Where could disruptive innovation come from in commercial insurance? – an interview with Ari Chester, partner at McKinsey & Company
I have known about Ari and his work for a long time but didn’t speak with him until we were preparing for this interview. A partner at McKinsey, he serves insurance clients across P&C and life and has a particular interest in commercial specialty and wholesale markets. Our conversation about the sources of disruptive innovation and how it could affect commercial insurance was inspiring and eye-opening.
(Even though Ari was happy to share his perspective on the industry, our conversation is not meant to be an endorsement of Planck by Ari or McKinsey.)
The complete interview can be found here. Following are some highlights.
Ari believes that although there’s lots of change in the industry including new or escalating risks like cyber or climate change; and that emerging digital channels and artificial intelligence could be game-changing - he thinks that most of the disruption in commercial insurance will come from potential shifts in the value chain. Who does what will be more important than the what.
By the what Ari is referring primarily to insurance products, supported by today’s insurance processes. There’s lots of innovation here, but one could argue that this change reflects ongoing evolution, not a revolution.
If we see major disruption in the industry, Ari believes it will probably come from who does what. The core challenge in today’s industry is what he calls the 60/40: about 40 cents of every dollar is transaction cost. It’s hard to see the loss ratio going much lower than an average of 60 points over the cycle. If it gets lower, one could argue that the insured has less need for risk transfer, not to mention that updated regulations would recalibrate and reduce the underwriting margin. The bigger challenge is the 40 points of expense needed to deliver the insurance product. That cost is split across intermediaries and the carrier’s internal expense base.
I recommend reading the full interview here.
To me it looks as if the title of the article does not really reflect its content. To present ILS as a possible efficiency gain is completely misunderstanding what ILS was meant to do: Access to new capital outside the traditional insurance market. Usually, this is an expensive solution. But for a good reason. Insurance pools are mention: They exist and can be improve - not really a disruptive idea.? Outsourcing (TPAs): Some do it more some less - neither new, nor disruptive. It is evolutionary improvement of value chains. The article can be summarized as follows: We don't really have ideas how the insurance industry can be disrupted and thus, we present normal evolution as disruption. My view is a different one: the interface between the risk and the insurer has to change in order to change the landscape. On purpose I do not write disrupt as this might leave the insurance industry as it is, but theway risks are bundled and end up in the insurance will change. Risk pooling, but substantially different than we do it today.