© 2016 Finity Consulting Pty Limited

Digital disruption and the

erosion of value Graeme Adams and Luke Cassar

ANZIIF Briefing: Industry Performance 11 November 2016

Digital disruption and the erosion of value

2

1. Why insurance is ripe for disruption

2. The rise of InsurTech

3. The sharing economy

4. The erosion of value

Digital disruption and the erosion of value

3

1. Why insurance is ripe for disruption

2. The rise of InsurTech

3. The sharing economy

4. The erosion of value

Premium growth is anaemic

4

• GWP J2016: $40.95 billion (up from $39.96 billion in J2015)

• Motor, Home, CTP account for 54% of the market

Domestic Motor 22%

Home 21%

CTP 10%

Commercial 16%

Long Tail 15%

Travel 2%

Other 14%

Source: APRA Source: APRA

0%

2%

4%

6%

8%

10%

15

20

25

30

35

40

45

GW

P G

row

th

($ b

illi

on

s)

GWP Growth

Motor and Home underwriting profitability

under pressure

5

Motor Home

0%

20%

40%

60%

80%

100%

120%

Sep

Dec

Ma

r

Jun

Sep

Dec

Ma

r

Jun

Sep

Dec

Ma

r

Jun

Sep

Dec

Ma

r

Jun

Sep

Dec

Ma

r

Jun

Sep

Dec

Ma

r

Jun

2010 2011 2012 2013 2014 2015 2016

Net Loss Ratio UW Expense Ratio CORSource: APRA

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

SepDecMarJunSepDecMarJunSepDecMarJunSepDecMarJunSepDecMarJunSepDecMarJun

2010 2011 2012 2013 2014 2015 2016

Net Loss Ratio UW Expense Ratio CORSource: APRA

Markets are becoming fragmented (eg. Motor)

6

Allianz 8%

Challengers (excl. Coles)

7%

IAG 32%

Motor Club 13%

Others 13%

Suncorp 27%

Suncorp & IAG make up 59% in 2015; 71% in 2010

Source: Roy Morgan, Finity

10%

12%

10%

5% 5%

8%

2%

0%

2%

4%

6%

8%

10%

12%

14%

NSW VIC QLD WA SA TAS NT

Motor - Challenger's market share across states

Challengers: Youi, A&G, Coles, Hollard

The insurance industry is facing several

headwinds

New entrants and price

competition has

fragmented the market

Technological change has

paved the way for

disruption

The community places a

greater value on trust,

changing their view on

insurance 7

Pressure

Anaemic growth and profitability

Market fragmentation

Technology

Community change

Digital disruption and the erosion of value

8

1. Why insurance is ripe for disruption

2. The rise of InsurTech

3. The sharing economy

4. The erosion of value

Insurtech examples

Customer experience

Brolly www.heybrolly.com

Fendamenda

www.fendamenda.com

New eco-systems

Friendsurance

www.friendsurance.com

Lemonade

www.lemonade.com

Insurance on demand

Trov www.trov.com

Metromile www.metromile.com

Insurtech examples

Customer experience

Brolly www.heybrolly.com

Fendamenda

www.fendamenda.com

New eco-systems

Friendsurance

www.friendsurance.com

Lemonade

www.lemonade.com

Insurance on demand

Trov www.trov.com

Metromile www.metromile.com

Lemonade: The future of home insurance?

11

Lemonade in 60 seconds The science behind Lemonade

Videos available at Lemonade.com

Some thoughts on InsurTech

12

Insurers should re-examine business models to test vulnerability

to disruption

Does an insurer’s culture allow innovation, ‘fast fail’ and taking of

calculated risks?

Insurers could consider investing in InsurTech if capital and risk

appetite allows it.

Risk transfer? How to price it? Reserving?

There could be a need to improve Board and C-suite technology

related strategy discussions

Digital disruption and the erosion of value

13

1. Why insurance is ripe for disruption

2. The rise of InsurTech

3. The sharing economy

4. The erosion of value

14

Now over 800 active sharing economies globally.

Projected global revenue of $335bn by 2025 (big but small).

The shared economy unlocks the value of unused or

under-utilised assets

Enablers of the Sharing Economy

15

Technology platform

Smart devices, and

Star rating and review

• 2,000 vehicles , 65,000 members. • 600,000 members, income $40M

per year.

• 262,000 guests in Sydney

26,000 listings in NSW

• Average $5,400 per year

The “trust leap”

The impacts of the shared economy on insurance

16

Issues

Changes to Liability

• New operating models creating new liabilities (product gaps?)

Slower growth of assets to insure

• Less insurance or different insurance?

Disconnect between

ownership and usage

Diminished value of traditional

insurance models

Opportunities

New product designs

• Products to suit users, not just owners? Eg liability extensions.

New technologies present opportunities

• Group insurance

New ways to connect with customers

• Eg, to assist with claims.

• Pay as you go insurance

Hitch yourself to the trust wagon

• change your business model

Digital disruption and the erosion of value

17

1. Why insurance is ripe for disruption

2. The rise of InsurTech

3. The sharing economy

4. The erosion of value

Fewer assets to insure…

18

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Co

un

t ('000)

Projected Number of Vehicles

Car Numbers Population

Note the change

between personal

and shared

vehicles

2016 2020 2025 2030 2035 2040 2045 2050 2055

Car Usage

Personal driven cars Personal autonomous cars

Shared driven cars Shared autonomous cars

A change in the way cars are used will reduce

premiums…

19

90% of road

accidents caused by

human error

-100%

0%

100%

200%

2020 2025 2030 2035 2040 2045 2050 2055

Ch

an

ge

re

lati

ve

to

2016

Change in Collision Risk

Frequency Severity (Current $)

-60%

-40%

-20%

0%

20%

2020 2025 2030 2035 2040 2045 2050 2055

Ch

an

ge

re

lati

ve

to

2016

Change in Collision Average Premium

Avg Premium

Therefore, the passenger premium pool will

drop from 2025

20

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

GW

P (

$m

)Premium Pool

Personal Cars

Shared Cars

Premium will be split

between car owners

(personal lines) and “auto

makers” (product liability)

The erosion of value

21

Changes to customer

preferences and use of assets

Displacement

More competition

• Less value placed on traditional brands

• Loyalty less valued

• Shared assets means fewer assets, pricing and liability issues

• Investment in traditional models and the need to invest in new models

(some will fail)

• Erosion of loyalty

• Transfer from profitable Personal Lines to less profitable Commercial

Lines

• New risk carriers and the competition for customers

• More focus on efficiency and pricing to stay competitive

• Shared assets means fewer assets

We conclude..

22

Insurers live in turbulent times (and do OK!)

Insurers will continue to live in (more) turbulent

times, and do OK!

Questions?

Contacts

Graeme Adams

Principal

Tel: +61 2 8252 3314

Mobile: 0411 012 646

Luke Cassar

Consultant

Tel: +61 2 8252 3418

Mobile: 0400 098 247

www.finity.com.au

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