The following is an opinion article, written by Graham Elliott, CEO of Azur
The recent CSFI Insurance ‘Banana Skins’ survey of risks facing the insurance industry found that executives are more anxious about the future than at any time in the past 10 years. The big story of this year’s survey is the significant rise in concerns about what the CFSI has dubbed “operating risks” – a cluster of risks that includes, in particular, advances in technology that are challenging the industry’s usual way of doing things. Management is having to adjust to rapid change and to fresh threats – particularly disruption from instech and ongoing cyber threats.
User experience vs. handling transactions
The vast majority of instech investment currently goes into the front-end customer experience. The reason for this is simple – the further back into the insurance transaction chain you go, the more challenging the complexities of the data model become. Indeed, it’s these complexities that engineers need to deal with in order to build systems that can handle insurance transactions. As such, at the moment, instech ‘disruption’ is mainly confined to eye-catching improvements in user experience (UX), such as the ability to photograph a driving license and get a quote immediately. But, these front-end processes are not fundamentally changing the fact that you need a regulated risk carrier to bring insurance leverage to bear.
The promise to pay implicit in an insurance contract needs a real balance sheet to make good on that promise. This is why the risk transfer process is wrapped in such tight regulation all over the world, and it is very hard to see how it can be disrupted. What we know is that at the back of all these shiny new instech ideas lurks a good old insurance company that must understand and account for the risks it is taking.
The problem of legacy
The next issue is that legacy insurance companies are operating on core systems that were built 20 or 30 years ago. It is not uncommon to see large companies still being run on IBM AS400 mainframes. These green screen systems were not built to handle data in a way that can deliver the highly personalised UX that the modern-day consumers are demanding in an API rich environment. As such, any aspiring disruptive pioneer will have to go back further into the chain to truly play the game, or risk being thwarted by the obsolescence of the capital providers’ systems. The fact that most legacy insurers have almost completely outsourced technology to third party systems developers further complicates the issue.
Also in the mix is the Conduct Risk bar which is constantly being raised, making it visibly harder for someone outside the industry to disrupt it. If the business that is looking to cause disruption is an intermediary it will have to nail conduct or run the risk that other parties in the transaction chain cannot even trade with it.
Furthermore, while it’s easy to understand why improving the user experience for the customer is a key focus for instech investment, it’s important to remember that a huge number of insureds are still using brokers as intermediaries, acting as agents on their behalf. This creates a situation where the data complexity in the transaction itself becomes even more complex in the chain from buyer to risk bearer. This is yet another barrier to entry.
Why MGAs are the answer
The right vehicle with which to attack this complex collection of challenges is the good old Managing General Agent (MGA). An MGA is, by its nature, capital-agnostic, it can construct risks to suit the end insured, and not the risk bearer. As a business, it is unencumbered by the capital constraints of a carrier as it ‘rents’ other companies’ capital. On top of this, it is probably the best vehicle to maximise the opportunities afforded by modern cloud-based SaaS technology.
An MGA is far enough back in the transaction chain that it is able to understand the complexities of the data. It can deal with brokers or go direct, and if it needs to, it can separate its front-end efficiency of delivery and the more clunky legacy back-end capital transfer. An MGA is a regulated entity, so it’s more than capable of holding its own in the brave new world of the Conduct regime.
Whilst the industry has a long way to go until it can truly say it is making the most of technology, the future of instech lies in the hands of those MGAs who are up for the challenge. It is also vital that we see investment being directed away from the front-end UX to the back-office transaction processes and the claims function, as that’s where the real opportunity for transformation lies.
The preceding was an opinion article, written by Graham Elliott, CEO of Azur. It does not necessarily reflect the views of Insurance Business.
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