Glacial Shifts in P&C Industry Value

Monday, November 25, 2019

ice falling from glacier

Property and casualty (P&C) insurance analyst Adam Klauber believes legacy insurers should increasingly lose relevance and value over the next decade as structural impediments limit their ability to pivot toward evolving industry dynamics. "This creates a sizable opportunity for up-and-coming competitors that are able to meet the demands of the changing landscape," he stated. This zero-sum struggle for half-a-trillion-plus dollars of P&C value encapsulates how the transfer of dominance is occurring. Klauber's analysis shows that the shift from the "old guard" to the "new guard" is accelerating.

Understanding the shift has been a challenge. There is a commonly held perception that the P&C industry is a laggard in technology, digital, customer service, etc. However, the pace of change has been tough to measure given the highly fragmented nature of the industry. Klauber established a framework to measure the movement toward "faster, better, cheaper" means of competing. In essence, P&C value has been and will likely be relatively constant in the $600 billion to $700 billion range.

The industry status quo is eroding. Insurance is being reengineered, and there is a massive shift underway among competing forces. The old guard is being upended and/or marginalized. The new guard is playing a larger role in the landscape today, will likely become a significant presence in the next few years, and has the potential to dominate in the next 10 years. Klauber notes, "insurance will not likely go away or be wiped out by a disruptive model." The problem with the large disrupter theory, like Amazon in retail, is that the disrupter would need to recreate an insurance company and take on major exposure to tort liability. While it cannot be ruled out, myriad industry complexities make it seem less likely.

A competitive transformation, however, is occurring, and there is a lot at stake. The P&C industry generates more than half a trillion dollars in value. The nature and orientation of the value have shifted since the mid-2000s. The zero-sum struggles for the half-a-trillion-plus dollars in value encapsulates how the transfer of dominance is occurring. Since 2006, over $75 billion of value has been transferred to the new guard. In the next decade, the value shift will likely be 3 to 4 times more than the prior decade.

The last decade has seen material competitive swings in the P&C industry. For decades, the industry has operated with a relatively static supply chain composed of: 1) a highly fragmented distribution network to connect with clients; 2) insurance companies that acquire business from the agent/broker platforms; and 3) carriers that process premiums and assume the risk. Reinsurers are then employed to diversify the risk. While on the surface the supply chain is still very much intact, the interrelated workings and competitive dynamics have changed. Companies that had dominant roles in the past are losing control, and a new guard is emerging.

In addition, the structural nature of property and casualty insurance is changing in a number of ways. Klauber believes the defining future trends (i.e., the means of change) are: digital emergence, vertical integration, distribution light, hyper-efficient node solutions, and acquisition battleground. These shifts are being led by new and diverging business models that are finding alternative ways of providing insurance and/or transforming the value chain.

The use of digital functionality is increasing at a rapid rate and is becoming an important part of the insurance process for both personal and commercial lines insurance. This is not exclusively related to selling insurance direct online but encompasses price discovery, information filtering, and simplifying and improving the efficiency of the quote/application/bind process. Nor does increasing digital suggest that the agency channel is being disintermediated. The trend, however, presents challenges and is increasing pressure on the distribution channel to change. Several factors are driving the shift toward digital. First, consumers have grown more comfortable and in many cases prefer the greater convenience, expanded choice, and increased availability of information associated with shopping for and purchasing items online. Second, the value of offline advertising channels declines as consumers spend more time online. And lastly, the industry is beginning to merge digital capabilities with analytics, which is crucial given the dynamic nature of risk.

Klauber believes that emergence of newer business models is real and picking up steam. "On an anecdotal level, a number of tech-enabled insurers are growing well north of 30% in a number of different areas of insurance, including auto, home, and even several niches within commercial," he stated. Another key indicator has been a big expansion in the digital environment for insurance. In just the last two years, we estimate that dollars spent on digital auto marketing have increased from $1.2 billion to $1.8 billion and that is just the beginning. The digital homeowners' insurance market, until recently a nascent market, has been making huge strides in the last 12 months, and commercial insurers are racing to digitize their product base. These are just a few examples of the progress that is occurring across a wide swath of the industry, whether it is in fraud detection, risk-based analytics, or automated claims process. Ultimately, Klauber believes a good testament to the rotation is the divergence in the stocks of old guard insurers compared with new guard tech-enabled and tech vendors. In the last two years, new guard stocks have outpaced the legacy insurers by almost two times.

For a copy of the "Glacial Shifts in P&C Industry Value: Mega Trends and Emerging Competitors" report or for more information on the companies from Adam Klauber's coverage list, please contact your William Blair sales rep.

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