With the wealth of data and analytical tools available today, insurers offering standardised products to clients may have less relevance going forward. Speaking to Asia Insurance Review in Singapore recently, Munich Re group CEO Joachim Wenning believes there is a lot of potential for insurers to deliver highly specialised and customised propositions, taking a more solutions- rather than product-based approach.
He said there were essentially two ways for any business to offer its products. One is an ‘industrialised’ offering which tends to be platform-based and low-cost, of which Amazon is a classic example.
“It is the same book that you can buy in a store but the delivery of that product to you as an end-consumer has totally changed and that is attractive to some,” said Dr Wenning.
While they are highly efficient and scalable, building such platforms has not been feasible for insurers given regulatory requirements and the fact that insurance is a localised business, he said.
The alternative is a highly specialised offering which is not automated and not highly scalable.
“Let’s say I want to go on a holiday and I don’t want to spend time searching the internet and making all the bookings, instead I need a person who knows my profile and preferences and they come up with two holiday packages for me to choose from.
“I would love to have such a person, this is an expert and they know you inside out. And they have brought me a specialised solution because for me to find that on my own would have been impossible.”
In that regard, Dr Wenning believes that insurance production will go the way of the latter, where (re)insurers provide increasingly customised solutions for various client needs.
Collaborating in an ecosystem
And that is also one of the reasons why he believes big tech firms won’t replace the role of traditional insurers.
“I can see the big tech firms being interested in distribution but not in risk-carrying because to underwrite risk you need deep domain knowledge, and that is something the insurance industry is simply better at.”
But given that these tech firms have proven to be very successful at building distribution platforms, will we see insurers white-labelling more of their products and placing them on these platforms?
“It would not be a rapid trend but I do see it gradually increasing over time, in terms of insurers white-labelling onto platforms or even white-labelling among each other.
“You may be an insurer that offers all lines of business and you may think that another carrier out there specialises in, say, legal protection insurance, so you white-label their product. Both become more efficient in that sense. I can see that happening and so it’s specialisation on both sides,” said Dr Wenning.
From an efficiency point of view, Munich Re has one of the lowest expense ratios in the sector after systematically reducing cost over the last few years. And the savings it has made have been reinvested aggressively in digitalisation efforts. With a more digital and leaner outfit, Munich Re has set a medium-term profit target of EUR2.8bn for 2020, having posted a profit of EUR2.275bn last year.
But despite its significant investment in digital assets, the strategy is not to imitate the business models of data and tech companies. In fact, the core business of reinsurance, direct insurance and asset management remains central, said Dr Wenning.
“These are the principal pillars of the business, they continue to make a lot of sense and I cannot foresee any change,” he said.
More ways to access risk
As economies and populations grow, there are more risks to be insured which is a positive thing for the insurance industry. While reinsurers have traditionally depended on insurance companies to access the risk, they also now have the option of working with non-traditional sources. And this ongoing shift in the industry’s structure is an exciting proposition, said Dr Wenning.
“Through digital plus data levers, we have the means to service our cedants more effectively, and as a reward, we get more business from them; or we serve other new distribution channels which are typically digital non-insurance platforms where we can plug in our offerings and get access to the original market. So this is exciting for us as we are able to serve both existing clients and new platforms.”
One high-profile example of this is Munich Re’s partnership with US-based on-demand insurance platform Trov. The tech company’s application enables people to turn coverage for their personal belongings on and off on their smartphones. As Trov is not an insurance company, it needs a partner like Munich Re to underwrite policies and help them navigate regulatory hurdles.
Cyber risk – now and in the future
Cyber risk has become ubiquitous in today’s risk landscape and the industry is providing ample cover, even more than the market currently demands, said Dr Wenning.
Although the vast and varied nature of the risk also means it would be impossible for the insurance industry to bear all the of world’s cyber-related risk on its balance sheet. With the interconnectedness of the internet, one loss event could potentially have a domino effect which would cripple the whole insurance industry.
In order to mitigate such an accumulation risk, a government backstop would be needed should insurers wish to broaden the scope of insurability in the future further, he said.
“If you would insure against the failure of the internet – and with the world’s production lines being increasingly dependent on it – then all of them would suffer business interruption and this would cause a collapse. So there would need to be some interstate guarantee.”
Insurance and the climate
Another big issue facing the world today is the urgent fight to mitigate the effects of climate change. Munich Re was one of the first corporations in the world, and certainly within the insurance industry, to raise awareness on climate change in the early 1970s when it undertook research to investigate the causes behind increasingly costly losses from weather-related natural catastrophes.
The insurance industry is uniquely placed to play an active role in managing climate risk, and has taken an increasingly principled stance in recent years to adopt sustainable investment policies.
But can the industry do more to influence the behaviour of others by choosing not to cover the companies who are responsible for high greenhouse gas emissions?
Dr Wenning said, “I don’t see what is wrong with us insuring, say, a power plant, or insuring the staff of such a company, as the risk is already there. And by insuring them, we’d rather set an incentive to mitigate the risk.
“An exception would be the construction of a new coal-fired power plant, which would typically have a lifespan of 50 or 100 years, maybe more. We know if it was built today, then it would probably be in use well beyond 2050, therefore contributing to us missing the target as set out in the Paris Agreement. That would be in contradiction with our understanding of corporate responsibility.”
He added that the power to influence the behaviour of corporates ultimately rests with governments. Recently, Dr Wenning made a public call for European policymakers to increase the cost of carbon tax in the EU to deter emissions.
“But even if that is not implemented, what we have been doing is to set our own incentives based on the investments that we make. But that is, of course, indirect and has a slower impact,” he said. A