Value creation & charging for it, an elephant in the reinsurance room

Value creation is a huge topic across the insurance and reinsurance industry right now.

Everyone insists they’re creating it for their clients.

But, in a world where the charging structure for insurance and reinsurance protection services and contracts are generally bundled, it’s really hard to identify and measure the value being created.

In a market where not much has changed over decades, the delayed adoption of the technology available to it has in recent years resulted in an urgency surrounding the first part of the value creation conundrum.

Demonstrating value

Demonstrating value was all about sealing the deal, building the tower, closing the book and signing those contracts.

It’s still a massive part of the process of course.

Often completed over lunch, drinks or/and dinner, brokers and underwriters met, agreed on terms and pricing (often with little changing year-to-year) and at the same time unanimously agreed there was value in what they’d achieved.

But now, with the ability to drill down into data and an increasing determination to try and own the customer, parties are wheeling out a raft of tools and services to demonstrate more clearly to clients the value they are adding.

This is a very good thing.

It’s about time reinsurance programs in particular were looked at with more than a cursory glance prior to renewal (I’m generalising, of course, plenty do get the attention they deserve).

Now the data and technology is available to completely remodel the risk tower, should you want to.

There are almost always better ways to slice, dice and transfer towers of risk now than has been achieved historically.

At last, the market has no excuse not to look seriously at the risk tower, to identify the most efficient and effective way to transfer it.

At least you’d think that was the case.

Touch points (there are more of them)

There’s a saying about too many cooks.

That’s not the real problem in risk and reinsurance, it can take a lot of expertise to get a deal done.

Numbers aren’t all-important, but making sure those involved (and getting paid) are adding commensurate value really is.

As expertise levels rise and technology use in reinsurance becomes ubiquitous, the need for more parties to be involved can rise.

It’s resulting in a tower of risk being touched (analysed, assessed, tweaked, tested) many more times and by many more actors than they were in the past, during their life cycle (from renewal to renewal).

These touch points can be actioned by one actor (company/role) or many, from many different companies.

Meaning there are now significantly more opportunities to demonstrate value creation than there used to be.

As well as more competing actors, coming from a growing range of backgrounds and disciplines as well.

Which also means there are a lot of actors adding minimal value and someone’s got to work out how to charge/pay for all of this more effectively.

Which brings challenges and threats to everyone.

Deconstructing the chain (of risk to capital)

The insurance and reinsurance market chain, along which risks travel to find their ultimate home with capital, is breaking apart.

Technology and more efficient business models / capital, as well as an increasingly technical and specialised range of service providers, are driving this break-up of what has often been called a value-chain (despite the questionable value some have brought to it over the years).

As the chain breaks down it creates even more touch points and opportunities to interact with the risk and its owners/holders at specific points in its life cycle.

Which brings us back to demonstrating value creation, as there are now many more opportunities to do so.

But if we’re breaking the chain into many pieces, with many more actors and touch points, the industry has a lot of work to do in defining pricing structures that will work going forwards.

Towards an unbundling

The cost structure of the reinsurance market chain remains one that is largely bundled.

With huge amounts of value creation charged for in one sum, as commission or supposedly near-free services designed to help in client and customer ownership.

Break this apart and nobody really understands how to charge for it, it seems. Or at least no-one is trying to change the game in an obvious way, yet.

An industry used to paying commissions for a bundle of services has so far not worked out how to break it down and apply new cost structures to the market chain and multiple touch points within it.

But it’s going to have to.

As expertise comes in and adds value in the process it needs paying for it.

At the same time, the industry is becoming more efficient and costs and expense need to come down.

More people to pay across the life-cycle of a risk, as it makes its way to capital, doing smaller and increasingly specialised chunks of the work.

Which means more competition for these roles as well, as even the very largest of brokers or underwriters cannot possibly hope to own the entire chain a risk moves along.

Which means unbundling is inevitable and as has been seen in other sectors of finance (or even other industries entirely) getting to grips with a new and unbundled normal is a challenge and requires a different approach to pricing as well.

For simplicities sake, consider the travel sector, an industry where I went through the significant changes in implementing new pricing and product structures to cope with the rapid unbundling caused by the advent of online travel agents, low-cost carriers and price comparison websites.

The end-product, a holiday, tour, or simple city break abroad, didn’t change.

But the players involved in fulfilling it did, the mechanisms used to fulfil it, the way it was purchased, how customer engagement occurred and relationships were formed and sustained. So too did the way it was priced…

The advent of the internet broke down the monopolies, levelled the playing fields of competition, delivered greater choice, enabled the product itself to be more tailored to the customer’s needs, and ultimately all of this needed an entirely new approach to cost, pricing and the related business rules defining all of that.

Sure, re/insurance is a very different industry. But this unbundling is happening and only going to accelerate.

Right now, we seem to be in a phase whereby the major players are undergoing their own internal unbundling, as the emerging service layer of the risk and re/insurance industry forms within the walls of brokers and global underwriting houses.

But eventually this will cause the walls to tumble.

At first we’ll see this as new, focused specialists look to increasingly bite off little chunks of the market chain and offer new products to the industry.

Some of these will find it hard to break through the decade’s old relationships, but eventually they will become viable competitors for chunks of the bundled service brokers and underwriters are used to providing.

Another way we’ll see the walls coming down is through platforms.

As technology focused methods of transferring risk, or managing portfolios, or analysing market-specific data, get so much better at these chunks of the chain than a large, generalist like a global broker or underwriter ever could be.

The result here could be that entire chunks of the process chain move out of the control of the incumbents, forcing them to either try even harder to win it back (often a pointless and costly effort, as other industries like travel saw) or to dive in and use these as part of their own service offering to clients.

However you look at it, risk and re/insurance is ripe for unbundling and the industry has to learn how to charge appropriately and sustainably for the bits it is really good at, while also turning the holistic, bundled service of the past into a more menu-like, fit for the future and unbundled selection of offerings.

Which brings me back to value creation.

As those who can, will, and will get paid commensurately with the value they bring to the market chain.

But no-one’s really talking about this need for a new approach to the cost-structure of the risk and insurance product lifecycle, hence me calling it an elephant in the room.

It needs discussing and it’s almost certain the major players are moving in this direction naturally, via a walled-garden, protect as much of the revenue as you can, transition phase.

It’s another of the really interesting features of the industry right now and I can’t wait to see how the incumbents work it out and the new entrants bring disruption and new offerings to market.

Change is good. But it can be a little challenging and painful…