Paradigm Shifts & Insurance

There may be light at the end of the pandemic tunnel, and some are beginning to consider the paradigm shifts that the Covid-19 pandemic might impart on our society, and on insurance and insurance innovation.  It is impossible to know how quickly the pandemic will recede, but it is not too early to begin to consider the potential permanent shifts, and the opportunities and threats that the shifts will produce.

We are experiencing a massive health crisis with severe economic disruption, and we are all looking forward to getting back to some semblance of normality as soon as is safe.  In the process, our lives, both personal and business, have been upended, and much of our interactions have moved to online.

Some of the adjustments we have been forced to make to accommodate the realities of the pandemic will be permanent – paradigm shifts.  As HBR noted:  “Tectonic shifts in society and business occur when unexpected events force widespread experimentation around a new idea (here).”  This is a time of forced innovation.

Mark Cuban, not shy, has said that “everything” will be altered as a result of the pandemic (here):

When we get to the other side, you know, I’ve been calling it America 2.0… We really don’t know what to expect, what’s on the other side.  But what I do know is that in this country, all the entrepreneurs that you referred to, all the capitalists that exist here … there is no better country.

Ray Dalio of Bridgewater Associates wrote a fascinating article called “Paradigm Shifts” in July of 2019 – before the Covid-19 pandemic.  (You will also find numerous other posts and interviews online, including recent publications here).  His commentary is focused on investment markets and the risks associated with high debt levels, and his July 2019 article did not contemplate the external shock we are now experiencing.  But the article is instructive, and much of the article is a noteworthy review of prior economic downturns and subsequent governmental responses.  Key comments include:

History has taught us that there are always paradigms and paradigm shifts and that understanding and positioning oneself for them is essential for one’s well-being as an investor and beyond.

Market pricing reflects expectations of the future; as such, it paints quite detailed pictures of what the consensus expectation of the future is.  Then, the markets move as a function of how events transpire relative to those expectations.  As a result, navigating markets well requires one to be more accurate about what is going to happen than the consensus view that is built into the price.  That’s the game.

I think now is a good time 1) to look at past paradigms and paradigm shifts and 2) to focus on the paradigm that we are in and how it might shift because we are late in the current one and likely approaching a shift.

McKinsey suggests there are five stages to the pandemic, and the fourth stage is reimagination (here).

Institutions that reinvent themselves to make the most of better insight and foresight, as preferences evolve, will disproportionally succeed. Clearly, the online world of contactless commerce could be bolstered in ways that reshape consumer behavior forever. But other effects could prove even more significant as the pursuit of efficiency gives way to the requirement of resilience…The crisis will reveal not just vulnerabilities but opportunities to improve the performance of businesses.

Some pandemic-induced adjustments are already being discussed as paradigm shifts.  You will likely have your own perspective on what will change and what will return to a pre-pandemic way of life.  A few shifts have been mentioned are noted below.  Note that most shifts appear to be an acceleration of existing technologies.

  • Remote work – Increasing acceptance and implementation of remote work (ex: here)
  • Commuting – Reduced commuting as a result of increased remote work (see here)
  • Teleconference – Video conferencing becomes more mainstream (here)
  • Telemedicine – Increased use of remote healthcare services (see below)
  • Online Buying – Accelerating shift to online buying (here)
  • Online Education – Acceptance of online education (here)

Some less obvious shifts have also been suggested:

  • Virtual Presence – Increased use of virtual reality, augmented reality (here)
  • China – Reduced dependence on China, particularly supply chains (here, here, here)

Telemedicine, or telehealth, is an excellent example of a paradigm shift, and this change may have some impact on property/casualty insurance.  The pandemic has driven a significant and immediate shift to telemedicine, and telemedicine may be a savior for certain practitioners who need to maintain cash flow through the pandemic (here).  Even Medicare has approved telehealth services (here and here) as a result of the pandemic.

Telemedicine has not seen mainstream use despite the efforts of American Telemedicine Association (“ATA”) and its members, and insurers and healthcare practitioners have resisted telemedicine for financial and liability reasons.

Typically, online interactions remove geography as a barrier and allow for national and even worldwide interactions, but cross border healthcare practice is a compliance issue (here, here and here).  And virtual healthcare interactions need to take place on systems with built in documentation, liability, security and compliance protections.  Specialty companies have developed comprehensive telemedicine solutions for healthcare providers which facilitate the patient interaction and address these concerns (for example here), and the current pandemic has accelerated use of these systems.

Despite the challenges, telemedicine is getting widespread acceptance by all parties.  As with other shifts to online driven by the pandemic, telemedicine may be here to stay.

Insurance & Insurance Innovation

While it is still early in the pandemic and impossible to know for sure where we are headed, we can speculate on pandemic-induced paradigm shifts in insurance and insurance innovation.

Here are a few thoughts, subjects for future posts:

SMB Market Decline – Large number of SMBs will not survive, and many of those that do will have suffered personally and financially.  The SMB market segment will see a decline in premiums due to insureds going out of business and declining exposure bases in many that survive.  Small business owners and their employees are all insurance industry customers, and their personal experiences and reduced exposure bases will influence insurance buying, and premium and commissions, well into the future.

Coverage Disputes – Many organizations are experiencing significant business interruption losses from the pandemic, but most policy forms do not contemplate coverage for these losses.  A few policyholders have already filed lawsuits, and some legislators have proposed various bills to force payment of these uncovered business interruption claims. This complex coverage issue covers many different situations and lines of business beyond property, including D&O.  While it is not clear how the coverage disputes will resolve, it is likely that coverage disputes could be with us for quite a long time given the amounts in dispute.

Distribution Disruption – The most important paradigm shift in insurance may be in distribution, a result of the online shift from the pandemic.  This will be an opportunity for those insurance businesses with models positioned to take advantage of a shift to online interactions for insurance, and a threat for those businesses that are not well positioned, creating a digital divide.

Technology Adoption – Challenging times can drive innovation, and the pandemic will drive adoption of innovative technology and related services in insurance.  Partnering with Insurtechs offering innovative technology or niche tech-enabled services can benefit those insurance organizations seeking to build out robust digital capabilities.

Cyber Risk Losses – Cyber risk concerns do not seem to go away, and sophisticated cyber attacks continue to be successful.  Increasing numbers of remote workers and BYOD is increasing SMB vulnerability to cyber risk, particularly from phishing and ransomware attacks.  While the increased exposure could drive Cyber Risk insurance uptake, it may also drive a deterioration in cyber risk insurance losses (here) and embedded risk management services.

Summary

The pandemic has changed our lives and our businesses.  Some of those changes will be permanent paradigm shifts, and some of these paradigm shifts will be opportunities for innovation.  Much of the shift to online that has been imposed by the pandemic will remain, and the online shift will accelerate in insurance after this difficult period is past.  The most significant paradigm shifts in insurance will likely be technology driven and may begin to create a digital divide, creating winners and losers.

Innovate Insurance – Innovation & Entrepreneurship in Insurance

 

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