The Indian IT industry, which has been facing macroeconomic challenges, might witness a further slowdown in BFSI (Banking, Financial Services, and Insurance) deals due to the recent collapse of Silicon Valley Bank (SVB).
Peter Bendor- Samuel, CEO of Everest Group, told TNIE that the direct impact of the SVB crisis on the Indian IT industry will be modest but the indirect could be more significant. In case of direct impact, this is going to have a negative effect on the high-tech customers, particularly the smaller start-ups.
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.
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.
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.
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.
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.
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.
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.
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.
The property and casualty insurance industry has become a significant adopter of Software as a Solution (SaaS) technology and continues to see a massive influx of SaaS applications embedded across organizations’ business operations.
“If you stack all of these SaaS solutions together, the spend becomes quite sizable. And what we’re starting to see is it’s not just the spend that is becoming sizable. We are also seeing duplication of solutions because these solutions, over a period of time, have evolved to do more.” says Ronak Doshi, Partner at Everest Group.
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.