Insurance Industry Archives

Transforming the Game: How Consolidation is Revolutionizing the Insurance Brokerage Industry | Blog

June 7, 2023

Readily available capital and low-interest rates made the past few years ideal for the insurance brokerage industry to consolidate in response to increased competition, changing customer expectations, and other challenges. Merged insurance intermediaries can partner with business process service (BPS) providers to optimize processes, manage risks, enhance data analytics, and improve customer experience, among other benefits. Read on to learn more.

Reach out to us directly for questions or to learn more.

The insurance brokerage industry went through an inflection point last year. A confluence of factors happening simultaneously created a perfect recipe for consolidation. These included large quantities of readily available capital, low-interest rates, highly valued broker stocks, all-time high valuation multiples, and the challenging insurance market.

The deal frenzy of 2021 slowed towards the end of 2022, with less than $2 billion of deal value announced and no large transactions in the last six months of the year. Despite this, insurance brokerage transactions trumped the activity. More than 90% of the overall insurance deals were in the brokerage space. In terms of both the volume of transactions and the multiples being paid, the consolidation rate in the re/insurance broker industry has accelerated.

Let’s take a look at the following dominant broker groups influencing the insurance brokerage industry:

Global brokers – Large multinational insurance brokers who typically operate in multiple countries and offer a wide range of insurance products and services
Private Equity (PE)-backed brokers – PE firms provide the necessary capital for mergers and acquisitions
Family-owned brokers – Small to mid-sized insurance brokers that are family owned and operated

Drivers and challenges leading to consolidation

Competition

Increasing competition: The insurance intermediary industry is becoming increasingly crowded, with new players entering it all the time, further fragmenting the market. These new players often can offer better services, lower prices, and more innovative solutions than traditional insurance intermediaries
Market share growth: Insurance intermediaries can inorganically boost market share with additional capabilities and market penetration in new geographies by consolidating with another firm. They also can benefit from customer base growth

Capabilities

Technological advancements: The industry’s recent drive towards digital transformation by implementing new technology and platforms is forcing intermediaries to seek funds to invest in digitization or lose against better-capitalized intermediaries
Economies of scale: Insurance intermediary consolidation can spread fixed costs over a larger number of policies, resulting in lower average costs per policy. It also can provide intermediaries with increased bargaining power with insurers, provide cross-selling and up-selling opportunities, and help increase brand and mind share
Service offering diversification: Consolidation allows insurance intermediaries to expand and diversify their services and product lines. Intermediaries can attract new customers by acquiring another brokerage that provides different products or services. This keeps intermediaries relevant and competitive in a dynamic market

Complexity

Regulatory pressure: Consolidation can help smaller intermediaries remain up to date on increasingly complex risk management requirements that would be difficult for them to do by themselves
Inefficient processes and people: By joining forces, smaller firms can improve process efficiencies and combine their talent pools. Consolidation also can help large entities better manage operations

Customer

Changing customer expectations: Consumers increasingly demand customized and convenient services and anticipate an omnichannel experience. Insurance intermediaries that cannot meet shifting consumer expectations risk losing clients to rivals who can.

Impact of consolidation on stakeholders

Insurers

Customers

Routes to consolidation

Insurance intermediaries can take multiple paths to consolidate depending on their strategy, such as:

Mergers & Acquisitions: This is the preferred route for consolidation where two or more intermediaries enter into an M&A to achieve economies of scale, expand into new markets, and gain access to the latest tools and technologies. Different forms of M&A pursued are horizontal mergers between intermediaries from the same market, vertical mergers between intermediaries with different capabilities, and cross-border M&A
Strategic alliances and joint ventures: Insurance intermediaries can pursue strategic alliances or JVs under many forms, such as distribution agreements, co-marketing agreements, and shared service agreements to effectively share resources and expertise while reducing risks and increasing market power
PE investments: In recent years, PE firms have increased their involvement in this industry as they look to invest in dependable, cash-generating companies with room for expansion. PE companies can assist insurance intermediaries seeking strategic acquisitions and expansions while also providing access to finance and experience

Many intermediaries also take an independent route and pursue organic growth by investing in digital transformation initiatives to achieve unparalleled scale and efficiency.

Key players in the insurance intermediary consolidation space

The insurance intermediary market is highly competitive and dynamic, with many players pursuing different strategies to achieve their growth objectives. Here are some of the active players in the consolidation space:

Marsh & McLennan: In 2019, the company acquired Jardine Lloyd Thompson Group, a leading UK-based insurance intermediary, in a deal valued at $5.6 billion. The company also has announced the acquisition of Focus Insurance, offering tailored personal insurance programs.
Gallagher: Gallagher has pursued a growth strategy focused on M&A and has completed over 500 acquisitions since 1984. Gallagher started 2023 with an acquisition of Dublin-based commercial and personal lines broker First Ireland, making it one of Ireland’s largest brokers.
Hub International: The company also is focused on growth through M&As, and has made more than 600 acquisitions since its founding in 1998. In 2020, Hub acquired the assets of The Insurance Exchange, Inc., a leading insurance brokerage firm in California.

How intermediaries can leverage insurance service providers

Intermediaries face increasing pressure to reduce costs, increase efficiency, and deliver better customer experiences. By partnering with BPS providers, they can achieve these goals. BPS providers can deliver policy administration, claims processing, customer service, data analytics, and other services, as illustrated below:

In selecting a BPS provider, intermediaries need to evaluate the service provider’s capabilities by carefully considering their expertise, experience, cost arbitrage, flexibility, security, business continuity, delivery footprint, talent maturity, technology, infrastructure, governance approach, and client-centricity.

Everest Group can help evaluate these capabilities through its proprietary PEAK Matrix® assessment and impartially rank service providers as leaders, major contenders, and aspirants, as well as provide expert commentary to help enterprises make better-informed decisions.

To discuss insurance brokerage industry trends, please reach out to [email protected] and [email protected], and stay updated by accessing Everest Group’s latest research on Insurance Business Processes.

Future Insurance Technology Trends: A Closer Look at the Need for Building Humanized Insurance Experience, Data-driven Intelligent Operations, and SaaS Integration | Blog

May 31, 2023

From the many thought-provoking conversations that Everest Group analysts engaged in at Formation ’23, three main themes emerged about the future of insurance technology. These priorities are: integrating a humanized and people-centric approach, leveraging data to make intelligent decisions, and strongly emphasizing the Software-as-a-Service (SaaS) ecosystem. In this blog, we will take a closer look at these growing trends and explore their potential impact on the insurance industry.

Contact us directly for more insights.

Formation ’23 on May 8-10, hosted by Duck Creek Technologies (DCT), provided an excellent opportunity for Everest Group analysts to engage in exciting conversations with the community of insurance enterprise leaders, technology providers (from DCT and its solution partners), system integrators, consulting firms, and other analysts, about what will drive the next era in insurance.

Based on the dialogue we heard, the following three themes stood out to our team:

Building humanized and consistent experience will be the key to success

Delivering high-quality personalized customer experience is taking center stage in the insurance industry’s current transformation as carriers move from their traditional role as loss payors to becoming empathetic insurers and guardians for customers.

Digital experience platforms, distribution management systems, and smart communication platforms are becoming increasingly relevant to streamline operations, provide seamless and consistent digital experiences, and engage customers more effectively.

Data will play an important role here by equipping insurers with the right information that they can use to personalize and humanize the experience for individual customers. Interestingly, DCT also gave us a preview teaser of its new product – Elea, an AI-powered and empathy-driven chatbot slated for release later this year.

Infusing data and intelligence into insurance operations is the industry’s top priority

Data-driven intelligent decisions are a key priority for the industry. As the insurance industry moves toward AI-powered workflows, infusing data and having standard data models at a value chain and workflow level will be a major demand.

We found it interesting to see various point solutions offered by technology providers, such as CogniSure’s AI platform, which helps automate the underwriting process by converting structured and unstructured data to improve efficiency and effectiveness.

We also heard many discussions about early use cases of Generative AI (GAI) for operational tasks (emails, presentations, etc.), GAI-powered chatbots, and writing codes. But concerns remain about using this fast-growing technology in core operations.

SaaS sprawl requires attention

SaaS sprawl was another theme that dominated conversations. While the point solutions across the value chain come with the benefit of speed to market and bridge the capability gap on the top of core systems, integration across these remains a concern as these solutions often don’t talk with each other.

Enterprises leveraging a wide number of these point solutions now see the need for digital rationalization. Most of these software platforms have evolved and added new functionalities. But enterprises are not taking advantage of the latest features because they are either unaware of these benefits or because they are paying for other software with the same purpose. This leads to duplicate costs and less value.

These conversation themes and focus areas resonate well with what we expect from the industry in this environment, but we felt some upcoming trends did not get enough attention from the community – low code/no code technology being the most prominent one.

As always, Formation ’23 was a great experience for Everest Group to interact, learn and exchange thoughts and points of view with industry leaders about the future. The fun atmosphere in Orlando, Florida, complete with country music, delicious food, and drinks, added to the interesting conversations, resulting in lasting memories.

To discuss these insurance technology trends in more depth, please contact Ronak Doshi and Roma Juneja, who attended this insightful event.

Continue learning about insurance technology trends in this blog, Uncovering a Massive Insurance Industry Cloud Opportunity.

The Role of Insurance Intermediaries in the Digital Age: Challenges, Opportunities, and the Future | Blog

May 24, 2023

As the insurance industry undergoes a paradigm shift post-pandemic, digital transformation can improve customer experience and engagement. Insurance intermediaries have an exciting future ahead if they can successfully adopt Artificial Intelligence (AI), mobile apps, big data, and analytics to better understand their customers and provide personalized products. Partnering with service providers will help insurers overcome barriers and improve efficiencies. Read on to learn more.

Reach out directly to discuss or for more information.

Insurance intermediaries (agents and brokers) play a crucial role in the industry by helping customers find the best insurance policies to suit their needs and connecting insurance companies to potential customers.

The overall intermediary market is vast with nearly 500,000 licensed intermediaries registered in the US, according to the National Association of Insurance Commissioners (NAIC), and 12,000 insurance brokers registered in the UK. The market is valued at more than $130B in the US and £13B-plus in the UK, as per IBISWorld and the UK Financial Conduct Authority. McKinsey estimates that 84% of sales in US property and casualty and 90 percent of US life policies go through agents or brokers.

This industry is undergoing a paradigm shift post-pandemic due to the increased adoption of digital direct-to-consumer (D2C) channels, remote work, and other trends. The intermediary business is evolving to maintain its growth momentum with rapid execution of quote to bind, hyper-aware consumers, increased competition, and declining margin profile.

Digital transformation is taking center stage on the intermediary side of business due to factors like the increased availability of customer data, demand for customized products, the rise of low-code/no-code solutions, increased use of self-serve options, increased use of D2C channels, rise of embedded and usage-based insurance, telematics, analytics, and advanced risk management solutions.

Role of service providers in helping intermediaries overcome barriers

While these changing industry dynamics push intermediaries towards adopting digital transformation, they still face the following barriers:

Legacy systems and processes: Insurance intermediaries have used outdated systems and procedures for many years, and the migration to modern systems is further delayed by a lack of funds
Resistance to change: Some insurance intermediaries are unwilling to adopt innovative technology and business models or lack the right knowledge and experience with digital technologies
Resource constraints: Putting modern technologies or business models into practice may require a substantial cash commitment or access to specialist skills that are unavailable with today’s talent crisis
Regulatory constraints: Various regulations like personal data protection, sales standards, and solvency requirements limit intermediaries’ flexibility and ability to innovate
Data security and privacy concerns: Intermediaries must safeguard sensitive client information and adhere to several data security and privacy laws
Shifting consumer expectations: Insurance customers demand more information than ever before and expect customized products through their preferred channel (digital, in-person, sales partner), better user experiences, shorter turnaround times, and digital touchpoints for the end-to-end process

Competition and customer retention also hamper the growth of intermediaries.

Service providers can help intermediaries overcome these barriers as illustrated below:

Digital technologies transforming insurance intermediaries

The following technologies can help intermediaries enhance the services they provide to customers:

Digital onboarding with interactive workflow and digital policies: The entire intake process should be digitized, reducing the intervention needed by intermediaries and showing customers the complete user journey from bind to quote. Insurance policies that allow electronic signatures also will accelerate the overall process.
Artificial Intelligence (AI) and Machine Learning (ML): Applying AI/ML for chatbots, fraud detection, personalized recommendations, and other processes can help insurance intermediaries enhance customer experience, boost efficiency, and offer more customized services.
Mobile technology and User Experience (UX)/User Interface (UI): To meet customers’ increasing desires to access services on the go, intermediaries need to provide access to policies and the ability to submit claims and pay bills available via mobile devices and applications.
Big data and analytics: Leveraging data and analytics will help intermediaries better understand their customers and provide more personalized recommendations. For example, agents may use data on a customer’s driving habits to provide personalized auto insurance recommendations.
Real-time insurance quotation and comparison tools: Using innovative technologies that automate the insurance underwriting process will allow intermediaries to deliver real-time insurance quotes and pricing comparison tools. Digital tools leveraging algorithms and data analytics will help agents/brokers instantly evaluate risk factors and determine
Claims management: Insurance intermediaries can play a key role in automating the claims management process by helping customers with online claims filling systems, automated claims triage, automated claims adjustments, and real-time communication.

By partnering with service providers or using third-party platforms and tools to accelerate their use of modern technologies, insurers have the potential to achieve large-scale cost savings and headcount reduction benefits. Depending on the adoption, insurers can achieve cost arbitrage generating a Return on Investment (ROI) of 1.5 to 3 times.

Intermediary of the future

Insurance intermediaries’ future likely will be shaped by a combination of technological advancements, changing consumer behaviors and expectations, regulatory developments, and economic conditions.

Intermediaries need to adapt to the following five changing trends to thrive:

Embrace digital innovations: The Internet of Things (IoT), AI/ML, blockchain, big data analytics, and other innovations increasingly are becoming mainstream and changing the way intermediaries operate and evolve.
Increase personalization: Data analytics can help intermediaries better understand their customers to provide more personalized recommendations and, in turn, find opportunities to cross-sell and upsell. Insurance plans must be customized to address clients’ unique needs and risk profiles.
Prioritize risk management: By gaining insight into customer risks, intermediaries can offer proactive risk management services. They should also identify emerging risks, such as cyber threats, and collaborate with clients to develop comprehensive risk management strategies and insurance solutions.
Shift to a consultative model: Insurance intermediaries must evolve from their traditional focus on selling policies into offering advice and guidance as consultants. They need to become trusted advisors, providing insights and recommendations to customers, such as risk management, insurance policy options, and financial planning since insurance is often a crucial part of an individual’s financial plan.
Integrate with the ecosystem: To stay competitive and meet evolving customer expectations, agents/brokers have to bundle services and offer financial planning and risk management in addition to traditional insurance products in a seamless customer experience.

To discuss digitization opportunities for intermediaries, please reach out to [email protected] and [email protected], and stay updated by accessing our latest research on Insurance Business Process Services.

Pension Risk Transfer: The Next Greenfield Opportunity in Retirement and Insurance | Blog

April 21, 2023

With pension risk transfer (PRT) activity hitting post-pandemic record highs of $53 billion in North America market volume last year, this growing market represents a massive untapped opportunity for technology and services providers to leverage their retirement and pension expertise to deliver new solutions. Read on to learn about the possibilities this option opens.

Even with the general shift towards defined contribution (DC) plans, defined benefits (DB) assets still contribute to the majority of retirement Assets Under Management (AUM) in the US. However, defined benefit plan providers often struggle to guarantee the security of retirement benefits because of the following risk factors:

Unpredictable investment returns due to variable interest rates, market volatility, and the geopolitical environment
Volatile interest rates
Increasing life expectancy and longer service tenure of plan participants
Underfunded pension liabilities

To shield against this unpredictability, plan sponsors are adopting pension risk transfer strategies to guarantee retirement and pension benefits for DB plan members. Under this approach, DB plan providers transfer their entire/partial pension liabilities to other firms, usually a life insurance firm, to remove their obligation to pay plan participants guaranteed retirement income or post-retirement benefits.

In the past four years, PRT transactions have increased as DB plan providers seek to de-risk huge pension liabilities. Many large and mid-sized plan sponsors are hedging these risks through PRT transactions with the intent of transferring or terminating existing DB plans.

The pension risk transfer market peaked in 2022 as retirement plan sponsors urgently felt the need to secure pension benefits in an increasingly uncertain world following the pandemic.

The growth momentum is expected to continue due to favorable transaction terms for sponsors and insurers’ continued desire to de-risk pension assets. North America accounted for approximately two-thirds of global PRT sales (US$60 billion) in 2021 and grew by 40% in 2022. In both these years, almost half of the PRT transactions were near US$1 billion or more, according to the LIMRA Secure Retirement Institute.

Pension risk transfer types

The following two PRT transactions are most prevalent in the market:

Buy-in – The insurance firm takes the liability of benefit payments for plan participants to the plan trust. The sponsor retains fiduciary and administration obligations and holds the pension plan contract as an asset on its balance sheet
Buy-out – The insurance firm takes the liability of benefit payments for plan participants entirely and all of the administrative responsibilities. This is the most common transaction type, as the entirety of pension obligations are transferred

Implications of pension risk transfer for services and technology providers

Transferring pension liabilities to an insurer comes with many challenges. Providers have several opportunities to support insurance enterprises, recordkeepers, plan sponsors, and third parties involved in such transactions in the following key areas:

Technology systems: Insurers need support to transform their technology landscape to meet the increasingly complex market requirements, including data migration, fund transfer, benefits administration, contracts and provisions management, and pension administration for the full participant lifecycle.

Varying technology maturity levels among recordkeepers, insurers, and plan sponsors presents a big challenge. A service provider or platform provider’s solution can help with the entire process of transferring liabilities (sometimes along with plan termination) and all the relevant data, provisions, rules, funds, and critical participant details. This presents an opportunity for system integrators (SI) and platform providers to work together to efficiently manage the process lifecycle

Strategic partnerships: As this business achieves scale, insurers will strategically view this as an alternate revenue stream. Insurance firms can partner with technology and service providers to enable user-friendly onboarding, payment/annuity processing, automated query resolution, and analytics-based PRT transaction pricing, as well as building newer underwriting and actuarial capabilities for deciding PRT transactions’ premiums
Regulatory compliance: Technology and service providers need to assist insurers and sponsors in complying with the changing regulatory environment, varying state and regional taxation laws, and accounting nuances of different transaction types such as buy-ins and buy-outs
Cyber security: The significant amount of sensitive participant data being exchanged between recordkeepers, insurers, and sponsors’ systems poses substantial security risks. With the varying complexities and formats for different plan sponsors and record keepers, traditional file formats of participants’ data are difficult to maintain. Technology and service providers can securely manage the migration of pension data from on-premise systems to cloud, on-prem systems to other on-prem systems, and between different cloud environments

With the transaction volume increase in the PRT market expected to continue, technology and service providers have many opportunities to seize this underserved industry segment by leveraging their existing business expertise in the retirement and pension domain to build new solutions catering to this market.

To discuss pension risk transfer further, please reach out to [email protected] and [email protected].

Learn about the evolving digital requirements for the insurance industry in the blog, Reinventing the P&C Insurance Claims Value-Chain: Moving to the Claims of the Future Vision.

Transformation Imperatives for Wholesalers and MGAs in Insurance: Exploring Opportunities to Unlock the Next Growth Phase | Blog

March 17, 2023

Managing General Agents (MGAs) and wholesalers are becoming increasingly relevant in the insurance ecosystem due to the unique advantages they have over brokers/agents. With five key transformation levers described in this blog, MGAs can overcome challenges and unlock a wave of unprecedented sustainable growth. Technology and business process services (BPS) providers can help MGSs reduce costs and increase their digitization and automation intensity. Read on to learn more.

As insurance intermediaries that represent carriers, MGAs provide insurance products to retail agencies and insureds. They are frequently positioned between other intermediaries, such as retail or wholesale brokers and insurance firms. MGAs also are qualified to underwrite and bind coverage as well as perform customer support services, including policy issuance and claims management. Overall, more than 1,000 MGAs are in the US, and 250-plus operate in the UK, covering nearly 5-10% of the overall insurance market.

Role of MGAs in the insurance ecosystem

The business model of MGAs stands apart from full-stack insurers and agents/brokers by the greater span of control and the profitability they generate. On the product side, MGAs have the flexibility to build products in collaboration with the insurer but may have a lower appetite for innovation and slower speed to market, depending on the insurer’s capability and commitment. On the customer relationship side, these specialized agents have full control over all customer activities.

According to a McKinsey report, 43% of top 100 Property and Casualty (P&C) insurers have at least one MGA relationship to source new premiums. Various types of MGAs operating in the ecosystem are illustrated below.

MGA profile

MGAs keep their financial profile stronger like other intermediaries in the ecosystem by achieving 20-30% EBITDA. MGAs are moderately capital efficient due to low setup cost, no legacy platform burden, quick monetization opportunity, and lean team setup.

However, they need to share the profit pool with insurers. The major revenue streams for MGAs are commission paid by insurers, risk performance-based commission, and offering additional services like claim administration and inspection.

Various value chain elements performed by MGAs include marketing, sales, distribution, underwriting, policy issuance, claims handling, policy review, customer services, risk management, policyholder communication, and renewal management.

Challenges MGAs face

Despite the significance of their role, MGAs face the following challenges in running operations effectively:

Complying with regulations: MGAs must keep up with the most recent rules and compliance standards because insurance regulation is always changing and is state-based. Penalties, fines, and legal repercussions may arise from breaking rules
Attracting and retaining talent: MGAs face hurdles in attracting and retaining skilled and experienced employees who can provide quality services to clients
Managing risks: On behalf of insurance companies, MGAs are in charge of risk management. This requires agents to have a thorough understanding of the insurance products being supplied, the underlying risks, and the potential effects of these risks on the organization
Balancing client demands with profitability: Client demands for new products, services, and coverage may not be aligned with the profitability goals of the MGA
Staying competitive in a rapidly changing industry: MGAs must stay abreast of advances in technology, goods, and services in the insurance sector to remain competitive
Competing with increasing industry consolidation: With large companies getting bigger, it is more difficult for other players to compete effectively

Five transformation pillars

To remain competitive, MGAs must find new ways to transform their businesses by leveraging new technologies and business models, as shown below.

Let’s explore each of the elements in the innovation framework in more detail:

Embrace digital transformation: MGAs can streamline operations, enhance customer experience, and cut costs by utilizing digital technologies, including automation, artificial intelligence, and cloud computing. To improve their decision-making and expand their business, MGAs can benefit from unique insights into consumer behavior and market trends provided by digital transformation
Partner with other ecosystem providers: Partnering with InsurTechs and technology and BPS providers is an effective way for MGAs to embrace digital transformation and wide-scale automation levers like Robotic Processing Automation (RPA), Artificial Intelligence/Machine Learning (AI/ML), Natural Language Processing (NLP), Optical Character Recognition (OCR), etc. By leveraging the expertise and technology of these providers, MGAs can access new tools and capabilities, helping them remain competitive and grow their business.
Embrace a customer-centric approach: Young customers prefer a digital-native approach and demand slick web and mobile interfaces to engage; direct-to-consumer (D2C) distribution platforms to buy; and two-way SMS messaging, chatbots, and interactive documents, forms, and videos to communicate. By offering these services, MGA insurance companies can not only improve customer satisfaction but also build deeper relationships with their customers, which can lead to increased loyalty and longer-term engagement
Enable data-driven decision-making: Data and analytics play an increasingly important role in the insurance industry, and MGAs must leverage these tools to remain competitive. By collecting and analyzing data from multiple sources, such as customer interactions, market trends, and operational performance, MGAs can gain new insights into their business, enabling them to make more informed decisions and drive growth
Foster a culture of innovation: Innovation is key to remaining competitive in the insurance industry, and MGAs must foster a culture of innovation to stay ahead of the curve. This requires a commitment to investing in new ideas and technologies, as well as encouraging employees to think creatively and embrace change.

These five transformation levers can help mitigate challenges like compliance adherence, talent management, low profitability, risk management, and strong competitive intensity by ensuring a culture of innovation, enforcing client-centricity, utilizing data analytics, outsourcing non-core functions, and embracing digitization.

Sourcing implications

MGAs operate in an area requiring specialized knowledge and experience in specific insurance markets and products. Companies typically prefer to keep core functions in-house and outsource non-core traditional and technology-led activities.

Multiple tech and BPS service providers work across the ecosystem with insurers, agents, brokers, insurtechs, and MGAs that have built superior capabilities to provide services across multiple business lines and geographies.

Service providers also offer the latest tools and technology, superior customer experience capabilities, operational efficiency, Service Level Agreement (SLA) management, flexibility to ramp operations up and down, superior talent, a low-cost advantage, best-in-class lean operations, improved risk management, and much more. MGAs can outsource either a part of the value chain or engage in end-to-end transformative deals, depending on their appetite for outsourcing, process maturity, and management buy-in.

Some of the areas within MGA’s and wholesaler’s process value chain that can be outsourced are as follows:

MGAs need to evaluate the service provider’s capabilities after carefully considering their expertise, experience, cost arbitrage, flexibility, security, business continuity, delivery footprint, talent maturity, technology, infrastructure, governance approach, and client-centricity.

Analyst firms like Everest Group can help evaluate these capabilities through its proprietary PEAK Matrix® assessment and impartially rank the service providers as leaders, major contenders, and aspirants, as well as provide expert commentary to help enterprises make better-informed decisions.

To discuss MGAs in insurance and outsourcing trends, please reach out to [email protected] and [email protected], and stay updated by accessing our latest research on insurance business processes.

The Recessionary Conundrum: What Lies Ahead for Healthcare Payers?

March 13, 2023

A looming global recession may finally take its toll on payers who have escaped prior economic challenges. Let’s take a look at the healthcare trends influencing decision-making by payers, the markets most likely to be affected, and the actions payers can take with the uncertain outlook.

Wall Street predicts that the probability of a global recession in 2023 is 61%, well above the stable benchmarks. Although inflation has eased up marginally since the last quarter, tighter financial conditions and weaker global growth still indicate a potential downturn.

The healthcare industry historically has weathered economic collapses better than core industries that are generally more severely impacted. A Forbes assessment shows that while the US economy (as measured by GDP growth) plunged into recession eight times over a 60-year period from 1960-2020, healthcare expenditure growth never shrunk, often outgrowing gross domestic product (GDP) as illustrated in Exhibit 1.

This stability is primarily because impacted employees either opt for subsidized government programs or forego medical care, as applicable, pushing the healthcare cost to the future. As a result, health plans tend to be relatively less affected due to recessionary headwinds. In fact, reports suggest that earnings for healthcare payers declined only by 27% compared to a 77% decrease for the overall S&P 500.

Exhibit 1: Real GDP growth and national health expenditure growth 1960-2020

Although many healthcare payers posted strong growth rates at the end of fiscal year 2022 as shown below (Exhibit 2), the results may not be as positive in 2023, particularly for employer-sponsored or provider-owned health plans.

Exhibit 2: Year-over-year growth rate by revenue for healthcare payers

The overall impact on the payers in the fiscal year 2023, however, will be determined by several upcoming trends. Let’s look at some of these influencing factors in detail below.

005 — Exhibit 3: Major healthcare trends defining the decision-making process of payers in 2023

Medicaid redetermination: As states kickstart Medicaid redetermination in April 2023, over 15 million Medicaid members are expected to lose their enrollment after the renewal process. Several payers, such as Centene, expect to lose about 2.2 million members over the next 18 months. On the other hand, payers like Humana and Molina Healthcare project their Medicaid membership to be largely stable due to new Medicaid contracts offsetting redetermination losses
Prior authorization rule: The CMS Interoperability and Prior Authorization rule requires regulated payers (Medicaid, Medicare, CHIP, and QHP) to utilize Application Programming Interfaces (APIs) that give healthcare providers more streamlined access to data. Payers will be required to maintain these APIs using the Fast Healthcare Interoperability Resources (FHIR) standard. This regulation is expected to bring effective workforce utilization, improved data exchange, reduced appeals, and, in turn, more timely claims disbursal
Inflation reduction act: Starting this year, Medicare will be allowed to negotiate prices for prescription drugs with pharmaceutical companies. Apprehensions are high that this will lead to cost-shifting to privately funded and employer-sponsored health plans. Or, the reverse also could be true, and privately-funded plans may demand similar negotiations along the lines of Medicare to avoid overpaying for healthcare. Moreover, the Part D plans will have to bear higher responsibility in the catastrophic phase as the law puts a spending and inflationary cap on out-of-pocket expenditure beginning in 2025
Focus on alternative care market: Payers are striving to strengthen preventative care and ensure end-to-end offerings, as many big players (e.g., United HealthCare, CVS Health) have invested in home, virtual, and alternative care. The race to outcomes-based care is shifting from retrospective to proactive and comprehensive health management through multiple integrations
Member experience and STAR Ratings: With the Consumer Assessment of Healthcare Providers & Systems (CAHPS) member experience weights increasing to four times in 2023, ensuring top-of-the-class member experience will remain a priority for health plans

Impact of the potential downturn on the healthcare payer market

So, how specifically will payers be impacted? It’s hard to say, given the global inflation outlook improvement. But lessons from the past indicate that a sustained period of economic uncertainty will impact both the government and the private markets in the following key markets:

Privately-funded market: Markets such as employer-sponsored health plans could lose members due to layoffs and loss of employee-sponsored coverage. Payers such as Cigna, that have significantly high commercial membership (Exhibit 4), could feel the heat of the competition from the health insurance exchange (HIX) and Medicaid plans. However, these losses can be offset if payers can retain these members in other product lines. Alternatively, having a diversified business portfolio such as a pharmacy or data services also may provide a cushion against medical membership loss
Government market: While the Medicaid market would traditionally gain membership in a recession, instead it will see the combined effect of redetermination and a potential economic downturn. As some of the members who lose employer coverage join Medicaid, the drop in membership might be less than expected after the redetermination process. The impact on Medicare, however, is expected to be relatively insignificant. Overall, the payer mix might experience a shift toward government business

Lastly, the uninsured population may experience an uptick due to information asymmetry and administrative complexities. According to an assessment done from 2007-09, only some of the insurance loss from a lack of employer coverage was offset by added public coverage, leading to a 5.6 million rise in uninsured adults. While the Affordable Care Act (ACA) has lowered the uninsured population, an economic downturn potentially can add to the current uninsured coverage.

004 — Exhibit.4: Percentage of membership in the commercial business

What should payers do in this uncertain market outlook?

With the market unpredictability, healthcare payers will have to take calculated measures to prevent business impact. Here are four actions they can take:

Focus on operational efficiencies: Healthcare providers are more likely to be impacted by a downturn, pushing them to negotiate for higher contract prices. Payers will have to explore ways to offset any price hikes. This can lead to increased outsourcing and offshoring of traditional processes, such as provider and claims management to ensure lower administrative spending and higher operational efficiencies
Invest in preventative care: Price-conscious members may move to higher deductible plans and avoid care, particularly preventive services, leading to lower utilization. This can have lingering long-term effects, particularly for members with multiple chronic diseases. To combat this, payers should identify susceptible members, invest in areas such as social determinants of health (SDoH), and devise strategies that prevent care gaps and discontinuity
Increase digital member engagement efforts: Millions of members lost their coverage in the last recession despite being eligible for other plan options, partly due to a failure in getting the right information and comprehensive engagement with their insurers. To avoid this from happening again, payers will have to ramp up investments in member engagement to avoid losing members. Regional health plans and the Blues will have to bring in digital-enabled solutions that help to understand member needs and provide forward-planning insights. Support from third-party services providers who offer customized, plug-and-play customer experience (CX) solutions can help meet this need
Upgrade systems: Several payers with strong capital support can undertake digital transformation efforts to replace legacy systems and move to interoperable, connected ecosystems that will help improve administrative as well as care outcomes. However, this might only be applicable for payers who experience limited utilization and payouts due to the downturn.

Outlook for service providers

These measures will require service providers to proactively engage with healthcare payers and focus on three levers – the right clients, the right capabilities, and the right value addition. This will enable service providers to aim for the right opportunities such as member engagement and preventive care and ensure sustainable growth in an uncertain economic environment. Finally, in a highly competitive market like payer services, service providers will have to offer targeted digital and traditional Business Process Outsourcing (BPO) services to serve the right client need and differentiate themselves with unique value propositions refined as per the prevailing market demand.

To learn more about healthcare payer and provider trends, contact Lloyd Fernandes or Vivek Kumar.

To learn about the changes in the pharmacy benefits management (PBM) industry, such as increased regulatory scrutiny surrounding pricing transparency and rebate-sharing rules, watch our video, Pharmacy Benefits Management: The Next Big Healthcare Opportunity.

You can also learn more about How to Deliver Hyper-personalized Customer Experiences in Life Sciences in this LinkedIn Live session.

Uncovering a Massive Insurance Industry Cloud Opportunity | Blog

March 10, 2023

Cloud computing presents a huge opportunity for insurers to drive growth, improve efficiency, and deliver innovation, among other benefits. Read on to learn about the coming phase of industry cloud and the key role system integrators (SIs) can play in advancing cloud adoption in insurance.

As insurance enterprises navigate the volatile and risky macroeconomic environment combined with recessionary market sentiment, increasing operational resiliency and agility and delivering superior speed becomes essential.

Insurers have to work effectively, efficiently, and, most importantly, smartly. The urgent demand to innovate and move beyond risk remediation to risk mitigation is making insurers realize the importance of leveraging cloud as a key enabler of growth and efficiency mandates. Let’s explore this opportunity further.

Cloud rises to the top of the business agenda for insurers

Most insurers currently rely on cloud for non-core operations while they explore stepping up to full production. While cloud’s massive potential is well known, insurance enterprises hold back from completely leveraging it for various reasons, including security concerns, integration issues, and the existing legacy stack. The inability to realize full value from cloud investments also becomes a massive roadblock.

Fortunately, the mindset regarding cloud adoption in insurance is taking a huge turn. A cloud-first approach is becoming important to insurance enterprise business leaders who find its benefits too irresistible to pass up.

In addition to helping meet cost and efficiency mandates, deriving full potential and optimizing cloud investments, and driving business-focused growth and experience are arousing interest in cloud adoption in insurance.

A recent Everest Group study on cloud initiatives with more than 75 insurance enterprises found that 70% of insurance leaders believe that cloud insurance initiatives make up more than 20% of their IT spend, as illustrated in the exhibit below.

Driving business agility and lowering the total cost of ownership has become the most important aspect of cloud transformation for insurers. Achieving data-centricity by seamlessly integrating external data with internal datasets, facilitating real-time analysis of large data volumes, and enabling data-driven decision-making across the value chain are other desires gaining prominence among insurers.

The near future is industry cloud

Slowly and gradually, innovation is taking a front seat in managing the IT estate for the insurance industry. As insurers embark on their next growth phase, they increasingly need to run industry-specific workloads on cloud, such as premium payment processing, policy administration, loss notification, multi-channel sales and distribution management, and claims management and fraud detection.

With insurers moving away from a one-size-fits-all approach, industry cloud is expected to drive the cloud spend going forward to future-proof the technology estate, monetize data to generate alternate revenue streams, and re-think value delivery to end customers. Insurance leaders have started realizing that industry cloud can be a catalyst for transforming and automating industry-specific business processes.

Industry cloud allows industry leaders to get all the assets organized in one place which are specific to the use cases of the industries they operate in. This platform is becoming the next big thing in cloud computing and insurance as it easily allows enterprises to customize processes based on usage, differentiate faster, and innovate in a better way.

SIs need to support hyperscalers and carriers to shape industry cloud

As the need to develop the industry cloud story gains prominence, the concept of co-creating also is booming. Generally, hyperscalers provide the building blocks for cloud, and SI partners assist insurers in creating and customizing specific applications and business processes on top of that foundation.

Insurers increasingly expect cloud providers to create customized and insurance-specific core solutions that address their unique needs and enable modular business processes. However, industry cloud is the missing piece in full-stack capability for hyperscalers.

As a result, they need support from SIs to realize their vision of catering to the entire enterprise IT stack. SIs need to support hyperscalers in identifying high-potential insurance industry cloud use cases aligned with specific business segments, as shown below.

Cloud computing has moved beyond being ‘just a digital infrastructure’ to replace on-premise servers. The latest cloud services are more aligned towards integrating advanced technologies such as Artificial Intelligence/Machine Learning (AI/ML), the Internet of Things (IoT), and data analytics to transform the insurance value chain.

For example, cloud computing can take claims management to the next level by managing and automating claims handling and offering a superior claims experience. By combining cloud capabilities with data and AI, insurers can fundamentally change how they manage claims. Infusing AI/ML in claims processes can help insurers tap the plethora of data they possess and unlock immense value to come out on top.

Cloud enables insurers to reduce manual handling, lower error rates, and perform more straight-through processing, eventually leading to faster claims processing and a superior claims experience.

Everest Group research shows about 35% of P&C insurers’ priorities across claims management focused on enhancing customer experience (based on an analysis of 60-plus case studies involving claims modernization/transformation).

Cloud computing also allows insurers to drive superior efficiency by enabling data and analytics-driven claims processing and focusing on effective service delivery to reduce claims expenses and improve claims handling accuracy – all while ensuring greater customer satisfaction.

The time for insurers to go big on cloud has come

Cloud computing is no longer a choice but a mandate for insurance leaders. The insurance industry is finally catching up to the momentum of integrating SaaS into IT systems. As insurers replace outdated mainframe and on-premise infrastructure that has become harder to update and inefficient to scale and maintain, they must leverage the skills and experience SIs offer. Close partnerships between insurers and SIs also can help drive innovation and is where the future is leading.

Everest Group is launching an inaugural Cloud Services in Insurance PEAK Matrix^®Assessment 2023. Please reach out to [email protected] and [email protected] for more information on cloud adoption in the insurance industry and to participate in the Cloud Services in Insurance PEAK Matrix^®Assessment 2023.

You can also watch our webinar to learn about software and cloud pricing and contract negotiations and to keep spend in check.

3Cs of Emerging Risks – How Insurers Can Capitalize on the Opportunity | Blog

February 24, 2023

Insurance carriers need to transform their risk function, become more agile, and proactively create new offerings that protect against the threats of 3Cs: climate risk, cyber risk, and crypto risk. Read on to learn how this environment can create opportunities for insurers.

In today’s evolving risk landscape, insurers need to seek new technologies to improve efficiency, streamline workflow, and fill coverage gaps. Insurers must carefully navigate the detrimental effects of these volatile threats and evolve from being risk insurers to risk guardians. But are insurers putting enough emphasis on exploring the lurking threat areas that can pose imminent risks? Let’s take a look at how this will reshape the insurance industry moving forward.

Hardly anyone could predict a global crisis such as COVID-19 leading to insured losses amounting to nearly US$44 billion, making it the third most costly catastrophe to the industry. After any such black swan event, insurers need better preparedness and foresight to manage their response. The impact of unforeseen risks is becoming increasingly evident. Insurers need to foresee, pre-empt, and prepare for future risks to reduce uncertainty, and underwrite risks in a better way.

Due to spiking losses caused by emerging risks in insurance, traditional rating models are losing relevance to advanced solutions developed by InsurTechs and niche solution providers that enable data-driven decision-making powered by next-generation technologies such as Artificial Intelligence (AI)/Machine Learning (ML) and internet of things (IoT).

With insurance products being largely commoditized, carriers need to differentiate their offerings by rapidly creating newer products for emerging risk segments. We have explored three key emerging risk segments that are complex to evaluate and increasingly gaining prominence, as illustrated below:

Market landscape and challenges faced by Insurers

The pandemic forced insurers to adopt newer technologies, scale up digital-first operations, and expand data estate leading to added risk and exposure. The average data breach costs jumped about 13% from 2020 to 2022, according to the IBM Cost of a Data Breach Report 2022
The increasing frequency and costs of extreme weather events is putting a greater burden on insurers. Traditional insurer risk models are not sufficient to face the challenge of accurately capturing and testing climate-related risks
Cryptocurrency presents a diverse risk landscape. Risky investments in digital assets and unexpected losses tied to cryptocurrency curtails their viability, triggering surety claims. Product development and coverage pricing become challenging because of the dynamic nature of these assets

In response to the challenges illustrated in Exhibit 2 below, insurers need to assess the risks and create personalized products and zero-touch claims processes.

Next steps in the right direction

With rising losses, insurers can no longer shut their eyes to the devastating impact of these emerging risks on pricing, underwriting, and investment decisions. Insurers need to strategically rethink their risk function.

Carriers must prioritize investment bets across the insurance value chain and evaluate InsurTechs and specialists that bring in niche talent, industry expertise, speed, and experience to help them meet their key business priorities.

According to Everest Group research, specialist providers (illustrated in exhibit 3) can act as catalysts for value realization by quantifying the financial impact of climate change, providing comprehensive cyber risk visibility, and offering innovative digital asset protection solutions.

Contextualized solutions from InsurTechs are gaining prominence to fill capability gaps, enhance value propositions, and streamline workflows across the insurance value chain.

Let’s explore some of the solutions providers offer for addressing the 3Cs of emerging risks in insurance.

Climate risk:

The quantitative consequences of risks must be appropriately assessed and addressed to minimize the impact. Real-time analytics providers use resiliency insights, risk engineering, probabilistic hazard maps, and historical catalogs to recognize the likely risk from natural disasters across the globe
Insights on possible hazards can be conveyed via geospatial web-based applications, reports, or application programming interfaces (APIs). Using asset and portfolio-level climate risk analytics, insurers can tap into these insights that affect crucial aspects of the value chain, starting from product development and portfolio planning to underwriting and pricing

Cyber risk:

Cyber risk analytics platform providers use telemetry and threat intelligence from across customer workloads, endpoints, identities, IT assets and configurations, DevOps, AI, and blockchain. Using this intelligence, they identify and map shifts in adversary tactics and create actionable data to automatically prevent real-time threats
As insurers navigate through uncertainty, they need to tap into the plethora of data they possess along with third-party data to unlock immense value. They must infuse data analytics at every step, starting with identifying, protecting, and detecting cyber-attack risk to proactively computing the cyber control performance. This will enable early identification of weaknesses and detect advanced attacks

Crypto risk:

Storing crypto assets is creating new risks. To quantify loss exposure, actuarial teams can draw on forecasting analysis of cryptocurrency crimes to build actuarial models around cold wallets (coverage against damages or theft of the physical storage device) and hot wallets (coverage against abuse of the private key that enables access to digital assets)
Insurers need to develop the tools to implement dynamic policy limits/pricing that increase or decrease based on the price changes of these assets, enabling insurers to respond and act upon real-time market changes and ensuring the policyholder is always protected even with innumerable value fluctuations during the policy period

Insurers have a critical role in leading society to navigate these looming threats. Carriers need to change their approach, become more agile, and proactively build products while safeguarding these risks.

It has never been more important to assess and address the 3Cs of insurance risks. To learn more about them in detail, check out our Insurance Solutions Specialist Trailblazers – 2023.

To discuss emerging risks in insurance, please reach out to [email protected], [email protected], [email protected], and [email protected].

Announcing our inaugural conference: Everest Group Engage, The Pragmatic Edge: Designing Your Future. Learn more.

Category: Insurance Industry