Simplified products, consolidation and more focus on digital – the insurance market five years from now

To celebrate Out-Law's 15th birthday we are looking ahead to the big changes facing business in the next five years. Read more and follow our celebrations on Out-Law and on Twitter.

We can expect the culture within insurance organisations to have evolved too to better reflect the current regulatory push for customer-orientated decision making.

Insurers offering specialist cyber insurance cover also stand to gain from a market set to grow in response to the increasing threat all businesses face from hackers and other online criminals.

Simplification of insurance products and digital penetration

The age of 30,000 word insurance policies is nearly over. In five years time, insurers will be selling more basic products with simplified terms and conditions that are easier for consumers to understand.

To get to the point where they can be said to be true providers of simplified products, insurers will need to tackle head on the existing risk appetite blocker attitudes that exist.

Historic practice has been to bolt on new exclusions and clauses to existing policies as new issues emerge. However, this means that many policies are lengthy and complex and hard for consumers to digest. Few have been bold enough to rewrite existing policies from scratch to make them simpler for fear of omitting important exclusions and not accounting for every conceivable eventuality.

However, the shift will come as insurers look to fit in with consumers' increased use of digital devices. The technology imposes natural limits which force regulated firms to think about how best to display information and meet their disclosure requirements.

When considered together with the continuing regulatory drive to make consumer terms and conditions simpler and fairer, we can expect this to prompt more insurers to offer basic products from scratch. The result will be simpler, cleaner and more understandable products that are more consumer friendly.

The provision of simplified products will be a major part of insurers getting better at all things digital. Other issues still need to be overcome. Insurers are still grappling with how to digitise the entire customer experience and tie in all aspects of their customer-facing activities, from sales and distribution through to claims processing.

In five years time, though, we can expect insurers to be much better at harnessing data so that customers' risk profiles are much more accurately determined. They will do this by bringing together information from multiple data points, such as from social media and other public sources. Improved use of analytics should be reflected by much more personalised pricing.

Better profiling could, though, increase the number of people deemed to be uninsurable. This will raise questions for policy makers and society as a whole about whether these people should nevertheless be covered in the insurance market and who should bear the cost of underwriting their risk.

Cultural change

Insurance companies are in the process of major cultural change, driven by messages delivered, and action taken, by regulators such as the Financial Conduct Authority (FCA) in respect of mis-selling scandals and other practices that resulted in poor consumer outcomes.

In five years time, insurers will have made further progress in adjusting their outlook and operations to be more firmly focused on the needs of the customer. Harnessing data and digital technologies and simplifying products will be a major part of improving customer service, but more deep-rooted changes will be evident. T

The push for the right customer outcomes will permeate through insurance businesses. Product design teams will develop products from a consumer perspective, making policies easier to understand and interact with. Sales teams will focus more on ensuring products are suitable for consumers and less on generating profits, and claims handling will involve clearer communications and decision making that embodies the regulatory principle that demands consumers are treated fairly at all times.

Market consolidation

The make up of the insurance market will also look different. We can expect a smaller number of larger insurers to be active in the market fives years from now. Consolidation will stem from industry's desire to drive down costs, maintain and improve profitability and grow their share of the market.

There are already signs of the market consolidating, with Aviva completing its acquisition of Friends Life earlier this year in a £5.6 billion deal. Zurich Insurance may have abandoned its plans to buy RSA in September, but the proposed transaction served to highlight the likely direction of travel in the coming months and years. The ACE / Chubb merger is a further example of a consolidating market.

The insurance sector is pretty fractured and there are a large number of incumbents in the existing market. As insurers look to get better at serving customers through digital channels, controlling costs so as to remain competitive on price will be of paramount importance. Those that achieve a compelling digital proposition early will quickly win market share.

Cyber risk and the insurance market

The cyber insurance market will expand to account for the increasing cyber threat, the inevitability of successful attacks and the significant costs companies face in managing and responding to cyber security incidents, whether directly through lost sales or through engaging forensic IT specialists to investigate breaches and paying for credit monitoring services to help protect customers from fraud.

The Association of British Insurers (ABI) predicts that cyber insurance products will become "as common a purchase for UK businesses as property insurance" by 2025, while PwC said the global cyber insurance market could triple in size by 2020.

The fallout from data breaches experienced by the US retailer Target, Sony and most recently TalkTalk sharpen the focus on the issue. Senior executives are realising the impact that a major security breach can have on their company's share price, sales and reputation, as well as their own job security.

Coming reforms to EU data protection laws promise to increase the number of data breach disclosures made to regulators and the public from current levels. The new rules also pose the threat of large financial sanctions for lax data security that dwarf the penalties that can currently be imposed. Considered in the round, it is no surprise that cyber risk is rising up the agenda in board rooms all around the world.

Insurers that address complaints that have been raised about the high cost of cyber insurance coverage, limitations and exclusions in the policies and tough terms and conditions stand to benefit from the coming surge in the market.

Alexis Roberts is an insurance law expert at Pinsent Masons, the law firm behind Out-Law.com