The increasing trend among insurance companies to invest in automation, particularly around the claims handling process, has disrupted the insurance cycle and is the main reason margins are higher than some would have expected at this point in the cycle, according to analysts at J.P. Morgan.
Margins in the non-life insurance sector have remained strong despite the current cycle, which started in 2011 in Germany, nearing its end. Typically, and in cycles prior to 2007/2008, J.P. Morgan explains that the longer they go on the more companies turn their focus to top-line over profit, lowering prices at the margin and acquiring new clients that are less profitable at the start.
“This leads to a rapid fall in margins, and a rise in the combined ratio. But this does not seem to be happening at present,” said J.P. Morgan, in a European Insurance report.
The main reason margins are refusing to fall and are maintaining resilience at this stage of the cycle is heightened investment in automation, which is supported by the overall improvement in the claims handling process of insurers, according to J.P. Morgan analysts.
“So far we have not seen the usual worsening in claims, even though many insurers have adopted a strategy of increased market share in specific segments,” said J.P. Morgan.
Insurers, reinsurers and the entire risk value chain has been looking to increase efficiency wherever possible in the current, challenging and highly competitive operating landscape. This desire, combined with the rise of technology and digitalisation has seen companies spike their investment in automation, which in turn is having an impact on the cycle.
“One reason we believe that this is unlike the normal insurance cycle, ie before 2007-8, is that insurers have invested in automation. Part of this investment has been in digital, which we believe bids up the cost of acquiring new clients. There has also been a change in claims handling, which we believe is the main cause of the better-than-expected margins,” explained J.P. Morgan analysts.
Claims handling for motor policies, for example, historically involves sending someone out to assess the damaged vehicle in person, and then handling the claims processing. However, technology now enables things like this to be automated, with a picture sent by phone usually being enough to assess the damage, with the estimate also then being assessed automatically and in a more efficient manner, while the end claim can be settled via email.
“And the whole claims handling paper trail is digitized with a big saving in staff costs and improvement in efficiency,” explained J.P. Morgan.
As technology continues to advance and the global risk transfer industry continues to strive for efficiency and relevance in a challenging marketplace, it’s expected that more and more parts of the value chain will be disrupted, ultimately reshaping the operating landscape of insurers and reinsurers in an effort to better serve clients while maintaining profitability.
