With the rise of digitally distributed insurance and increased commoditisation, what does the future hold for traditional commercial insurance?
Whilst there have been huge advances in online distribution for personal lines, commercial insurance has been relatively untouched by digital innovation. However, figures from the Department for Business show that this sector offers a growing opportunity, with a significant growth in the numbers of both small and medium sized businesses since 2000.
Time to grasp the potential
For commercial insurers that put a flexible and technology-enabled business model in place, there is considerable potential in the decade ahead. Many insurers still depend on pricing models that rely on spreadsheets and time consuming and expensive actuarial involvement. This doesn’t need to be the case as the intelligence of technology is evolving to accommodate more complex processes. With the new generation of rating and business driven rules software the possibilities for increasing speed and accuracy are significant.
The specialised nature of data required for some complex commercial risks, coupled with the limited availability of such data, make it impossible to completely automate all underwriting decisions. Manual underwriting will always play an important part in the commercial insurance process. Nevertheless, insurers should grasp the opportunity to apply new decision support tools to underwriting where appropriate. This will enable them to significantly reduce the inefficiencies of manipulating data within the underwriting process so they can apply manual touch points only were absolutely necessary. Technology can deliver both business efficiencies and an improvement in customer engagement.
Recognising the complexity in the commercial market underlines that the small in SME does not equal simple. Commercial insurance needs are far from straightforward. For example, a sole proprietor electrician whose main job is to change light bulbs struggled to get insurance coverage because one of his clients was a nuclear power station. When your business operates near high-grade uranium, getting insurance suddenly becomes a lot more complex.
Although there has been an increase in direct models for SME clients, this approach will not fit all. Figures from the CII show that the average premium being traded through direct channels is around 40% lower that through an intermediated channel. This underlines the need for choice from insurers. The more simple commercial insurance can be offered direct whilst more complex risks are supported via intermediated distribution.
There can never be a complete move to automation, but there are definite benefits for insurers who embrace the potential of new technology. From a product design perspective, risk assessment and pricing can become more efficient. When it comes to distribution, pairing direct and intermediated buying options will lower costs for insurers whilst giving customers the choice they have come to expect with their personal insurance.
The benefits are simple: cost reduction through efficiency savings, more seamless delivery of products and services, and an enhanced user experience.