Blind Sighted

As savvy businessman Peter Drucker says, “trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” Wouldn’t we all like a glimpse of the future? 

Even if we can’t change it, we’d know what to expect. If you’re running a business, you’d probably like to know what the next iPad is and whether it will knock you out of the competition or open up new opportunities.

But when it comes to the future, most of us are driving blind.

To shine a little light on the insurance industry’s future, PricewaterhouseCoopers (PwC) recently released What the Future Holds: Insurance 2020, a report on emerging trends that could impact insurance and distribution. The report identifies social, technological, environmental, economic and political drivers that could profoundly change the business. PwC sets out a range of scenarios from “regressive gloom & doom” to “progressive boom & zoom.”

With that in mind, the report provides brokers and insurers with insight into how these trends might influence their business and where their opportunities lie.

Some highlights from the report follow.

Social: Power is shifting toward the consumer and away from distributors. Customers expect to get things faster, simpler and transparently. The use of smartphones and other technology has made this easier to do. An estimated 1.6 billion people use mobile Internet devices. By 2014, that will exceed desktop use.

In a survey of U.S. consumers, PwC found that more than “32% of all respondents, and 50% of those aged 18-25, prefer to work directly with insurers.” Social networking through Facebook and other sites is changing the dialogue. As trust grows in social networks, PwC sees a “trust balance shift from insurance agents and advisors to online communities.” Social networks could become new “group channels” for insurance with substantial buying power.

Technology: The insurance industry is reaping gains in productivity and significantly boosting operational efficiency through technology. The explosion in use of smartphones and tablets is generating a huge amount of customer data. This so-called “Big Data” can be harvested as never before to provide “actionable” insights into customers, their lifestyles and preferences. PwC believes these trends will have a significant impact on the p-c and life and annuities businesses. Insurers can use the data to proactively reduce losses and better manage risks upfront rather than after the fact.

Environment: Damage from natural and man-made catastrophes has grown in severity and frequency over the last 20 years. During this period, hurricanes and tropical storms accounted for 45.2% of total catastrophe losses. It’s expected that the “rate and intensity” of storms will increase with global climate change. Business interruption accounted for a large portion of the losses. Insurers must embrace more sophisticated risk modeling to manage these risks. Those who do not may be forced to exit market segments such as flood or forest fire.

Economic: Global economic power is shifting to emerging countries. Brazil, Russia, China and India are a large and growing portion of global GNP. Because of the huge, untapped economic potential, these markets are particularly attractive to multinationals looking for growth. More than 20,000 multinationals are operating in emerging countries. Western companies expect to find 70% of their growth in these markets—40% in China and India alone. If the growth trend continues, it could drive more globalization for insurers as countries harmonize regulations and allow more cross-border distribution of products. On the other hand, PwC notes that financial strains could just as easily result in greater protectionism in countries. The middle ground is greater free trade between developed and emerging nations.

Political: The economic crisis has forced a better dialogue on regulation between Western nations and the developing world. PwC suggests regulators could agree to more global harmonization of insurance regulation. This is what is currently being discussed by the International Association of Insurance Supervisors (IAIS), which the G-20 tasked to create standards for the insurance industry. Or regulators could enact very different and in some cases more onerous regulations. There is also the possibility of either greater protectionism or more free trade.

How you respond to change is a business decision.

PwC describes four paths:

• “Innovators” who create their own future
• “Expansionists” who leverage capabilities to expand globally
• “Fast Followers” who don’t want to lead the pack but who are quick adapters
• “Survivors” who focus on short-term performance and wait for the majority to adopt new ideas.

To revisit Mr. Drucker: “The only thing we know about the future is that it will be different.” The brokers’ challenge is to keep an eye on the present while creating a flexible business model and mindset that can adapt to change when it comes.