NextWave : personal lines and small commercial How insurers must change to thrive in the next normal Insurance: personal lines and small commercial

A message from the EY Insurance leadership team

The most serious threats — pandemics, societal megatrends, disruptive technology advancements, and intensifying competition from new and traditional players — also hold the greatest potential for growth and transformation. Insurers that can demonstrate new and differentiated value to individuals, businesses, and communities around the world will seize that potential and prepare themselves for success on the industry’s next frontier.

The industry Insurance leaders must maintain their resilience in navigating an uncertain present and a complex and turbulent future. As the strategic faces a great evolution of the industry accelerates, the most effective response for paradox of risk insurers is to harness the power of change and thoughtfully design their futures. They must develop their vision for the future and adjust and opportunity. their strategic and tactical plans to realize that vision.

Tomorrow’s leaders will be purpose-led in their strategies, more agile and nimble with their resources, and dramatically more customer-centric. They will engineer their operations for efficiency and incorporate analytics in all aspects of the business. Across the organization, human talent will focus on higher- value tasks and work with technology in entirely new ways. Top performers will opportunistically launch innovative new products and tailored service experiences to capture customer loyalty and market share. All of these changes were necessary before the onset of the COVID-19 pandemic, which has only intensified the need for transformation.

02 NextWave Insurance: personal lines and small commercial We welcome the opportunity to discuss your perspective on these issues, as well as your company’s particular transformation journey into the next About EY wave of insurance. NextWave

The EY NextWave vision represents the EY perspective on the most powerful trends and forces shaping the

Isabelle Santenac Ed Majkowski industry’s future. The process Global Americas brings together strategic EY Insurance Consulting Leader Insurance Leader thought leaders, industry and functional professionals and technologists, outside experts and academics. In collaborative ideation workshops, these groups help clients envision a brighter Peter Manchester Grant Peters future and map out the EMEIA Asia-Pacific Insurance Leader Insurance Leader road ahead.

03 NextWave Insurance: personal lines and small commercial A message from the EY Insurance leadership team 02

Executive summary 05

Framing the next wave: trends and forces that explain where we are today and where we’re heading 07

Envisioning the next wave: 10 market scenarios 16

New types of policies The auto insurance protect small businesses market dramatically and society against the contracts as driverless 01 unthinkable 06 vehicles and ride- 17 sharing eliminate risk 27

Personal carriers shift Cyber risks present a focus from automotive hundred-billion-dollar policies to home-centric opportunity and a trillion-dollar threat 02 product hubs 19 07 29

Real-time risk visibility The ecosystem expands: and responsiveness cloud models and new become reality connections enable 03 21 08 radical innovation 31

Direct, digital and The subscription revolution embedded sales become arrives: insurance becomes dominant channels deeply woven into consumers’ 04 for growth 23 09 everyday lives 33

Weaponizing data AI adoption and competing on accelerates in claims: experience, tech the last processor 05 giants reinvent the 10 turns out the lights insurance model 25 35

Table of contents of Table How to lead the next wave: from purpose and business model to offerings and capabilities 37

The bottom line: it’s time for change 44

Authors and contributors 45

04 NextWave Insurance: personal lines and small commercial Executive summary

Our world has never been more in need of a high-functioning and innovative insurance industry. With unsurpassed ability to understand and model risk, insurers have a critical role to play in helping society prepare for and protect against the threats presented by pandemics, climate change, cybercrime, disruptive technologies, demographic shifts and social unrest. Insurers must play a critical role in helping to restore the global economy.

05 NextWave Insurance: personal lines and small commercial NextWave Insurance: executive summary

These profound changes, as well as industry- If insurance is specific trends, present unique opportunities for insurers with a clear plan for the future. changing, how The industry has many strengths to leverage, including strong capital positions, decades of risk and claims data, many well- should personal and known brands, and a profitable customer base with relatively low propensity to switch. small commercial Still, the challenges and need for change should not be underestimated. COVID-19 offers an opportunity to restore trust insurers change? if insurers can live their purpose and demonstrate leadership in getting the global economy back on track. Consumer trust has been We believe tomorrow’s winners will drive slipping and could further erode if they fall short. transformation through: Growth is a challenge for most carriers, and maintaining recently improved results will be increasingly difficult. New alliances and • A clear purpose and inspiring mission that partnerships will be necessary to expand capabilities and foster resonate with employees and consumers, innovation. Legacy technology needs significant updating, and the while strengthening trust and clarifying the workforce requires new skills and higher levels of engagement. value of insurance Looking further out, the lost revenue from inevitable and potentially • Ubiquitous use of digitization, automation and substantial reductions in personal and commercial auto risk will AI that drives vastly improved expense ratios need to be replaced. Regulatory and liability issues will only grow and leaner, more flexible cost structures, as more complex. Tricky ethical questions regarding consumer well as supporting operational resilience and privacy and the use of data and artificial intelligence (AI) are sure maintaining productivity for remote workers to emerge. Large-scale, direct-to-consumer players will continue • Customer experiences as good as or better their relentless capture of market share. New competitors will force than those offered by digital leaders in insurers to rethink their services and offerings. Pandemics, cyber other industries catastrophes and natural disasters may pose existential threats • A data and analytics environment that for some insurers. All the while, managing channel conflict and provides continuous and actionable insight, cannibalization of existing lines of businesses will require delicate with a clear focus on target outcomes balancing acts. • A commitment to designing, launching, While many of these forces have long been on the radars of senior and servicing innovative new products and insurance executives, the urgency for action has increased. experiences more quickly and at a fraction The fundamental question for insurers is: will growth opportunities of today’s costs, with offerings aligned to outweigh the threats in the next wave of insurance? The possible changing consumer needs developments and outcomes presented here examine how leaders • Highly agile organizations, cultures and work will seize the potential upside, as well as the worst-case scenarios environments that foster innovation, provide laggards will likely face. meaningful work, and support personal and professional growth for a diverse workforce • Win-win collaborations with InsurTechs, non-insurers and nontraditional competitors • New approaches to distribution and supply chain, featuring product specialists, third- We always overestimate the change that party platforms, and the right mix of digital innovation and the human touch will“ occur in the next one or two years and underestimate the change that will Carriers that can envision the future and have the courage to invest in thoughtful, customer- occur in the next five or ten years. focused transformation will overcome today’s Bill Gates threats and seize the next wave of opportunities.

06 NextWave Insurance: personal lines and small commercial Framing the next wave

Trends and forces that explain where we are today and where we’re heading

07 NextWave Insurance: personal lines and small commercial Framing the next wave

The numbers must get better

Today’s marketplace is hypercompetitive with extremely tight margins, slow (if any) growth and high operating costs. The industry’s current economics are unsustainable,

Compound annual growth rate (CAGR) in gross Combined ratios, US insurers, 2018 written premium (in US$), non-life, global P&C 99.3%

Personal lines Non-life 99.3% 4.3% Source: EY analysis, SNL Financial

2.2% Overall Operating ratios, top 20 European insurers

Source: SwissRe 94% 2012

Distribution and transactional costs, as 98% 2017 a percentage of premiums collected Source: EY analysis, SNL

Average expense ratios, top three 30%-40% Asia-Pacific markets 28.0% 2012 Source: Geneva Association

30.2% 2017 Source: SwissRe

08 NextWave Insurance: personal lines and small commercial Framing the next wave Trust suits the brand

The insurance industry is built on a foundation of trust between the carrier and its customers. This fundamental promise of 20% decline in consumer trust of US financial protection and reliability services companies, 2017–18 cannot be compromised. Source: Edelman

With new risk threats emerging and privacy concerns paramount, maintaining trust is more critical than ever. What takes years or generations to build can be lost in an instant. The <40% Asia-Pacific consumers who trust insurance worldwide protection gap is a good companies with their personal data place to start in strengthening trust. Source: Experian The industry’s response to the COVID-19 pandemic demonstrates the stakes. On one hand, insurers offered billions of dollars of premium rebates and holidays. On the other, they faced significant reputational risk regarding the denial of 3.75% decline in consumer trust of UK business interruption claims based on insurers, 2018–19 pandemic exclusions. Source: Consumer Intelligence

09 NextWave Insurance: personal lines and small commercial Framing the next wave Consumers expect something different

Consumers are embracing new technology to buy products and services. Consumer trends in retail, transportation and other industries will soon come to insurance; carriers with 51% strong technology, intuitive experiences, and clear value propositions will have a US consumers aged huge head start in winning market share. 35–49 interested in After COVID-19, consumers will expect more subscription models, with flexible and usage-based products that are higher interest relative to easier to research and purchase through marriage, having children digital channels. and other life events

Source: EY NextWave Consumer Financial Services 19% 31%

European consumers European consumers who would interested in buying consider buying nontraditional insurance from services (e.g., broadband, nontraditional competitors, energy or data storage) from including tech giants their bank or insurer

Source:

10 NextWave Insurance: personal lines and small commercial Framing the next wave Revenue threats and opportunities are everywhere

Megatrends and disruptions driving uncertainty today will have definitive impacts in the near to middle term, potentially diminishing traditional lines of business and revenue sources. At the same time, innovators — including non-insurers — may view crises as opportunities to enter the business, either directly or through partnerships with incumbents.

Climate $219 billion combined global insurance losses from natural change disasters, 2017–18 Source: 90% natural disaster costs that can be attributed to weather-related events in an average year Source: 5x total economic losses caused by hurricanes in 2017 relative to average of the prior 16 years Source: Aon Benfield 2018 30% average percentage of catastrophic losses covered by insurance, 2009–18 Source: The Economist $180 billion global protection gap for weather-related risks Source: Swiss Re

11 NextWave Insurance: personal lines and small commercial Framing the next wave COVID-19

The pandemic demonstrates the industry's risk-opportunity paradox: widespread remote working increases cyber risks but reduces the likelihood of automotive claims.

During the lockdown, P&C (property and casualty) insurers responded with auto premium holidays and rebates and reinforced their messaging about telematics-based products that offer discounts in exchange for driving data. The stability of retention rates post-COVID-19 shows the effectiveness of these strategies. $10.5 billion estimated amount of auto premium refunds, discounts, dividends and credits offered by insurers in the wake of COVID-19 Source: Insurance Information Institute 40%–60% reduction in miles driven and car trips taken during lockdown Source: Swiss Re, Arity 0.1% growth in global non-life premiums, 2020 Source: Swiss Re $40 billion– $100 billion projected losses for P&C insurance industry due to COVID-19 Source: EY analysis, Swiss Re

12 NextWave Insurance: personal lines and small commercial Framing the next wave Driverless cars 23 million number of level-4 autonomous vehicles on the road by 2025 Source: Stevens Institute of Technology 21% compound annual growth rate of collision-avoidance technology market 2018–25 Source: Grandview Research $96 billion usage-based auto insurance market, 2025, 4x growth from 2018 Source: Markets and Markets

Cybercrime 7.1 billion number of identities exposed in data breaches 2010–17 Source: Symantec $23 billion global cybersecurity insurance market by 2025 Source: Adroit Market Research 38% global organizations reporting that they are prepared to handle a sophisticated cyber attack Source: ISACA

13 NextWave Insurance: personal lines and small commercial Framing the next wave The upside of underinsurance

Insurers are well-positioned to help protect the many underinsured consumers and businesses around the world. They must find ways to engage younger consumers — the so-called “generation rent” — sooner. 40% As these consumers wait longer to purchase vehicles (which they may never do), buy homes, get married or have children, their first interactions with insurers happen later in life. Insurers must innovate with technology to engage and support underserved markets. Insurers in US consumers who can’t emerging markets exhibited great creativity meet a $400 short-term emergency in using mobile phones to provide micro- insurance, asset-based coverages and Source: US Federal Reserve embedded insurance purchases in their efforts to connect to the underinsured.

14 NextWave Insurance: personal lines and small commercial Framing the next wave

Percentage of US consumers aged Home ownership among 25–37 who are married millennials

83% 70% China 67% 46% Mexico

57% 35% US 46% 31% UK

28% Australia

1968 1982 2001 2018 26% UAE

Source: Pew Research Center Source: HSBC

8–20 years average number of years by which retirees in six major global economies will outlive their retirement savings

Source: World Economic Forum

15 NextWave Insurance: personal lines and small commercial New types of policies protect Envisioning small businesses and society 01 against the unthinkable the next wave: Personal carriers shift focus from automotive policies to 10 market 02 home-centric product hubs scenarios Real-time risk visibility and responsiveness 03 become reality The following scenarios reflect our thinking about likely developments in Direct, digital, and embedded the next 5-10 years. Many of the issues sales become dominant 04 channels for growth are already influencing C-suite and board-level decisions. Soon they will Weaponizing data and become operational realities, the new competing on experience, normal, across the industry. 05 tech giants reinvent the insurance model

The auto insurance market dramatically contracts as 06 driverless vehicles and ride- sharing eliminate risk

Cyber risks present a hundred- billion-dollar opportunity 07 and trillion-dollar threat

The ecosystem expands: cloud models and new connections 08 enable radical innovation

The subscription revolution arrives: insurance becomes 09 deeply woven into consumers’ everyday lives

AI adoption accelerates in 10 claims: the last processor turns out the lights

16 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

New types of policies protect small businesses and society against the unthinkable

Leaders launch relevant new products quickly to meet market demand and shore up their reputations. 01Laggards continue to offer the same policies. In the wake of COVID-19, there was simply too great for the industry to assume considerable public outcry and litigation by itself. Insurers clarify policy language relative to pandemic exclusions. While and identify what is covered and what is insurers are often on strong legal ground, excluded. Some carriers go on the offensive their trial in the court of public opinion and develop new policies that address some diminishes brand reputations and weakens elements of the market need for pandemic trust in the in the industry. Despite billions business interruption coverage. of dollars returned to consumers in the form of premium holidays and rebates, These new policies are underwritten and the pandemic’s overwhelming damage to priced so small businesses gain some limited small and medium sized businesses is of protection and are structured on triggers greater interest to elected officials and the and thresholds that build on traditional media, who often play to perceptions that loss limitations and deductibles. Pricing the industry isn’t standing by its customers these new policies is extremely challenging, during a global crisis. given the lack of actuarial history, potential concentration risk, and the lack of any In response to the controversy, insurers known or predictable period of restoration. engage regulators on private-public Parametric coverage helps address the consortiums to backstop future pandemic lack of risk assessment clarity and claims risks. Industry risk pools are formed in adjustment complexity. markets around the world as the risks are

17 NextWave Insurance: personal lines and small commercial 01. New types of policies protect small businesses and society against the unthinkable

How this changes insurance Impact and value in the next wave for customers: Accepting the challenge, leaders to insurers’ purpose statements. put their brightest data scientists These complex offerings are • Increased preparedness and protection on the task of modeling and communicated in simple terms so against future “black swan” events pricing the risk, with appropriate that they can be sold through digital • Clearer understanding of coverages triggers for government-backed channels. Carriers find ways to More flexible buying options — via protections. They use advanced enhance pandemic-related health • bundles and through digital channels analytical techniques and apply protections, adding new coverages learnings from the COVID-19 and preventive services within pandemic, natural disasters and personal lines. They also develop and cyber attacks. The necessary risk market new product bundles that management discipline proves too transcend traditional product silos. much for laggards, and they miss the Implications and opportunity for improved customer Insurers engage regulators and retention and revenue growth. collaborate on extensive education possibilities for programs for agents, brokers and The most innovative carriers policyholders. The industry is enhance their offerings with able to generate new premiums insurers: risk advisory services that help as it lives its purpose through • Demonstrated leadership in helping businesses prepare for the enhanced risk awareness, society restore the economy unthinkable and that directly align prevention and protection. • Proactive engagement with governments on broad societal risks • Increased insight into the potential impacts of unthinkable events • Increased revenue through new offerings for prevention and protection • Clearer contractual language to reduce the risk of litigation

1,229 number of COVID-19-related legal filings against the insurance industry in the US (as of September 14, 2020) Source: University of Pennsylvania 34% top-line growth achieved by leading digital-only Chinese insurer during COVID-19 Source: Zhong An

18 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

Personal carriers shift focus from automotive policies to home-centric product hubs

Leaders proactively manage falling auto premiums with blended offerings and new features centered 02on homeowners insurance. Laggards don’t make the adjustment and suffer significant premium erosion.

In the aftermath of the economic lockdowns reflect the reality of dramatically more caused by COVID-19, automobile traffic complex households, including property significantly diminished across the country. coverage, small business endorsements, As the lockdowns eased and the economy warranty coverage, cyber coverage, pet came back to life, miles driven rebounded, insurance, enhanced liability and personal though remote working significantly reduced article coverage, and other features. commuting. It is not clear when — or if — miles driven will return to prior levels. Leading carriers increase their digital engagement with customers, with COVID-19 accelerates the shift away connected data and ancillary services from auto-centric insurance relationships supporting the broader homeowner to products and services that provide ecosystem. The top performers live their protections for the unique needs of missions and align the value of insurance to individual homeowners. Carriers get distinct and evolving customer needs. creative in designing new features that

19 NextWave Insurance: personal lines and small commercial 02. Personal carriers shift focus from automotive policies to home-centric product hubs

How this changes insurance Impact and value in the next wave for customers: As the focus shifts from auto For their part, laggards are slow to home, leaders embrace the on the uptake with usage-based • Better pricing and coverages reflecting opportunity to get closer to insurance (UBI), bolt-on features and how people live, work nd drive customers. Auto policies become targeted offerings for market niches. • Increased ability to shift protections and increasingly usage-based, with They also struggle to integrate add services as needs change premium and coverage adjustments features in bundles that are easy to Clearer understanding of the value to reflect fewer miles driven. understand, buy and use. • of insurance Leaders focus on personal Getting it right requires greater protections, with new and diversified imagination, more sophisticated offerings built on the foundation of underwriting and richer digital homeowners coverage, with added engagement to enable intuitive Implications and features to provide for rent and experiences (e.g., “swipe left, swipe mortgage payments in the case of right” for additional coverages). In possibilities for future job loss or major economic many cases, leading insurers partner disruption. They apply lessons from with third parties to offer tailored early adopters that struggled with coverages and add-on services. insurers: first-generation income protection These developments further • Increased relevance, engagement and products. Because they are priced accelerate the shift to subscriptions retention attractively, the new solutions gain and non-indemnity revenues. traction and retain share even as • Clearer demonstration of purpose, employment levels normalize. Gig resulting in higher levels of trust workers especially like the offerings • Enhanced ability to launch new products tailored to their needs. and add features and services to existing offerings Employees who will work remotely at least some of the time:

48% Post-pandemic

30% Pre-pandemic Source: Gartner 20% growth in time spent online in China during quarantine Source: Nomura

20 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

Real-time risk visibility and responsiveness become reality

Leaders act on the insights boldly and swiftly. 03Laggards can’t keep up with all the data. Leading insurers are data-driven and who like personalized guidance for traffic, insight-enabled in everything they do, weather and fitness will likely accept similar from straight-through processing in both services for risk exposures (particularly if it back-office and customer-facing functions, helps them save money). to sophisticated pricing and underwriting algorithms, to thoughtfully segmented Leaders will be those firms that buy, build digital marketing programs. or partner for the infrastructure and tools they need to capture, manage and analyze The next major innovation opportunity real-time risk performance data effectively. with data and analytics involves rapidly They will continuously operationalize identifying and precisely measuring and monetize their information assets by risk, and then using that insight to adjusting pricing and providing immediate proactively meet customer needs. In the performance feedback to customers. wake of COVID-19, risk forecasting and management take center stage in helping Even if laggards collect the data — 90% of the global economy recover and prepare which didn’t exist two years ago and which for future threats. will only expand exponentially with the advent of 5G — they will be overwhelmed Consumers have become accustomed to with its volume, variety and velocity and tailored notifications and prompts through will struggle to produce meaningful or activity trackers, wearable tech and mobile valuable insights. apps. Consumers and business owners

21 NextWave Insurance: personal lines and small commercial 03. Real-time risk visibility and responsiveness become reality

How this changes insurance Impact and value in the next wave for customers: Insurers will capture streams of at different times or on different data from apps, mobile devices, roads, conducting safety training • A safer and lower-risk lifestyle wearable tech, connected vehicles, for workers). Satellite imagery and and workplace smart homes and workplaces, as predictive analytics will enable • Potential cost savings through lower well as alliance partners and the insurers to provide real-time feedback premiums billions of devices connected to the to insureds on wildfires, storms and Higher prices for higher-risk individuals Internet of Things (IoT). By applying other weather-related exposures. • and companies, including those that can’t AI, machine learning and other or won’t take corrective action to reduce advanced analytics techniques, However, as insurers become more their risk profiles insurers can measure risk and price savvy and sophisticated in risk-based premiums in real time, leading underwriting and pricing, higher-risk • Increased profitability for small businesses to discounts, tailored prevention individuals and companies may be based on better risk management services and usage-based products. priced out of the insurance market, furthering an already serious Through mobile apps and insurance gap. personalized portals, insurers Implications and can promote risk awareness and Real-time risk visibility is clearly prevention by sharing proactive tips a win-win. For small businesses, possibilities for and alerts. These capabilities have better risk management promotes been extensively piloted by many bigger profits. For individuals, it’s insurers: insurers. The next step is to drive about safer and better lifestyles. widespread customer adoption. At the same time, insurers benefit • More accurate risk measurement for from closer long-term relationships more informed decision-making Customers can also lower their based on more frequent • More precise and profitable pricing premiums in real time by adopting interactions and opportunities to through real-time premium optimization low-risk behavior (e.g., driving add value. • Algorithmic underwriting and continuous rules refinement • Increased customer engagement and trust 27% proportion of corporate data that is used for analytics Source: Forrester

22 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

Direct, digital and embedded sales become dominant channels for growth

Leaders seize the cost savings and master the omnichannel approach. 04Laggards have trouble moving beyond their historical channels and never catch up to early adopters.

The long, slow decline of the traditional In the future, agents will emphasize advisory agency model will continue and even services for consumers and businesses with accelerate in mature markets. COVID-19 more complex risk profiles. They will embrace was a wake-up call in that insurers glimpsed contextual information, complete customer a future in which digital is the only viable data, next-best-action analytics and one-and- sales and service channel. Agencies will done processing. They will deploy mobile aggressively fight and take defensive steps technologies, such as texting and apps, to (e.g., consolidation and enhanced services) enhance sales and service experiences. As to protect their position. They will enhance agents go upmarket, insurers will benefit digital capabilities to meet consumer from lifetime premiums generated and demand and complement — rather than durable customer relationships built on replicate — the capabilities of large insurers. financial well-being. Several large carriers will remain committed to agency models. The human touch will However, direct and digital channels will be less frequent and focused on higher- come to dominate the mass market because value moments. And the human touch will consumers prefer the simplicity and control. be delivered via the phone, web chats or Embedded sales will grow as more companies videoconference rather than face-to- selling products and services seamlessly offer face settings. insurance at an attractive price, which will generate additional revenue.

23 NextWave Insurance: personal lines and small commercial 04. Direct, digitaland embedded sales become dominant channels for growth

COVID-19 will accelerate digital channels and digital engagement adoption across the business, from strategies to boost retention and Impact and value sales and service to risk management loyalty. They might use automated and operational resilience. The pricing reviews to automatically renew for customers: transition to direct, digital and policies at the most competitive embedded will occur at different rates market price. The most effective • Flexibility to shop, buy and transact in in different regions. China, already insurers will target and cross-sell channels they prefer among the most digitally advanced more effectively and build out robust markets, will see rapid innovation and self-service capabilities. They will • Access to personalized advice and sophisticated hybrid strategies. Ping also enable digital agents with AI guidance when needed An will lead the way with its pervasive and machine learning to engage with • Insurance becomes an integrated use of AI-driven distribution. In other customers using text, video and voice component of everyday purchases Asian markets, the agency model recognition technologies. • Transparent and tailored relationships with will remain viable, with agencies insurers across a complex spectrum of risk consolidating to control market For laggards, channel conflict and share. In Europe and Middle Eastern cannibalization will prove exceedingly markets, the continuing growth of the difficult to manage. Investing in aggregator model will influence the multiple channels will be too great a fate of the agency base. cost. Some may remain committed to Implications and the potentially profitable, but slowly for Direct and digital leaders will be those fading, revenues of their old-line possibilities companies that use data and analytics distribution networks. to target profitable customers, while insurers: minimizing acquisition and service unit costs. These firms will use affinity • Dramatically lower transactional costs • Higher demand for highly sophisticated How this changes insurance digital marketing and acquisition analytical models in the next wave • Bifurcation of channels — high-value Millennials and Generation Z will The most successful agents in advisory and high-efficiency digital drive the evolution of distribution personal and small commercial lines • Increased risk of channel conflict and models in the most mature markets. will function more like risk advisors, cannibalization of existing business They will have extremely high providing business and financial • Risk of disintermediation by digital expectations for seamless digital advice, especially as the line blurs agencies with clearer value propositions experiences (whether from insurers between business and personal and superior experiences or agents), but also expect easy assets and activities. access to personalized support. • Preparation for subscription models based on increased digital engagement 8 billion number of embedded, or point-of-sale, policies sold in China in the first five years of a joint venture between a leading insurer, media company and ecommerce player Source: Reuters 1.5 million number of agents affiliated with the joint venture, many of them recruited and trained via AI Source: The Economist

24 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

Weaponizing data and competing on experience, tech giants reinvent the insurance model

Leaders both compete and collaborate. 05Laggards negotiate and lose share. For years, it’s been predicted that the But the tech giants’ substantial world’s largest and most successful advantages remain. They have more technology brands and platforms would consumer data and are much better at enter the insurance market. The complex monetizing insights and personalizing regulatory environment and the high interactions. They enjoy significantly turnover and low profitability of new higher levels of consumer trust (even business remain a high barrier to entry for after recent data privacy controversies) nontraditional competitors (including both than insurers and stronger customer InsurTechs and established tech firms). relationships. These platforms enjoy Thus, they will likely engage insurers high engagement levels where with regulatory experience, seasoned insurance purchases could be easily books, years of data and nationwide added as a feature within existing claim networks. Some are already shopping experiences. experimenting with alliances, such as Amazon and a leading insurer.

25 NextWave Insurance: personal lines and small commercial 05. Weaponizing data and competing on experience, tech giants reinvent the insurance model

The market entry of tech giants insurers may be able to market their seems inevitable. The main branded products, while smaller Impact and value questions are what form it will take insurers may need to white-label and when it will happen. We see certain products to be sold through for customers: ample reason to believe that soon embedded channels. Other carriers — in one to three years — one or may provide advanced skills (such as • Personalized and intuitive experiences more tech giants will place big bets, specialized underwriting) or a claims from brands they trust including substantial partnerships network that tech giants don’t have • Simplified business relationships with with top national insurance brands. or can’t easily develop. clear and personalized value for different Insurance leaders are more likely to segments collaborate than compete directly. Laggards, regional carriers and weak That’s because the ability of tech brands won’t be very attractive to • Increased price transparency giants to generate high volumes of tech giants, who will expect their • Increased customization and flexibility to customer traffic and create superior partners to be nimble and have niche scale coverages up or as necessary customer experiences will be process expertise, national reach, extremely difficult (if not impossible) brand recognition and specialized for incumbents to match. Some large technology. Implications and How this changes insurance possibilities for in the next wave insurers: Big tech’s broad data sets, Frequent interactions provide based on billions of business- natural sales opportunities for • New business-model options — to-consumer and business-to- insurance purchases. Because of ecosystem collaborations, white-labeling, business interactions, provide a their ability to use AI within the specialty services strong foundation for acquisition, context of existing platforms, • Rising importance of national and global underwriting, product creation, tech giants can launch and scale reach and brand recognition cross-selling and claims insurance-as-a-service models and settlement. Indeed, tech firms may subscription-based products offering • Increased engagement through more use AI to redefine underwriting. clear price transparency and high frequent interactions Rather than, for example, degrees of personalization. For • Insurance embedded into other providing a workers’ compensation instance, they can easily launch transactions and broader relationships rating based on number of small business portals and apps to with tech firms employees and class codes, AI- meet multiple needs, from legal and driven models could correlate security services to business travel multiple metrics to determine to insurance. employee activity and risk levels. 37% European consumers who would switch their insurer if it didn’t offer up-to-date technology Source: Fujitsu

26 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

The auto insurance market dramatically contracts as driverless vehicles and ride-sharing eliminate risk

Leaders embrace the future and diversify their offerings. 06Laggards dismiss the technologies as immature and put their long-term survival in jeopardy.

The enormous potential negative impact to vanish, the bottom line is clear: a huge on future P&C revenue streams from ride- chunk of revenue is going away, and sharing and driverless autos has largely insurers need a plan to replace it — soon. been viewed as a problem for the next generation of insurance executives. The Contingency plans may include new best time to make contingency plans for types of insurance products that cover change is now. autonomous vehicles, ride-sharing services and ride-sharing passengers. Yes, the hype cycle may overstate how Insurers should also account for soon and how much of the revenue will the period when driver-assisted and disappear. And yes, ride-sharing off driverless vehicles share the roads. For post-COVID-19 — with volume decreases of instance, policyholders with fleet-based up to 60%, by some estimates. Though some insurance may have more data to prove R&D investments for autonomous vehicles that accident liability lies with drivers were put on hold, widespread adoption still of traditional autos, which could lead to appears inevitable, if slightly delayed. more claims payouts for legacy insurers. Given reduced commuting, usage-based However, there is little room to doubt the auto policies become the norm. It’s not long-term impact. Whether it takes 10 or a matter of “if,” but rather “how fast” 15 years for 25% or 75% of auto premiums consumers adopt them.

27 NextWave Insurance: personal lines and small commercial 06. The auto insurance market dramatically contracts as driverless vehicles and ride-sharing eliminate risk

Insurers’ product innovation Leaders will engage with capabilities will be severely tested. autonomous vehicle manufacturers Impact and value They will need to rapidly adjust and ride-sharing platforms to premiums based on vehicle safety provide real-time risk insights for features, fewer claims arising from that direct cars and trucks where customers: distracted driving, hybrid products riders need them and along the • Convenient, safe and on-demand that cover a mix of vehicles for most efficient and safest routes. transportation a household or business, and The upside is particularly high coverage for both ride-sharing for commercial insurers that can • Freedom from the costs of vehicle drivers and passengers. Many provide fleet management and ownership, including insurance premiums insurers have already begun to tracking, proactive maintenance • New needs for non-owner personal injury shift their focus to homeowners and other supplementary services. protection and commercial coverage for and renters products. In the Laggards will ride the trend ride-share providers future, these products may serve downward, insuring the ever- as the primary risk coverage with diminishing number of vehicles a multitude of endorsements that driven by humans. cover a broader range of risks and Implications and potential services. possibilities for How this changes insurance insurers: in the next wave • Emergence of usage-based insurance as the norm, with policies tailored to While the frequency of auto claims Car ownership goes the way of distances, routes and driving behavior will plummet, it is likely that the horse-drawn carriage ownership • Gradual, then dramatic, reductions severity and complexity of claims and becomes a historical curiosity in traditional automotive policies and will increase. Over time, with more before the end of the 21st century, claims usage data and precise analytics, though much litigation and • Significant growth in commercial fleet- the assignment of claims liability legislation will occur before liability based policies will be simplified. Some carriers standards are defined. will exit the auto business and seek • High likelihood of consolidation, radical to shore up premiums through downsizing or reinvention of product additional products and services. portfolios for carriers losing up to 50% of their revenues 12.5% loss of US auto insurance premiums by 2035 Source: Stevens Institute of Technology

30 billion–83 billion number of person trips provided by ride-hailing services by 2030 Source: Goldman Sachs, Princeton University

28 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

Cyber risks present a hundred- billion-dollar opportunity and a trillion- dollar threat

Leaders take a proactive approach to personal and commercial cyber risk protection. 07Laggards play a limited, reactive role after their customers suffer losses.

The industry’s historical strength in To seize the upside, insurers have a great deal understanding and quantifying risk is being of work to do in framing the risk, quantifying severely tested as the annual number of the potential losses and designing products adversely affected consumers reaches into with sufficient protections. the hundreds of millions and the amount of damages adds up to billions of dollars. Citizens, businesses and communities And as many organizations are operating around the world are woefully under- remotely amid the pandemic, there are protected from cyber risks. The stakes will more weaknesses and pathways for cyber only rise as hackers take aim at everything criminals to exploit. from connected vehicles and smart homes to nuclear power plants and defense Of course, optimists see billions of dollars in systems. Insurers must lead the way premium growth and ask whether revenue forward by developing the most effective from cyber policies can replace the loss techniques — from proactive monitoring of premiums in traditional lines. A related to incident response — to fight cyber question: how can insurers grow their threats. In protecting their own assets top lines by helping consumers and small and systems, insurers can build trust and businesses with privacy and security services? confidence with consumers.

29 NextWave Insurance: personal lines and small commercial 07. Cyber risks present a hundred-billion-dollar opportunity and a trillion-dollar threat

Leaders adopt the strongest Laggards never develop the and possible defenses to protect expertise to understand and price Impact value themselves and gain full visibility cyber risks and protective services into their risk concentration. They at scale. They even fall short in for customers: also expand offerings by patrolling patching vulnerabilities in their own the dark web for policyholder data systems. In the worst-case scenario, • Assistance in protecting against common and conducting personal security a catastrophic cyber incident could hacking, identity theft and data breaches audits. In commercial lines, leaders bankrupt an insurance company. • Stronger protections against reputational help businesses protect themselves risk, data loss and financial hits against reputational risk and • Clearer products and coverages through negligence claims. They develop dedicated cyber policies new products and preventive services to help protect small • Reduced threat of litigation and claims of businesses with remote workers. negligence • Greatly improved control of personal data How this changes insurance and privacy in the next wave: Many in the industry believe a than they realize. Emerging Implications and cyber catastrophe is inevitable. privacy regulations could be a Consider a simultaneous hack trial lawyer’s dream and require possibilities for of all driverless vehicles, the massive remediation of legacy shutdown of a crucial financial systems similar to Y2K. insurers: institution, or the broad infiltration of a technology platform. In such Insurers must also redefine • Demonstrated leadership in establishing an event, the damages will be coverages and reset premium best practices for cybersecurity, starting incalculable and one or more levels in line with actual risks with their own systems insurers could become insolvent (rather than simply to capture • Clear visibility into cyber risk almost overnight. revenue). Small businesses will concentration, including potential for be challenged to afford properly catastrophic events Lack of visibility into cyber risk priced cyber insurance. Insurers Higher revenues through new offerings concentrations is a nearer-term must be bold and think beyond • for threat awareness, prevention and threat. With cyber coverages traditional boundaries as they customer self-protection present in many existing policies expand their purpose to include (e.g., business interruption), some cyber loss prevention. • Clearer lines of responsibilities defined insurers may be more vulnerable for commercial lines to litigation and claims payouts $8 billion–$9 billion estimated cyber crime premiums by 2020 Source: Munich Re $6 trillion economic impact of cybercrime by 2021 Source: Cybersecurity Ventures

30 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

The ecosystem expands: cloud models and new connections enable radical innovation

Leaders optimize their value chain with creative 08alliances, new capabilities and smart bundles. Laggards move slowly into the cloud ecosystem and offer underwhelming customer experiences.

As carriers move to cloud-based platforms, Our dialogue with industry stakeholders open application program interfaces and analysis of the financial performance (APIs), and InsurTech integration their of various insurers lead us to conclude that traditional proprietary processes are open one or two small commercial carriers could for reconsideration. Add in the pressure for capture a large, even dominant, market profitable growth and the evolving nature share — up to 30%, compared to 5%–6% today. of risk, and you have an environment where They will do so by bringing economies of insurers must find new and more visible scale, pricing sophistication and marketing ways to deliver value. Ecosystems, which analytics to personal lines and combining entail multiple companies partnering to offer these with a seamless and intuitive customer specialized but complementary services experience that is enabled by their ecosystem in mutually beneficial ways, are one way relationships. The small commercial business for insurers to expand the value of their environment offers a plethora of innovation offerings. opportunities that combine broader business services with the protection of insurance products and services.

31 NextWave Insurance: personal lines and small commercial 08. The ecosystem expands: cloud models and new connections enable radical innovation

Leaders capture market share by Laggards will be those firms that and defining their role in the ecosystem can’t find a niche, don’t open Impact value relative to other types of entities themselves up to the broader (e.g., sharing platforms, social media, capabilities of the ecosystem, or for customers: InsurTechs, data providers, customer miss out on the right alliances. • Innovative and satisfying end-to-end associations, business services). They cling to the thinking that experiences By connecting with InsurTechs, they can (or should) do everything leaders can rapidly add innovative themselves or that the cloud is too • Highly tailored insurance products and technologies and enhance business risky a place to do business. services embedded in everyday activities processes and customer experiences. • Simplified, concierge-like business They have the advantage of being relationships for related services able to lead the way through the Increased ability to connect with industry’s regulatory complexity. • trusted companies that anticipate their unique needs How this changes insurance in the next wave Implications and Insurers move their infrastructure Incumbents increasingly seek to the cloud and open their niches, following the lead of possibilities for core process APIs. In addition InsurTechs in specializing in to InsurTechs, insurers engage functions (e.g., underwriting, insurers: with home builders, office distribution, claims) or micro- supply stores, automotive and segments (e.g., dental practices, • Expanding and disaggregating value appliance manufacturers, credit first-time millennial homeowners). chain focused on customers’ needs card companies, travel agencies, Every link in the value chain • Broader systemic risk and complexity as and other consumer-facing is constantly evaluated, with insurers contract with a greater number companies to leverage data and executives asking whether it’s of vendors provide offerings that complement better to buy or build and what their traditional strengths. The services can be sold into the • Increased stress on technology and risk ecosystems take many forms: marketplace. management capabilities, especially for strategic partnerships, alliances, small and midsize insurers (M&A), • Increased market share and retention joint ventures. through partnerships and add-on and wraparound services 76% global insurance executives who view partnerships and ecosystems as determinants of competitive advantage Source: Swiss Re 52% incumbent insurers that view InsurTechs as potential partners Source: Majesco

32 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

The subscription revolution arrives: insurance becomes deeply woven into consumers’ everyday lives

Leaders drive growth with insurance on demand and convenience at scale. 09Laggards fail to anticipate consumer needs related to life events and lifestyles.

As the subscription revolution comes to Recent EY research confirms that insurance and other financial services insurance subscriptions are attractive to sectors, senior leaders should consider many consumers and businesses because the large potential opportunity. Indeed, of their easy and convenient bundling of compared to other financial services holistic services, many of which will be firms, which generate fees largely based provided by ecosystem partners. on transactions, insurers already operate somewhat like a subscription, with regular Even better news: our research payments and auto-renewals; insurers indicates that consumers will pay a just need to engage consumers more fee for subscriptions. frequently and creatively.

33 NextWave Insurance: personal lines and small commercial 09. The subscription revolution arrives: insurance becomes deeply woven into consumers’ everyday lives

The secret sauce for subscriptions needs. The top performers may in insurance is linking services develop “financial operating Impact and value and engaging customers around system” platforms that serve as a key life events (e.g., starting a single hub for all critical information for customers: new household or downsizing and tools. They will make it as easy for retirement) or emerging to adjust policies (e.g., adding or • Increased sense of control and financial lifestyles (e.g., urban gig workers, removing family members from wellness recreational farmers, world policies or additional locations to • Easier access to the protection they need travelers) and complex financial commercial policies) as it is to add — when, where and how they need it decisions (e.g., launching or features on streaming services on expanding a business). As such, leading apps. • Guidance and support for all types of subscription models are largely customers in the channels they prefer about customer centricity — that is, Meanwhile, laggards will remain to use product-centric in their thinking offering products and services that • Increased convenience of concierge and approach. They will be most reflect the way people really live services and bundles and businesses actually operate. vulnerable to losing customers to the financial offerings of tech • Increased brand loyalty and confidence that Leaders will reorient the giants or InsurTechs, which are companies are focused on their interests fundamental value proposition poised to lead the charge in the — and all offerings — for direct subscription revolution. alignment to customer lifestyle Implications and How this changes insurance possibilities for in the next wave insurers:

Based on a consumer’s lifestyle, to key life events or lifestyles. • Stronger relationships by focusing on subscriptions are clearly and Consumers will gain access to what really matters to consumers transparently priced, with a fixed personalized robo-advisor portals Increased relevance and engagement fee linked to specific products and apps that help them make • through expanded service offerings and and services. More personalized better financial decisions, find richer value propositions aligned to key offerings and additional features answers to their questions, and life events are available based on the data access appropriate coverage and consumers share and the insights guidance (including from human • Superior competitive positioning insurers produce with AI. advisors) as their needs change. based on deeper and more data-driven Insurers will be more proactive customer relationships Insurers will serve as concierges in customer outreach and • Emphasis on enhanced services rather in connecting consumers to emphasize value-adding services than basic transactions complementary service providers (e.g., planning) as subscriptions (e.g., accountants, mortgage become their primary customer • Improved margins driven by appropriate lenders, travel agencies) aligned acquisition strategy. and simple consumer access 5% increase in consumer demand from the offer of subscription models, even accounting for fees Source: EY NextWave Consumer Financial Services

34 NextWave Insurance: personal lines and small commercial Envisioning the next wave: 10 market scenarios

AI adoption accelerates in claims: the last claims processor turns out the lights

Leaders aggressively automate to cut costs, 10minimize indemnity, enhance service and ensure operational resilience. Laggards can’t make the leap and suffer a competitive disadvantage.

As long as there are insurance companies, In the COVID-19 era, automation and strong there will be claims to process. But in the digital capabilities have become operational future, the number of claims will fall to a necessities, rather than just a business fraction of what it is today. The role of the priority. Vehicle owners submit photos or function will shift, shrink and specialize video of accident damage immediately in the years to come, becoming almost through mobile apps. Aerial drones inspect unrecognizable when compared to traditional damage to homes and commercial buildings models. The historical goal has been to after storms. Loss estimates are calculated lower the cost of adjusting without adversely via machine learning models. Chat bots impacting indemnity. Soon, insurers will manage customer interactions and alerts. no longer have to choose between these Lawyers are replaced by AI arbitration objectives, as emerging technologies are services. Predictive models identify fraud. now available that help them achieve both at Payments are electronic and instantaneous. once. And they’ll be able to enhance service Early adopters are just scratching the at the same time. surface now.

35 NextWave Insurance: personal lines and small commercial 10. AI adoption accelerates in claims: the last claims processor turns out the lights

Leaders will deploy technology a pleasant claims experience and to capture the right data at that reimburses losses faster Impact value every step of the claims process than ever, increases loyalty and — from entry to adjustment to strengthens trust. for customers: settlement. Their claims teams will add value by reducing Laggards can’t or won’t make the • A seamless, satisfying, even delightful fraud, providing personalized necessary technology investments claims experience, thanks to more service to important customers, or alliances. They will be stuck convenient claims submission and faster and efficiently handling the with inefficient, manual processes payment, plus personalized service when few, but severe, claims that better handled by intelligent necessary remain. The end result will be automation. • Clearer visibility into claims status through automated alerts How this changes insurance • Elimination of costly, paper-based processes and the need to play “phone in the next wave tag” with claimants Automation lays the groundwork Tomorrow’s claims teams will • Less time-consuming claims process for true claims transformation. The feature more data scientists and (e.g., no in-person visits from adjustors) definition of high-quality service will software engineers, experience no longer just be emphatic care, but managers and service concierges, also speed and accuracy in paying loss avoidance and risk mitigation claims. The number of people specialists, security and privacy Implications and involved in claims falls dramatically. experts, and performance for Those who remain will be skilled coaches. Claims experiences were possibilities analysts and investigators, whose once a huge driver of customer judgment is enhanced — rather than satisfaction, with negative insurers: replaced — by advanced tools. experiences undercutting loyalty. With higher degrees of automation • Fulfillment of the promise to be there come fewer customer defections for customers in need due to poor claims experiences. • Increased customer satisfaction, trust and loyalty • Lower claims processing costs from fewer personnel and reduced risk of human error • Reduced legal expenses and attorney representation rates 50% • Reduced claim deterioration and fraud claims cost savings based on automation Source: LexisNexis 87% consumers who believe claims experience impacts decision to stay with insurer Source: EY Global Consumer Insurance Survey

36 NextWave Insurance: personal lines and small commercial How to lead the next wave From purpose and business model to offerings and capabilities

What is our mission and purpose? In the industry’s next wave, insurers must raise fundamental How are we different? What is questions and challenge long- held assumptions, if they are to our optimal business model? How succeed in the post-pandemic next normal. Traditional do our products and experiences competitive strategies won’t be the answer. Incremental annual align? What capabilities will we improvements will no longer be need to be successful? enough. Because COVID-19 has accelerated the pace of change, the pressure to transform will never abate; continuously “working on the business” will be as important as “working in the business.” The following five steps outline a path forward for insurers seeking to thrive in the years and decades to come.

37 NextWave Insurance: personal lines and small commercial How to lead the next wave

Define your purpose to differentiate your brand

Purpose is critical in setting a clear strategic direction. The key questions that senior On a practical level, purpose provides differentiation in the minds of customers and employees who are eager leaders must address are: to engage with companies that share their values. • What is our purpose? Younger generations claim to care about purpose as much as, if not more than, monetary compensation. • What customer problems are we trying to solve, Thus, the industry’s commitment to premium holidays and which segments are we targeting? for financially strained consumers can help strengthen • Should we focus on higher-order consumer brands. Carriers can also engage consumers by needs (e.g., comprehensive risk management) or maintaining carbon-neutral operations. Others may functional benefits (e.g., low price, convenience)? promise to donate a percentage of premiums and profits to community service organizations or charitable • Should we aim to be proactive business partners causes. Being bigger than the bottom line can be both a (like other financial services organizations) or highly efficient first responders during and compelling purpose and an effective positioning tactic. after emergencies? Insurers’ commitment to purpose will face scrutiny coming out of COVID-19. Regulators, media and the • What can we do better than, and differently from, the competition? public will be watching to see if claims are paid and if insurers resort to litigation. Insurers must be seen as • How do we communicate our value and capture being part of the solution. appropriate profit margins?

These difficult questions require significant executive dialogue, meaningful analysis and bold leadership. Finding the right answers is critical to defining and designing the right business models for the future.

Purpose provides differentiation in the minds of your customers and employees.

38 NextWave Insurance: personal lines and small commercial How to lead the next wave

Identify and create the offerings

An insurer’s purpose and differentiation, as well as its Moving forward, they must: commitment to customer centricity, must guide the design of products and services. The journey from a • Dig deeper in their data sets and apply product-centric legacy to a customer-centric future market intelligence to understand what’s is a long one. If “location, location, location” is the next for their customers mantra in real estate, it must be “customer, customer, customer” as the insurance industry rethinks what it • Think beyond traditional insurance products offers people and businesses. As society emerges from and services to get ahead of shifting risk the pandemic, that’s never been more true. exposures and emerging consumer needs Carriers must come to view the entire customer experience as the ultimate product. Most insurers • Test new offerings tangential to their core to already have baseline skills in customer segmentation, redefine relationships with customers and journey mapping and product design. They also know traditional distribution partners how to cater to specific segments. It’s clear that consumers will be looking for more flexible and Tailoring products and services to suddenly shifting usage-based products, particularly for auto coverage, needs is essential to enhancing consumer perceptions given the sustained decrease in commuting. New of the value offered by individual insurers and products for home offices and cyber risks may also see strengthening trust in specific brands. Similarly, aligning significant demand. to the moments that matter in policyholders’ lives is essential to enhancing consumer perceptions of the value offered by individual insurers and strengthening trust in specific brands. Those two factors provide the foundation of sustainable and mutually beneficial relationships. With the current pattern of limited Products and engagement — with interactions primarily occurring when premiums are due or claims are submitted — insurers services should must embrace the challenge of engaging customers in strong and active relationships.

be keyed to Beyond identifying the right portfolio of products and service offerings, insurers must move quickly in the moments designing, developing, testing, launching and tailoring new products and services. The entire process should that matter in be measured in weeks or months, rather than years. “Better products faster” is another suitable mantra policyholders’ lives. for the insurance industry.

39 NextWave Insurance: personal lines and small commercial How to lead the next wave

Design the right business and operating models

How insurers organize and design their capabilities and No insurer can afford to be all things to all consumers; market and deliver their offerings is in need of major focus is necessary for future success. For instance, one renovation. From algorithmic underwriting to no-touch insurer might own the entire customer experience and claims processing to omnichannel sales and service, every relationship, while sourcing many products and services link in the value chain must be purposefully reconsidered from other partners. Another might prioritize its efforts and redesigned. on product design and manufacturing, while relying on a variety of distribution methods and partners. Some Insurers face big decisions as carriers may decide to sell leading capabilities into the insurance marketplace. they seek sustainable growth No matter the business model decisions, all carriers will and profitability: need to move from closed, proprietary, often analog business models to open, cloud-based models that leverage • What are the most critical capabilities required the power of digital ecosystems. to achieve our purpose? Alliances and partnerships will become more prominent in operating models across the industry and serve as • Where should we be best-in-class and where the driving forces behind broader ecosystems. These should we be best-in-cost? ecosystems can improve speed-to-market through access to wider capabilities, talent pools and cutting-edge • Should we build, buy, partner or even sell our technology solutions. Insurers must think expansively capabilities in the growing risk management as they consider potential partners. However, there will ecosystem? be an increased need to understand and manage both vendor and systemic risk, as responsibility for bad actors Insurers will need to make difficult trade-offs. For or careless participants will fall directly on the carriers who instance, will they invest more heavily in transforming manage their ecosystem. existing operations or launching greenfield offerings While several well-defined business models look likely and value propositions? Will they prioritize defending to gain traction in insurance and financial services existing lines of business or capitalizing on new products (see next page), individual insurers must consider their and underserved market niches? Will they invest in new own evolutionary paths. Typically, that will involve finding brands and channels or build on the existing customer the right spot along a number of strategic and tactical base and distribution networks? These questions will continuums, hence, the need to rethink — and likely become more important given the intense financial redesign — the business and operating models. pressure caused by the pandemic.

Focus is necessary for future success.

40 NextWave Insurance: personal lines and small commercial How to lead the next wave

In ongoing dialogue with industry leaders and stakeholders, EY research has identified a number of business model templates that will guide insurers as they seek the optimal business model for their markets and objectives. These are not mutually exclusive, and insurers will combine and merge elements in line with their strategies and objectives.

Vertical integration

Own the entire value chain across consumer, producer, distributor Digital risk and servicer Digital manager native Extreme focus on Build stand-alone business customer risk exposure model on greenfield, with best-in-class digital native platform products to target a specific segment and/or value NextWave proposition business models Ecosystem Capability integrator specialist Aggregate products and Become the invisible service providers in a back-end and/or data marketplace ecosystem custodian for intelligent Product risk assessment producer

Create timely insurance products and leave the customer relationship, experience and distribution to others

41 NextWave Insurance: personal lines and small commercial How to lead the next wave

Build the enabling capabilities

It’s not enough to create an aspirational purpose, conceive A virtuous circle applies here; for instance, of new offerings or design an innovative business model. automating processes and upgrading technology Insurers must also get better at execution. Tomorrow’s can remove friction and reduce costs across leaders will be notable for a few high-impact enterprise functions, which can free up resources for further capabilities and cultural attributes, including: investments in new channels, new products and new talent.

Conversely, breakdowns in cybersecurity may cause • Extreme agility, especially in product insurers to instantly lose trust that has taken years design and development, through the use to build up. These capabilities are fundamental of minimally viable products, agile product to increasing performance across the business management techniques and rapid A/B testing and helping insurers implement faster, pivot more nimbly and embrace digital in everything they do. • Innovative thinking, with business leaders stepping forward to drive innovation COVID-19 showed just how fast insurers could through cultural change and organizational adjust their operations. Thus, executives across the business should be looking at ways to sustain the models that more broadly distribute decision- gains in remote collaboration and operational agility making and risk-taking in the initial response to the pandemic. • Full digitization and mass automation, from the modernization of core systems for straight-through processing, to the use of AI and drones for claims processing, to engaging customers wherever they may be in social, mobile and other channels

• Data and analytics in everything, with the ability to rapidly assimilate internal and external data and make it broadly available for data scientists and business analysts; top performers will have hundreds of predictive models to optimize everything from pricing to claims to customer acquisition

• Trust by design, employing sophisticated technologies and strong cultures to secure company assets and to protect and Insurers must get respect privacy in a manner that exceeds the baseline requirements of emerging regulations better at execution.

42 NextWave Insurance: personal lines and small commercial How to lead the next wave

Manage the transformation

Looking ahead, in light of all the powerful forces reshaping positive change, rather than justification for the industry, particularly the effects of COVID-19, the retrenchment. Senior leaders, as well as boards, will ability to drive organizational change may in the end be the be focused on sustaining their cultures post-COVID-19. most important capability for insurers. Such cultural shifts Insurers have a variety of tools they can use to shift the are necessary to use the crisis as a launching pad for organization, including:

• Strong leadership • Proper governance Change at this scale and pace must be sponsored from Formal enterprise governance processes with new the top. Highly visible, authentic, even passionate methods for investment allocation, performance advocacy for change is critical. Culture needs to be measurement, resource management, and actively defined, managed and measured. business and technical architecture are among the capabilities that insurers must cultivate. • Talent and workforce There is no doubt tomorrow’s top insurers will have • Agile collaborations radically different skill sets (e.g., many more data and partnerships scientists, vastly fewer claims adjusters). Employees Agile, cross-functional collaboration led by product must be empowered and granted owners is critical to driving more integrated, to make strategic and operational decisions. customer-centric operations; partnerships and To compete in the war for talent, insurers must alliances with the right external firms will drive provide an attractive work environment, appealing out “not invented here” thinking and other compensation, clear growth opportunities and the outmoded mental models. ability to contribute to a larger purpose.

While embarking on a transformation journey is exciting, insurers must take the time to define the proper management frameworks or risk suboptimal results or even failure.

43 NextWave Insurance: personal lines and small commercial How to lead the next wave

The bottom line: it’s time for change

The insurance industry intertwines In assuming this responsibility, senior industry leaders also recognize the vulnerability of the traditional with every industry and is uniquely insurance business. Forces ranging from climate change and pandemics, to the explosion of data and positioned to mitigate a wide range interconnected technology, to globalization of risks, while making the world and demographic shifts each have the potential to reorder — even overturn — the industry. a better place. It has an awesome At the same time, new business models, new value propositions and new product offerings promise to responsibility in protecting what transform the industry. It’s this paradoxical situation matters most to individuals, families — existential threats and unprecedented opportunity — that has the entire EY insurance services team excited and businesses around the world. The about and ready for the next wave of insurance. industry’s purpose and importance have never been clearer than in the wake of COVID-19.

44 NextWave Insurance: personal lines and small commercial Authors and contributors

Thomas Cranley Jeff Wenger Americas New England Insurance Distribution Insurance Consulting Leader Optimization Leader

NextWave Insurance leadership

Global Isabelle Santenac Bernhard Schneider Global Insurance Global Insurance Strategy Leader and Operations Leader

Americas Ed Majkowski David Connolly Nicole Michaels Sophia Yen Americas Insurance Insurance Technology Insurance Business Insurance Strategy and Consulting Leader Leader Transformation Leader Innovation Leader

Europe, Middle East, Africa, and India (EMEIA) Peter Manchester Simon Burtwell Richard Reed Tony Sault EMEIA Insurance Leader UK Insurance Advisory UK General Insurance UK General Insurance and Global Insurance Leader and EMEIA Partner Associate Partner Consulting Leader Insurance Advisory Partner

Asia-Pacific

Grant Peters Matt Charlesworth Lai Yu Asia-Pacific Insurance Asia-Pacific Insurance Greater China Insurance Leader Customer and Strategy Transformation Leader

45 NextWave Insurance: personal lines and small commercial EY | Assurance | Tax | Strategy and Transactions | Consulting

About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.

© 2020 Ernst & Young LLP. All Rights Reserved. EYG no. 004099-19Gbl ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com