Understanding the market

Three interconnected components are critical to the insurance market: demand from risk owners, supply from capital providers, and the data and analytics risk assessment capability needed to join the two and effect a transaction.

As in prior editions, we have dedicated sections of this study to the relevant trends in each of these three areas. In addition, we now see a fourth component of the insurance market exerting its influence on the other three: the transformative power of technology. But rather than view technology as a disruptor, we instead see it as a key source for renewal and growth.

Collaboration is key

Unlike earlier waves of the technology revolution, the “third wave” of innovation is taking place in industries with established incumbents that cannot be easily replaced by a new app on your phone. These industries—such as healthcare, transportation, education, and food, as well as insurance tend to be capital-intensive, infrastructure-dependent, and are often subject to regulation and policy considerations that become critical factors to navigate in doing business. Despite the zeal and consternation over “disruptive” technology, the theme in third wave industries is more likely to be “technology + incumbents” than “technology vs. incumbents.”

Steve Case writes that third wave industries are characterized by having gatekeepers: the key decision makers that are responsible for approving products before they enter the market. While it is a relatively small task for an individual consumer to choose to ride an Uber or Lyft instead of a traditional taxi, it is a much larger task to change the technologies used in surgeries at major hospitals. And we accept having gatekeepers for surgeries—including doctors, regulators, and insurers—because a surgery comes with a level of risk that these gatekeepers help us to mitigate. For insurance, the incumbent system of carriers, agents, brokers, 5 and regulators are the gatekeepers that can allow emerging technologies to gain traction. So while we may fear would-be disruptors, it pays to remember: they need us as much as we need them. Hence the need for collaboration in the third wave.

What does this look like in practice? Collaboration in insurance can take many forms, from innovation labs to corporate venture capital funding for start-ups. We will discuss these in greater depth in the Capital section. And collaboration can either be experimental or core in nature.

• Experimental collaborations have the potential to really define the future performance of a company, but require a higher level of risk taking and acceptance of the possibility of failure. These collaborations tend to involve fewer participants as a result. For example, the blockchain consortium B3I was created to pioneer research on capital management and efficient transaction opportunities for its members
• Core collaborations are inherently less risky, but can attract widespread participation from across the industry more easily. For example, Lloyd's and London Market participants are investing in a new target operating model (TOM) that includes a placement platform aimed at reducing frictional costs.

In either case, participants work collectively to overcome potential hurdles such as standardization, regulation, and systems integration, at a reduced cost and with the assurance of mutual commitment.

Insurers should strive to balance the types of collaborative initiatives they enter, and each come with different risks. Through the TOM, for example, collaboration will improve the competitiveness of all London Market participants, helping to protect market share of participants from external threats in the process, but without tilting the playing field toward any one participant in particular. This form of collaboration needs to be chosen by all, for the benefit of all. But by itself, core collaboration is not enough. Experimental collaborations have the potential to provide a competitive advantage for those who choose to participate. These kind of collaborations have the potential to create new kinds of data and analytics, enabled by technology, to find new ways to bring insurance risk and capital together, and realize growth in this market.

Opening up

When we look at the possibilities for collaboration in insurance, it’s important to find a balance between the stability of gatekeepers and the creative potential of innovators. For this, we should seek to collaborate with an open architecture—in other words, a system that sets operating standards while at the same time allowing for a great deal of flexibility and permutation. When we think about the Apple App Store, the Google Play Store, or eBay, each of these platforms have become a commons where an astounding array of things are bought and sold by many buyers and many sellers, held together by a set of rules and norms that provide sufficient security for these markets to continue and thrive. Such an open architecture will be difficult to create in the current insurance environment – but we believe it is essential to us taking dynamic steps forward . Successful organizations will treat collaboration capability as a source of sustainable competitive advantage and will invest in it accordingly.