This week we’re taking a look at the state of the property and casualty (P&C) insurance industry from both an external and internal perspective, laying out some disruptive forces that are shaking up the way P&C is sold, bought, and understood by the end user.
Property and Casualty (P&C) insurance is in the midst of serious disruption by both internal and external forces. These changes are influencing strategy decisions for both insurance agents and insurance carriers.
External Influences
The P&C insurance industry is in an upward swing and ROI from all operations are at heights not seen since the 2008 financial crisis. Since 2012 industry combined ratios – sum of all expenses divided by the total earned premium income – are positive, which signals a more stable insurance-policy environment overall. See image 1 for a 2005 to present trend analysis (Source: EY, 2015).
Image 1
Recent years have seen ROI decline faster than combined ratios, and the declines are pressuring insurance carriers to reassess and transform their revenue streams for improved future growth.
Let’s examine some of those pressures that are driving down that ROI:
Investing Environment: P&C insurers earn their profits by investing premium incomes into a variety of financial assets, and paying out claims from both earned premium and investment income later on. Referred to as a “float”, it is the time period between when premiums are earned and claims are paid out (Source: Wiki Invest).
Understandably, P&C insurers tend to invest their premium incomes into safe and lower risk assets. The three primary investments favoured by P&C insurers are stocks, corporate and government bonds, and mortgage backed securities. Image 2 illustrates a breakdown of investments for P&C (Source: Market Realist, 2015).
Image 2
Volatility in global financial markets, stalled interest rate recovery, and maturing assets being invested at lower rates are all contributing to a depressed ROI for P&C carriers (Source: EY, 2015).
Reinsurance Market: The spike in P&C profitability from fewer catastrophic events and policy claims has seen a renewed interest among investors in the reinsurance market. Image 3 helps illustrate this year-over-year change (Source: Deloitte, 2014). Sustained downward risk is contributing to a growing interest from hedge funds, and EY predicts that this will increase with stronger predictive modeling (Source: EY, 2015).
Not to be mistaken, reinsurance markets are an essential component of P&C insurance given that they spread out the risk currently on the books of the primary insurer. Unfortunately though, the continued growth of reinsurance is greater than that of insurance exposure and subsequently leads to volume increase and depressed pricing for policies (Source: EY, 2015).
This kind of pressure depends largely on the risk tolerance of the market, and insurance claims being paid out as a result of environmental events. For now however, reinsurance appears to be on a steady pace.
Image 3
Depressed Policy Rates: Volume growth is now spilling over from the reinsurance market and into primary insurance. KBRA expects insurance rates to remain flat, and even decline through 2016 and into 2017. Rate influences are expected in both commercial and property markets.
Commercial insurance is expected to decline by the low-to-mid single digit percentages, meanwhile property and even reinsurance is expected to decline by as much as 10% over the next 12 to 18 months (Source: SeekingAlpha, 2015).
Should these trends continue on this path and in line with analyst expectations, insurance carriers will need to re-evaluate their current operations, trim expenses, and improve profitability elsewhere.
Unpredictable organic growth opportunities and a need to reduce risk is leading many insurance carriers to look internally for ways to improve their ROI outcomes. Of particular interest is an insurance industry push for internal partnering with Finance Departments for future strategy.
Internal partnering is something we’re familiar with at SKURA. I will be covering the benefits and drawbacks of finance-led planning in a future post. If the topic is of interest, you can start by reading our previous discussion about sales vs marketing-led planning. CLICK HERE for more.
Internal Influences
Internal disruptions within the P&C insurance industry are reshaping not only organizational decision making, but the insurance sales process as well. Brand new and exciting avenues for growth are slowly being recognized, but an aura of pessimism and concern over an impending decline of the insurance agent stands front and center among industry analysis.
Let’s examine the trends:
Concentration of Carrier Market: Over the last decade, insurance carriers have been increasing in size and market dominance. Today we are seeing a continued concentration of carrier market dominance.
- In 1995 the top 10 personal passenger auto insurance carriers represented 58.8% of the market, by 2012 that grew to 69.8%, a 19% increasel; and
- Overall, the top 25 insurance carriers held 69.8% of the total market, today that rests at 83.6% (Source: Agency Revolution, 2014).
If we dig deeper, the concentration becomes even more pronounced.
- The top 10 P&C insurance carriers control over 50% of the entire US P&C market (Source: AiteGroup, 2012); and
- Just 5 carriers control 52.53% of the total US auto insurance market (Source: Insure, 2015).
- This is up from 45% in 2000 (Source: AiteGroup, 2012).
For some perspective, there were approximately 2583 P&C insurance carriers in the USA in 2014 (Source: Insurance Information Institute, 2015).
Undoubtedly there is an upward trend towards concentration within this industry and it's worth noting that little of this growth has been from mergers and acquisitions, but rather at the expense of smaller industry competitors (Source: AiteGroup, 2012).
Decline of Insurance Broker: While insurance carriers have been concentrating, a subsequent decline in agent-written premiums is also being recognized among those in the P&C insurance industry. This isn’t to say that fewer policies are being written, but rather fewer consumers are choosing to use insurance agents as a primary means of shopping for a policy.
Consider these statistics:
- In 2003, over 80% of auto insurance, and almost 100% of homeowners insurance, was written through an insurance agent; and
- By 2010 agents only wrote 63% of auto insurance policies, and low single digit movement is now occurring in homeowners (Source: Agency Revolution, 2014).
Considering that anywhere from 30% to 60% of the policies held on the books of independent agents are auto insurance, the declines are likely going to have a disproportionate impact on the net revenues of individual agents.(Source: McKinsey, 2013).
Where are consumers choosing to purchase insurance then? They purchase directly from the carrier, bypassing the insurance agent and progressing their own decision journey, policy comparison, and benefit research. Consumers are comfortable buying auto insurance directly over the phone and online.
Image 4 illustrates the consumer purchase trends in the P&C insurance (Source: McKinsey, 2013). The auto insurance shift is quite pronounced, meanwhile homeowners insurance is steadily following a similar path. Commercial insurance is still dominated by agent interactions.
Image 4
Though this trend of a self-directed decision journey is new for P&C insurance, it is common and even expected among those industries pushing the envelope with inbound digital content marketing. Buyers are becoming ever more empowered with an abundance of information available freely and online. CLICK HERE to learn more about how an empowered buyer impacts the sales process. Comparisons and conclusions from other industries are increasingly applicable to P&C buyer interactions.
If nothing else, the decrease of agent employment among independent P&C agencies is the surest sign of a gradual decline. Between 1995 and 2011, McKinsey reports that there has been a decline in P&C insurance agents employed, from 100,000 in 1995, to 90,000 in 2011. (Source: McKinsey, 2013)
Consumers Buying Direct: The decline of P&C agents and market concentration among carriers is influenced by a consumer preference for direct-distributed policy underwriting. Decision journeys that begin and end with an agent are now the third most common avenue (See image 5), with most starting their journey via a direct interaction. In 1998 only 10% ever began their search via a direct channel, while in 2013 that number sat at 80%! (Source: McKinsey, 2013)
Image 5
This is exactly what we would expect from an empowered buyer, and both agents and carriers must recognize the strategic shift required to attract and convert today's insurance consumer. Inbound digital content strategies are going to be a new paradigm for many in P&C. If you’re interested in learning more about the new decision journey and appropriate digital content strategies, CLICK HERE.
Interestingly, even those who specifically prefer to purchase their insurance from an agent started their search via direct means, with 60% indicating so (Source: McKinsey, 2013).
Why are Consumers Buying Direct?
Though empowered buyers are a likely reason for this shift, disruptions in preferred distribution typically do happen to such a great extent given the steadier shift being seen in homeowners and commercial insurance.
Empowered buyers will however continue to drive this trend forward thanks to conditioning from other industries for an omni-channel interaction. Canadian Underwriter notes that insurance consumers want to have straightforward and direct digital sales transactions for smaller more simple interactions (Source: Canadian Underwriter, 2014).
If you’d like an introduction to omni-channel engagement, CLICK HERE. When you embody an omni-channel strategy, a customer should feel like any interaction with your brand, or brand’s touch-points, are consistent and contextual to the last. In other words, the customer sees your brand as one entity regardless of channel, and just like meeting an old friend who knows intimate details of your last interaction, so should your company. It sounds complex but it doesn’t have to be, CLICK HERE if you’d like to better understand a seamless omni-channel sales process.
The Big Influence
So what is the big influence driving these new channel preferences? It has a lot to do with how carrier corporate dollars are being spent, as in some cases the spending correlates closely to the shift in distribution.
The 'new' P&C insurance industry comes at no surprise to us at SKURA, and it's interesting to note that these kinds of changes are already happening to sales and marketing teams across a number of other industries - most notably within those industries that push the envelope in omni-channel digital sales.
[RELATED CONTENT] For a broader perspective on the changes being seen across industries, take a look the first chapter of our 'Sales Enablement Success' series. You'll see the broad-area trends impacting sales (broker in this case), markeing, and management decisions, as well as four proven best practices. Click the link below for more.
Keeping things in Perspective
Regardless of your position in P&C Insurance, a shift in distribution preferences is among the biggest disruptions that can occur in an industry. Consider what’s happening currently to the taxi industry now that a new distribution medium is influencing consumers. The UBER digital distribution alternative is flipping value-proposition on its head for the industry, and many are protesting the shift.
Whether or not the shift in P&C will spark protesting among agents is certainly nothing more than a speculative thought experiment. Nevertheless, the fact that 6 out of 10 insurance consumers say they receive no other particular service from their agent beyond shopping for coverage is serious cause for concern.
Unlike other industries, like taxi for instance, where the services are paid for on a single use basis, P&C insurance operates on terms and is thus much more ‘sticky’. This means there is a strong likelihood that many consumers who would buy direct, don’t do so because they are still ‘stuck’ within their term, or simply cannot be bothered and renew each year.
There is a need for more effective digital sales calls within the industry from both carriers and agents. Insurance agents are five times more likely than any other industry to use a tablet as their primary work computer so the opportunity exists to shift the entire agency workflow model to one that leverages sales enablement for omni-channel digital sales calls. CLICK HERE to learn more about mobile sales enablement and how tablets can enhance your marketing efforts.
Recognizing and appreciating the impending disruptions is essential for sustained organic growth within P&C insurance. Internal and external influences are molding a new insurance buyer, and those who best position to add value to this buyer will be rewarded for their efforts in kind.
