NextWave Insurance: Personal Lines And Small Commercial (pdf) - EY

Framing the next waveRevenue threatsand opportunitiesare everywhereMegatrends and disruptions driving uncertainty today will have definitive impactsin the near to middle term, potentially diminishing traditional lines of business andrevenue sources. At the same time, innovators — including non-insurers — may viewcrises as opportunities to enter the business, either directly or through partnershipswith incumbents.Climatechange 219 billioncombined global insurance losses from naturaldisasters, 2017–18 Source: Swiss Re90%natural disaster costs that can be attributed toweather-related events in an average year Source: Munich Re5xtotal economic losses caused by hurricanes in 2017relative to average of the prior 16 years Source: Aon Benfield 201830%average percentage of catastrophic losses coveredby insurance, 2009–18 Source: The Economist 180 billionglobal protection gap for weather-related risksSource: Swiss Re11NextWave Insurance: personal lines and small commercial

Framing the next waveCOVID-19The pandemic demonstrates the industry'srisk-opportunity paradox: widespread remoteworking increases cyber risks but reduces thelikelihood of automotive claims.During the lockdown, P&C (property and casualty) insurersresponded with auto premium holidays and rebates andreinforced their messaging about telematics-based productsthat offer discounts in exchange for driving data. The stabilityof retention rates post-COVID-19 shows the effectiveness ofthese strategies. 10.5 billionestimated amount of auto premium refunds,discounts, dividends and credits offered by insurersin the wake of COVID-19 Source: Insurance Information Institute40%–60%reduction in miles driven and car trips taken duringlockdown Source: Swiss Re, Arity0.1%growth in global non-life premiums, 2020Source: Swiss Re 40 billion– 100 billionprojected losses for P&C insurance industrydue to COVID-19 Source: EY analysis, Swiss Re12NextWave Insurance: personal lines and small commercial

Framing the next waveDriverlesscars23 millionnumber of level-4 autonomous vehicles on the roadby 2025 Source: Stevens Institute of Technology21%compound annual growth rate of collision-avoidancetechnology market 2018–25 Source: Grandview Research 96 billionusage-based auto insurance market, 2025, 4xgrowth from 2018 Source: Markets and Markets7.1 billionCybercrimenumber of identities exposed in data breaches2010–17 Source: Symantec 23 billionglobal cybersecurity insurance market by 2025Source: Adroit Market Research38%global organizations reporting that they areprepared to handle a sophisticated cyber attackSource: ISACA13NextWave Insurance: personal lines and small commercial

Framing the next waveThe upside ofunderinsuranceInsurers are well-positioned to help protectthe many underinsured consumers andbusinesses around the world. They mustfind ways to engage younger consumers —the so-called “generation rent” — sooner.As these consumers wait longer to40%purchase vehicles (which they may neverdo), buy homes, get married or havechildren, their first interactions withinsurers happen later in life. Insurers mustinnovate with technology to engage andsupport underserved markets. Insurers inemerging markets exhibited great creativityin using mobile phones to provide microinsurance, asset-based coverages andembedded insurance purchases in theirefforts to connect to the underinsured.14NextWave Insurance: personal lines and small commercialUS consumers who can’tmeet a 400 short-termemergencySource: US Federal Reserve

Framing the next wavePercentage of US consumers aged25–37 who are marriedHome ownership %200146%2018Source: Pew Research CenterSource: HSBC8–20 yearsaverage number of years bywhich retirees in six major globaleconomies will outlive theirretirement savingsSource: World Economic Forum15NextWave Insurance: personal lines and small commercialChinaMexicoUSUKAustraliaUAE

Envisioningthe next wave:10 marketscenariosThe following scenarios reflect ourthinking about likely developments inthe next 5-10 years. Many of the issuesare already influencing C-suite andboard-level decisions. Soon they willbecome operational realities, the newnormal, across the industry.0102030405060708091016NextWave Insurance: personal lines and small commercialNew types of policies protectsmall businesses and societyagainst the unthinkablePersonal carriers shift focusfrom automotive policies tohome-centric product hubsReal-time risk visibilityand responsivenessbecome realityDirect, digital, and embeddedsales become dominantchannels for growthWeaponizing data andcompeting on experience,tech giants reinvent theinsurance modelThe auto insurance marketdramatically contracts asdriverless vehicles and ridesharing eliminate riskCyber risks present a hundredbillion-dollar opportunityand trillion-dollar threatThe ecosystem expands: cloudmodels and new connectionsenable radical innovationThe subscription revolutionarrives: insurance becomesdeeply woven into consumers’everyday livesAI adoption accelerates inclaims: the last processorturns out the lights

01Envisioning the next wave: 10 market scenariosNew types ofpolicies protectsmall businessesand society againstthe unthinkableLeaders launch relevant new products quickly to meetmarket demand and shore up their reputations.Laggards continue to offer the same policies.In the wake of COVID-19, there wasconsiderable public outcry and litigationrelative to pandemic exclusions. Whileinsurers are often on strong legal ground,their trial in the court of public opiniondiminishes brand reputations and weakenstrust in the in the industry. Despite billionsof dollars returned to consumers in theform of premium holidays and rebates,the pandemic’s overwhelming damage tosmall and medium sized businesses is ofgreater interest to elected officials and themedia, who often play to perceptions thatthe industry isn’t standing by its customersduring a global crisis.In response to the controversy, insurersengage regulators on private-publicconsortiums to backstop future pandemicrisks. Industry risk pools are formed inmarkets around the world as the risks are17NextWave Insurance: personal lines and small commercialsimply too great for the industry to assumeby itself. Insurers clarify policy languageand identify what is covered and what isexcluded. Some carriers go on the offensiveand develop new policies that address someelements of the market need for pandemicbusiness interruption coverage.These new policies are underwritten andpriced so small businesses gain some limitedprotection and are structured on triggersand thresholds that build on traditionalloss limitations and deductibles. Pricingthese new policies is extremely challenging,given the lack of actuarial history, potentialconcentration risk, and the lack of anyknown or predictable period of restoration.Parametric coverage helps address thelack of risk assessment clarity and claimsadjustment complexity.

01. New types of policies protect small businesses and society against the unthinkableHow this changes insurancein the next waveAccepting the challenge, leadersput their brightest data scientistson the task of modeling andpricing the risk, with appropriatetriggers for government-backedprotections. They use advancedanalytical techniques and applylearnings from the COVID-19pandemic, natural disasters andcyber attacks. The necessary riskmanagement discipline proves toomuch for laggards, and they miss theopportunity for improved customerretention and revenue growth.The most innovative carriersenhance their offerings withrisk advisory services that helpbusinesses prepare for theunthinkable and that directly alignto insurers’ purpose statements.These complex offerings arecommunicated in simple terms sothat they can be sold through digitalchannels. Carriers find ways toenhance pandemic-related healthprotections, adding new coveragesand preventive services withinpersonal lines. They also develop andmarket new product bundles thattranscend traditional product silos.Insurers engage regulators andcollaborate on extensive educationprograms for agents, brokers andpolicyholders. The industry isable to generate new premiumsas it lives its purpose throughenhanced risk awareness,prevention and protection.1,229number of COVID-19-related legal filings against theinsurance industry in the US (as of September 14, 2020)Source: University of Pennsylvania34%top-line growth achieved by leading digital-only Chineseinsurer during COVID-19Source: Zhong An18NextWave Insurance: personal lines and small commercialImpact and valueforcustomers: Increased preparedness and protectionagainst future “black swan” events Clearer understanding of coveragesMore flexible buying options — viabundles and through digital channelsImplications andpossibilities forinsurers: Demonstrated leadership in helpingsociety restore the economy Proactive engagement withgovernments on broad societal risks Increased insight into the potentialimpacts of unthinkable events Increased revenue through newofferings for prevention and protection Clearer contractual language to reducethe risk of litigation

02Envisioning the next wave: 10 market scenariosPersonal carriersshift focus fromautomotive policiesto home-centricproduct hubsLeaders proactively manage falling auto premiumswith blended offerings and new features centeredon homeowners insurance.Laggards don’t make the adjustment and suffersignificant premium erosion.In the aftermath of the economic lockdownscaused by COVID-19, automobile trafficsignificantly diminished across the country.As the lockdowns eased and the economycame back to life, miles driven rebounded,though remote working significantly reducedcommuting. It is not clear when — or if —miles driven will return to prior levels.COVID-19 accelerates the shift awayfrom auto-centric insurance relationshipsto products and services that provideprotections for the unique needs ofindividual homeowners. Carriers getcreative in designing new features that19NextWave Insurance: personal lines and small commercialreflect the reality of dramatically morecomplex households, including propertycoverage, small business endorsements,warranty coverage, cyber coverage, petinsurance, enhanced liability and personalarticle coverage, and other features.Leading carriers increase their digitalengagement with customers, withconnected data and ancillary servicessupporting the broader homeownerecosystem. The top performers live theirmissions and align the value of insurance todistinct and evolving customer needs.

02. Personal carriers shift focus from automotive policies to home-centric product hubsHow this changes insurancein the next waveAs the focus shifts from autoto home, leaders embrace theopportunity to get closer tocustomers. Auto policies becomeincreasingly usage-based, withpremium and coverage adjustmentsto reflect fewer miles driven.For their part, laggards are slowon the uptake with usage-basedinsurance (UBI), bolt-on features andtargeted offerings for market niches.They also struggle to integratefeatures in bundles that are easy tounderstand, buy and use.Leaders focus on personalprotections, with new and diversifiedofferings built on the foundation ofhomeowners coverage, with addedfeatures to provide for rent andmortgage payments in the case offuture job loss or major economicdisruption. They apply lessons fromearly adopters that struggled withfirst-generation income protectionproducts. Because they are pricedattractively, the new solutions gaintraction and retain share even asemployment levels normalize. Gigworkers especially like the offeringstailored to their needs.Getting it right requires greaterimagination, more sophisticatedunderwriting and richer digitalengagement to enable intuitiveexperiences (e.g., “swipe left, swiperight” for additional coverages). Inmany cases, leading insurers partnerwith third parties to offer tailoredcoverages and add-on services.These developments furtheraccelerate the shift to subscriptionsand non-indemnity revenues.Employees who will work remotely at leastsome of the time:48%30%Post-pandemicPre-pandemicSource: Gartner20%growth in time spent online in China duringquarantineSource: Nomura20NextWave Insurance: personal lines and small commercialImpact and valueforcustomers: Better pricing and coverages reflectinghow people live, work nd drive Increased ability to shift protections andadd services as needs change Clearer understanding of the valueof insuranceImplications andpossibilities forinsurers: Increased relevance, engagement andretention Clearer demonstration of purpose,resulting in higher levels of trust Enhanced ability to launch new productsand add features and services toexisting offerings

03Envisioning the next wave: 10 market scenariosReal-time riskvisibility andresponsivenessbecome realityLeaders act on the insights boldly and swiftly.Laggards can’t keep up with all the data.Leading insurers are data-driven andinsight-enabled in everything they do,from straight-through processing in bothback-office and customer-facing functions,to sophisticated pricing and underwritingalgorithms, to thoughtfully segmenteddigital marketing programs.The next major innovation opportunitywith data and analytics involves rapidlyidentifying and precisely measuringrisk, and then using that insight toproactively meet customer needs. In thewake of COVID-19, risk forecasting andmanagement take center stage in helpingthe global economy recover and preparefor future threats.Consumers have become accustomed totailored notifications and prompts throughactivity trackers, wearable tech and mobileapps. Consumers and business owners21NextWave Insurance: personal lines and small commercialwho like personalized guidance for traffic,weather and fitness will likely accept similarservices for risk exposures (particularly if ithelps them save money).Leaders will be those firms that buy, buildor partner for the infrastructure and toolsthey need to capture, manage and analyzereal-time risk performance data effectively.They will continuously operationalizeand monetize their information assets byadjusting pricing and providing immediateperformance feedback to customers.Even if laggards collect the data — 90% ofwhich didn’t exist two years ago and whichwill only expand exponentially with theadvent of 5G — they will be overwhelmedwith its volume, variety and velocity andwill struggle to produce meaningful orvaluable insights.

03. Real-time risk visibility and responsiveness become realityHow this changes insurancein the next waveInsurers will capture streams ofdata from apps, mobile devices,wearable tech, connected vehicles,smart homes and workplaces, aswell as alliance partners and thebillions of devices connected to theInternet of Things (IoT). By applyingAI, machine learning and otheradvanced analytics techniques,insurers can measure risk and pricepremiums in real time, leadingto discounts, tailored preventionservices and usage-based products.Through mobile apps andpersonalized portals, insurerscan promote risk awareness andprevention by sharing proactive tipsand alerts. These capabilities havebeen extensively piloted by manyinsurers. The next step is to drivewidespread customer adoption.Customers can also lower theirpremiums in real time by adoptinglow-risk behavior (e.g., drivingat different times or on differentroads, conducting safety trainingfor workers). Satellite imagery andpredictive analytics will enableinsurers to provide real-time feedbackto insureds on wildfires, storms andother weather-related exposures.However, as insurers become moresavvy and sophisticated in risk-basedunderwriting and pricing, higher-riskindividuals and companies may bepriced out of the insurance market,furthering an already seriousinsurance gap.Real-time risk visibility is clearlya win-win. For small businesses,better risk management promotesbigger profits. For individuals, it’sabout safer and better lifestyles.At the same time, insurers benefitfrom closer long-term relationshipsbased on more frequentinteractions and opportunities toadd value.Impact and valueforcustomers: A safer and lower-risk lifestyleand workplace Potential cost savings through lowerpremiums Higher prices for higher-risk individualsand companies, including those that can’tor won’t take corrective action to reducetheir risk profiles Increased profitability for small businessesbased on better risk managementImplications andpossibilities forinsurers: More accurate risk measurement formore informed decision-making More precise and profitable pricingthrough real-time premium optimization Algorithmic underwriting andcontinuous rules refinement Increased customer engagementand trust27%proportion of corporate datathat is used for analyticsSource: Forrester22NextWave Insurance: personal lines and small commercial

04Envisioning the next wave: 10 market scenariosDirect, digital andembedded salesbecome dominantchannels for growthLeaders seize the cost savings and master theomnichannel approach.Laggards have trouble moving beyond their historicalchannels and never catch up to early adopters.The long, slow decline of the traditionalagency model will continue and evenaccelerate in mature markets. COVID-19was a wake-up call in that insurers glimpseda future in which digital is the only viablesales and service channel. Agencies willaggressively fight and take defensive steps(e.g., consolidation and enhanced services)to protect their position. They will enhancedigital capabilities to meet consumerdemand and complement — rather thanreplicate — the capabilities of large insurers.Several large carriers will remain committedto agency models. The human touch willbe less frequent and focused on highervalue moments. And the human touch willbe delivered via the phone, web chats orvideoconference rather than face-toface settings.23NextWave Insurance: personal lines and small commercialIn the future, agents will emphasize advisoryservices for consumers and businesses withmore complex risk profiles. They will embracecontextual information, complete customerdata, next-best-action analytics and one-anddone processing. They will deploy mobiletechnologies, such as texting and apps, toenhance sales and service experiences. Asagents go upmarket, insurers will benefitfrom lifetime premiums generated anddurable customer relationships built onfinancial well-being.However, direct and digital channels willcome to dominate the mass market becauseconsumers prefer the simplicity and control.Embedded sales will grow as more companiesselling products and services seamlessly offerinsurance at an attractive price, which willgenerate additional revenue.

04. Direct, digitaland embedded sales be

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