Forrestertested business continuity plans.Insurers and reinsurers need clear vision andfresh perspectives to address both externalchallenges and internal constraints.10 NextWave Insurance: large commercial and reinsurance
2030large commercial globalmarket projectionDespite the severity and extent of these challenges, largecommercial insurers and reinsurers have realized approximately 200 billion in top-line growth during the last ten years. Thescale of this growth should provide optimism for the 2020s, giventhat the 2010s were characterized by a soft cycle and limitedinnovation in products and technology.Gross written premiums:Average ratios:from 2020Total: 1.6 trillionInsurance: 1.2 trillion 500 billionfrom 2020Combined:70%45%15%Acquisition: 300 billion15%Retrocession: 30 billion 10 billionSource: Industry databases, EY analysis11 NextWave Insurance: large commercial and reinsuranceAnnual opportunity by 2030:GWP: 600 billionProfit:Loss:Reinsurance: 100 billionWe believe that top-line growth of up to 600 billion can beachieved by 2030 through new customers (particularly in fastgrowth markets), a hardening market, well-targeted technologyinvestments, strategic partnerships, and innovative new productofferings focused on intangible assets.10%Administrative:10%10% 500 billion
2030 large commercial global market projectionGrowing the top line with advanced tech andproduct innovationThe opportunity is significant for the entire industry. By focusingon product innovation for intangible risks and targeting fast-growthmarkets, insurers and reinsurers can seize the huge potentialupside. As for technology adoption, artificial intelligence (AI),machine learning, and big data will be critical to drive growth. That isespecially true in pricing intangible products. It is the combination oftechnologies (e.g., AI, machine learning and sophisticated businessrules engines, blockchain, and other enabling tools) that will make thedifference for insurers.Partnerships with local industry participants and the continued riseof GDP and insurance penetration in fast-growth markets will furtheraccelerate the growth of large commercial business. Rate increaseswill form only a fraction of the market growth over the next decade.Because they lack statistical histories, insurers will have to do thehard work of finding data to model the costs and impact of intangiblerisks — including brand impairment and disruptions to virtual supplychains — and develop a methodology to price it. The industry hasbeen in this situation before. Only a few years ago, insurers creatednew models to price terrorism policies. In the early 20th century, theindustry developed the ability to price natural catastrophes.Boosting the bottom line by optimizing ratiosSignificant ratio improvements are built into our projections. Bettertechnology and increased automation will deliver massive gains inprocess efficiencies and, therefore, considerable cost reductions.More effective loss prevention will make a significant bottom-linecontribution, thanks to more precise data-driven risk assessments andreal-time risk visibility. Acquisition ratios will fall as direct and digitalplacement becomes more common. Cloud-based and blockchainenabled platforms will connect customers and carriers more closelythan before.In terms of expense ratios, automation will eliminate many timeconsuming manual activities. Distributed ledgers, cloud technologiesand AI will enable straight-through processing for simpler andhomogenous risks, as well as helping to lower headcounts inadministrative roles across the front and back office.Blockchain and the cloud are critical technologies to improving ratiosand unleashing growth. By streamlining the matching of capital andrisk, increasing visibility into changing risks, and enabling smartcontracting and automated loss resolution, blockchain is alreadyproving itself to be a transformative technology for insurance.Beyond releasing capital tied up in on-premise data centers, cloudenvironments simplify collaborations with external suppliers and canhelp streamline product development and launches.12 NextWave Insurance: large commercial and reinsuranceMany things must go right for theindustry to realize the potentialgrowth, and not all companies willshare in it equally or advance at thesame pace. Indeed, in some regions,most notably Asia-Pacific, the mostinnovative insurers have alreadyembraced many of these NextWaveideas. Consolidation and M&A maybe necessary for some smaller firmsto gain the scale they need to realizethe full benefits of automation.However, based on the sector’shistorical resiliency, we believethese numbers are attainablewith the necessary bold leadership,well-informed investment decisions,cultural change and increasedcustomer-centricity. Stabilizationof the global economy after theCOVID-19 lockdown — which insurerscan help lead — is a must. Perhaps themost important ingredient for successis a sense of urgency; the time is nowfor insurers and reinsurers seeking towin in the next wave.
Our framework: how we arrived at these projectionsThe estimates above are based on the domain knowledge of EYInsurance analysts and a proprietary model that factored in: The most recent available GWP numbers from insurance industrydatabases covering global regions and markets Organic top-line growth deriving from GDP gains and the resultinggains in insurance penetration, based on historical data Increased demand generated by new products and services,and other innovations Gains from process efficiency, including improvements from newtechnologies Unique predictive models for different global regions based on fivekey mature markets (US, Japan, UK, France, Germany), and fivefast-growth markets (China, India, South Korea, Brazil, Mexico), aswell as the likely impacts of rate movements on growth13 NextWave Insurance: large commercial and reinsuranceWe also accounted for the development of a new market “engine”as the traditional value chain becomes more dynamic and existingbusiness models evolve toward greater specialization. The variousscenarios throughout this paper highlight how individual marketparticipants may refine their strategies and operations in pursuit ofimproved performance and growth.Note: These projections were completed early in 2020, before the fullextent of the disruption of the coronavirus became clear. However, theEY Insurance team stands by them. Indeed, we believe the COVID-19situation will accelerate the trends and developments we haveoutlined here. Those trends include the shift toward loss preventionand risk advisory services, process digitization and automation, usagebased products, and a focus on new and emerging risk classes (suchas those related to climate change, pandemics and cyber security).
The customerof the futureClients already want something different.Soon, they will demand it.Given how fast — and fundamentally — their customers are changing, largecommercial insurers must develop new offerings. And without new productsand new ways to serve customers, insurers will struggle to seize the top-linegrowth opportunity that sits before them.EY NextWave research confirms that businesses of all shapes, sizesand sectors are aiming to be more platform-like by: Building highly sophisticated and fully integrated digitalinfrastructures Operating on and trading through the cloud Processing transactions frictionlessly Innovating continuously, largely via collaboration and co-creationwith suppliers, partners, and even customers Generating scale and expanding their footprints to create diverserevenue streams Enhancing and personalizing customer experiences Relying on flexible sourcing and contingent workforce strategies Participating in emerging ecosystems to support risk protectionand loss prevention needs2See page 38 for definition3See page 38 for definition14 NextWave Insurance: large commercial and reinsuranceIn these models, intangible assets — brands, IP, networks andexperiences, virtual supply chains — comprise most of the value.In the past, the largest businesses were built on mostly tangibleassets and insurers priced commercial risk based on the number ofthose assets, as well as a firm’s revenue and headcount. Pricing forintangible risks will be predicated on a fundamentally different set ofassumptions than traditional pricing models.Today’s lean and tech-fueled organizations place more value onpreventing losses than on transferring risks. They will increasinglyexpect insurers to bring forward-looking insights to them so theycan make policy adjustments proactively. Thus, standard languageand traditional policies may not fit the unique situations ofindividual companies.Similarly, annual renewal cycles may not be frequent enough toreflect constantly evolving risk profiles, especially those related tovirtualized supply chains or reliance on third parties. Increasinglywidespread, more sophisticated and tailored collective policies2 thatcover all the links in a supply chain would better reflect how manybusinesses actually operate today. Similarly, smart contracts3 thatcan be updated efficiently as risks change would be synchronized tothe accelerated pace of many sectors.
The customer of the futureTomorrow’s customers want policies that are tailored to moreaccurately reflect their actual assets and operations. They will alsoneed to be more flexible and usage-based. Insurers need to findnew ways to quickly underwrite and price emerging risks (suchas pandemics, cyber attacks and climate change), and carefullymonitor client needs going forward.Although not every company will be a unicorn, consider theimplications of one of the bigger stories in commercialinsurance in the last few years. The world’s biggest peer-to-peerproperty rental company moved the largest-ever real estateportfolio into the commercial insurance market. The mostastonishing fact was not necessarily the amount of premium,but that the customer doesn’t own any property — its assets arealmost entirely intangible, meaning risks have shifted frombeing primarily asset-based and first-party oriented to beingthird-party oriented and liability-based. Such anomalies willundoubtedly be more common in the mid-21st centuryglobal economy.Serving the customer of the futureThe traditional practice of pushing products into the market andseeking the right price point will no longer be sufficient to servetomorrow’s platform-driven companies. Consider what insurers canoffer if they are willing to take on new roles: New products to cover intangible assets and virtual operations A wide range of advisory services related to risk management andloss prevention More choice, coordination, and personalization for insureds,including through the promotion and endorsement of specializedmarket players and partners Tailoring of coverages and services relative to sector, geography,operating model, and product and protection needsInsurers must also understand the increasing importance of environmental,social, and governance (ESG) factors. Today, more firms articulate a clearpurpose and a commitment to sustainability and other issues, partially becauseconsumers expect them to do so. ESG, and the related area of corporate socialresponsibility (CSR), feature more prominently in investors’ strategies.Insurers can align to these expectations by showing leadership, as some havedone on climate change in their refusal to offer coverages for coal-burningpower plants. Some insurers may help companies as they seek to becomegreener and more sustainable in their operations.15 NextWave Insurance: large commercial and reinsurance
Envisioning the next wave: from a linearvalue chain to a dynamic value exchangeFor generations, the commercial insuranceand reinsurance value chain has been highlylinear, with dependent relationships amongkey stakeholders. As a result, many tasksand activities have become inefficient. Andthanks to misaligned incentives, not all workdirectly supports the ultimate objective ofadding value for the end customer.In the next decade, this chain will be transformed into a moredynamic, efficient and data-driven value exchange that addsconsiderably more value for customers and contributes significantlyto top-line growth and profitability gains for the industry.This is not to say that all existing functions and processes will beeliminated. Capital and risk management, business support andenablement (including finance, HR, and IT functions), and lossresolution will all remain important. However, they will be handledin new ways (e.g., through automation or outsourcing). Greatertransparency will lead to the elimination of rewards for simply havinga legacy or gatekeeping role.New services and tasks (such as loss prevention) will become moreimportant. So-called ancillary services (such as risk advisory) willmove to the heart of the value proposition and become primaryproducts for certain market participants.In the wake of the COVID-19 outbreak, we expect leading insurersand reinsurers will rapidly expand not only specific coverages forpandemics, but also the loss prevention and risk advisory servicesthat will allow them to significantly upgrade their core valuepropositions.Although this tran
shrink organically. Those that make the right bold decisions and change effectively will translate opportunity into results. See "10 high-impact market scenarios," page 28 The large commercial insurance and reinsurance sector is entering a time of turbulence. Whether it's also a period of breakthrough
3 NextWave Insurance: life insurance and retirement NextWave Insurance: life insurance and retirement Given the nature of the life insurance and retirement market, its leaders have always taken long-term views of their strategic horizons and growth prospects. Today, a combina
Insurance leaders must maintain their resilience in navigating an uncertain present and a complex and turbulent future. As the strategic . substantial reductions in personal and commercial auto risk will need to be replaced. Regulatory and liability issues will only grow more complex. Tricky ethical questions regarding consumer
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The commercial health insurance market is the only source of health insurance directly regulated by the Utah Insurance Department, hereafter referred to as the Insurance Department for the purposes of this report. Approximately 44 percent of Utah's commercial health insurance market is comprehensive health insurance (also known as major medical).
The commercial health insurance market is the only source of health insurance directly regulated by the Utah Insurance Department, hereafter referred to as the Insurance Department for the purposes of this report. Approximately 40 percent of Utah's commercial health insurance market is comprehensive health insurance (also known as major medical).
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