Insurance sector must rapidly embrace sustainable business models

19/08/20

Focus on customers and their needs

PwC recently published the report ‘Beyond Covid-19: Five key strategic priorities for a post-crisis world’. This report outlines the strategic options for the insurance sector amid the economic fallout from the pandemic. ‘This crisis has made the vulnerability of insurers tangible,’ says PwC partner Matthijs Kortenhorst, commenting on the report. ‘It is now even more important to embrace new, digital and above all sustainable business models which focus on customers and their needs. This all has to happen a lot faster than has been thought up to now.’

- Is the corona pandemic bringing a sense of urgency to the insurance sector?

Kortenhorst: ‘I do indeed hear that from directors. There’s the feeling that we are on the eve of major changes. In the period following the financial crisis 10 years ago, the insurance sector already faced loss of turnover, thinning portfolios and shrinking margins. The market became more difficult, and low interest rates certainly didn’t help. Firms consolidated to cut costs, but that strategy has its limits. At the same time, there was a growing awareness that the existing earnings models no longer suffice. It’s likely that the economic consequences of this pandemic will put further pressure on the conventional earnings models. We don’t yet know how severe the looming economic crisis will be. But it will certainly be a considerable challenge. The market is becoming even more difficult for the insurance sector than it already was. It’s understandable that this is causing concern in the boardrooms.’

- If the insurance sector continues to worsen in the coming period, do directors know what course they need to follow?

‘I think they know it in broad terms, but up to now everything has happened fairly slowly. Now it is vital that we move quickly. If insurers want to stay relevant to their customers, they are going to have to develop earnings models that really focus on customers and their wishes and priorities. I know that people have been saying it for a long time, but more than ever before, this is our task for the time to come. Propositions can go much further than insurance alone. They can extend, for example, to healthier living, safer travel and safer homes. In this context, sustainable, environmentally friendly, socially equitable, digital and ‘cool’ have to be prerequisites, because young target groups find those things important. I can already see nice examples of this way of thinking. Take Vitality from ASR, where an app has been developed relating to health insurance, with all kinds of functionalities with which a customer can manage their own health. In this respect, time is on our side. Many things are possible, thanks to technological developments and digitisation. But to start with, you have to think about what you want to be for your customers and be prepared to accelerate development.’

- Does this also mean that companies will have to be organised differently?

‘That seems essential to me. We will have to work with new organisational models. In the old models, tasks are often still functionally separate. You see departments for operations, sales, finance, IT, etc. This leads to silos, lost time and mistakes. At the insurers of the future, work is organised according to a customer’s journey and experience. Take, for example, obtaining a mortgage. In future, all these functions will be concentrated in one team. That lets you move more quickly, precisely and efficiently, and you offer the customer a pleasant experience.’

- What else can insurers do?

‘The existing business must become more efficient and cheaper, and productivity has to rise. For various reasons, outsourcing is now far from being an attractive option in all cases. In addition to the decline in the cost advantage, there is also the risk of discontinuity in the event of another lockdown. This is because if there is a pandemic, work also comes to a halt in low-wage countries. The solution is to simplify products and automate as much as possible. That means saying goodbye to old IT. Technology has now reached the point where you can automate all kinds of processes, so that there is little or no need for human intervention anymore. Outsourcing is then simply no longer needed. The accelerated digitisation of processes is therefore extremely important, in the front office first of all, but ultimately throughout the organisation.’

- The Covid-19 report for the insurance sector also mentions tapping new revenue streams. How can companies do that?

‘Companies can set up cooperative partnerships with new partners and join various platforms (ecosystems) or build their own platform, so that their range of services encompasses more than just insurance products. I see that players such as ING and NN Group have taken this route. With the digital platforms that they develop, insurers can become distribution partners, for example for suppliers in the areas of work, well-being, living and travelling. They can create communities around their platform and take more tasks off their customers hands by offering more than just products that provide protection against risks. At the same time, they can also seek new partners in order to distribute their own insurance products. Bancassurance might well make a comeback – that’s my assessment.’

- If digitisation and automation play a key role in innovation for insurance companies, what does that mean for the staff?

‘There will be employees who cope very well with retraining in such a transition phase. For others this will be more difficult. The digital transformation of organisations goes hand-in-hand with a transformation of the workforce. In any case, there is an impact on the staff who, to a greater or lesser extent, all have to be given further digital training.’

- Legislation is being prepared at the European level which requires insurers to work and invest in more sustainable and ‘greener’ ways. What are the consequences of this for the transition that the insurance sector is currently facing?

‘Sustainable asset management will be part of future operations. It remains important for us to strengthen our own capital position. But investing in clean industries, contributing to the ESG goals and the European Green Deal will characterise the entrepreneurship of the future. After this crisis, the ‘new normal’ will increasingly highlight care for the environment, which I think is an excellent development. Insurers will have to participate in this development, both on the investment side and in their company’s processes and positioning. This is not only required under new legislation: customers also increasingly expect it from insurance companies. Ignoring it is not an option. We have seen with banks that sustainable business models are successful. Triodos Bank is one example. I can’t see why things should be any different in the insurance sector.’

‘Many things are possible, thanks to technological developments and digitisation. But it starts with thinking about what you want to be for your customers and being prepared to accelerate development.’

Matthijs KortenhorstPwC