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The future of general insurance

CFO Knut Arne Alsaker and CIO Kjell Rune Tveita of Nordic insurer If.

The insurance sector is undergoing major changes and some observers claim that the industry, much like the rest of the financial services sector, is on the cusp of disruption. To get an insider’s view, we sat down with CFO Knut Arne Alsaker and CIO Kjell Rune Tveita of Nordic insurer If.

CFO Knut Arne: We now have a 16 year long history as one company, even if our roots go way beyond that. I think that one of the things that really characterises If is stability. Since the company’s inception we have had a very stable leadership team. In my view, this has been, and continues to be, a strength. Throughout this period we have worked continuously to improve, making steady, year-on-year improvements, rather than betting on giant leaps and major overnight transformations. At the same time, we are conscious about the need to adapt in a timely and appropriate way to changes and developments in our markets.

One of the characteristics of our market is that there is a lot of innovation going on and many changes taking place. However, at the same time – in our type of business – it will often take a long time to see the effects of a change. We therefore need to use our experience and make sure that, if we make substantial changes, they don’t undermine our profitability.

CIO Kjell Rune adds: Another important characteristic of If is that we have consistently maintained a Nordic perspective right from the start. The Nordic markets are similar and, in our view, a Nordic perspective is both justified and warranted. Most products are pretty much identical.

Workers Comp is a notable exception where you have an insurance-based solution in Norway, a product that is very integrated with the social insurance system in Finland and that does not exist in Sweden. However, in our view there aren’t really a lot of good reasons for not developing pan-Nordic products and offerings.

Furthermore, in the development of our offerings, from the start we have tried to think more in terms of concepts than products. While it’s very easy to become product-focused, you really need to focus more holistically on the customer needs and once you do this it also enables you to see similarities and synergies more easily across markets.

Customer segments and needs have also been the dominating logic for our organisation as opposed to geography. For instance, we have a large industry segment portfolio and we have to adapt more to the customer needs that characterise this segment per se than differences arising from the geographical location of our customers. I find this is the same for both the private and commercial portfolios.

In our experience, to realise the full synergy potential of being a Nordic business, you really have to apply a Nordic perspective from the start – a shared perspective of what needs to be built in a coherent way across the whole of the Nordic market. Only when you have put this in place, should you consider allowing for adaptation to specific needs in national markets.

This was something we learned through experience during our first 2 to 3 years of operation. For example, at first, the selection of new systems to support our business was done on a country-by-country basis. However, we quickly realised operating in this way would prevent us from creating a truly Nordic operation, so we therefore changed to evaluating everything from a Nordic perspective.

Furthermore, in order to accelerate our work and make sure we increasingly built a pan-Nordic operation; we consciously stopped projects that didn’t contribute to this long-term objective. I think we have come a long way on this journey now and that we are able to build standardised processes across the whole of the Nordics. One recent example of this is our Cyber Insurance.

We have also worked consistently to consolidate our systems portfolio, starting with the systems and processes closest to the customer touch-points. Customers in the private, commercial and large enterprise segments will soon be served using the same systems across the whole of the Nordics. Going forward, we think this will enable us to realise even further synergies and give us competitive edge.

CFO Knut Arne: When it comes to the impact of the macro-economic developments we’re a bit like a bank. Falling interest rates have an impact on 90% of our assets which obviously represents a challenge – as it would for any business. We don’t have a growth target but an ROE target.

Faced with a scenario of sustained lower market returns, we realised 5 years ago that we would have to adapt our business model. We therefore updated our yield expectations and adjusted our prices accordingly. It turned out that our competitors viewed the situation similarly and adapted in a similar way. The consequence was that the market allowed for an adjustment in prices.

That said with regards to prices, in order to maintain a satisfactory return on equity, we also have to secure a stable cost level. We have been working continuously with our cost base over the years, and have managed to secure year-on-year improvements of around 20 basis points on our cost ratio. The result is that in spite of challenging macroeconomic conditions, the average CR has followed the yield curve downwards.

CIO Kjell Rune adds: In a low growth scenario you really need to be in control of your costs. We have been very conscious of the need to build flexibility into our cost structure. This means that we are focused on finding the right balance between a solid, stable in-house capability and the right level of temporary capacity and external capability to handle peaks. As a result, we have managed to achieve stability and maintain the core capabilities of the organisation even in periods of low growth.

In addition, a low inflation rate has of course been a positive factor in our efforts to contain costs.

CFO Knut Arne: When it comes to how we manage our business, I would say that we have really been managing our business according to the economic principles in Solvency 2 for a long time already. In that respect, there’s not really so much new yet in terms of investment or product risk.

On your specific question, of whether Solvency 2 has led to changes in our product portfolio, the answer therefore, is no. We made changes long before Solvency 2 – not because of Solvency 2, but because we already saw that they were the right things to do from a risk-return point-of-view.

Overall, I think it’s a good regulation because capital requirements are now measured consistently with how we assess the economic risk and profit of our business. We no longer have a capital adequacy regulation that requires us to report numbers based on completely different principles, and that don’t necessarily make much sense, from a true risk-based and economic capital point of view.

CIO Kjell Rune adds: Even if Solvency 2 obviously has its challenges, the introduction of the new regulation has also been an opportunity. We have definitely improved the governance and documentation of our business. Furthermore, in our preparations for implementation we have been able to carry out a substantial rationalization, consolidation and re-engineering of our data management and reporting processes.

CFO Knut Arne: Seen from our point of view, new regulation also has another positive aspect. We believe there are synergies for the larger players when it comes to the cost of compliance. It’s hard to put a number on this, but I think there are parts of the costs of compliance that have not been fully realised yet among all the players in the market.

With our Nordic operation, we should be able to extract synergies across our business that enable us to operate more cost efficiently than some of the other players in the market.

On a more general note, regulatory developments will also be important after the implementation of Solvency 2. In our view Solvency 2 just represents the start.

CIO Kjell Rune: We approach the environmental challenge from both an internal and an external perspective. First of all, from an internal perspective we work consciously to reduce our own environmental footprint. As a large player in the P&C market we review all aspects of our operations and seek to make them more sustainable.

Secondly, if you look at it from an externally oriented, commercial perspective, environmental changes obviously may have a substantial impact on the risks we face and the profitability of our business. But again – this is something we have always monitored closely and we continuously strive to develop our commercial management and adapt as required.

Specifically, we have developed more sophisticated pricing models based on climate-related factors and the active use of geographical information systems. However, I wouldn’t say that we, in our markets, have yet seen developments that have altered the picture dramatically. That said, there are also risks we don’t write.

CFO Knut Arne: In terms of distribution, we are present in several indirect channels like bank distribution and the car channel. These are and will continue to be important channels for us. However, as a result of the macro-level technological and social changes, our approach to the market is changing.

We can’t ignore the fact that direct, online distribution is becoming increasingly important, often in combination with the other channels. Direct distribution has always been important to us and gives us a good knowledge of our customers’ needs and their risks, in combination with cost efficient distribution and customer service processes. As an insurance company, we have also been involved in technology-enabled communication with our customers for a long time, with telephony being our main channel.

Currently, we see a rapidly increasing importance of online distribution as a channel that also fundamentally drives and determines the overall customer experience. Mobile is a very important factor in this. This development has profound effects on our business at many levels.

CIO Kjell Rune adds: Another example is the requirements the development puts on us in terms of technology solutions and product design. To illustrate, one of our products originally required the customer to decide on each of 11 sets of options to complete a purchase. In order to adapt this to an online world we reduced the complexity to 4 sets of options. To secure a good customer experience we have to think in terms of responsive design and adapt our products and concepts accordingly.

It has also been a journey for us to achieve a holistic understanding of how we should design our customer journeys so that all stakeholders are taken into account properly. For instance, in the early days, at first we forgot to consider the perspective of our agents.
Nonetheless, while complex at times, we also see great win-win opportunities to really improve the experience for our customers. One example of this is the claims process where customers can now enter their own information instead of us wasting their time doing it for them. This allows us to focus our dialogue with the customers on the things that really matter to them – to help them with the problem they’re experiencing.

CFO Knut Arne: We believe that with change, there may also be new opportunities. When it comes to the sharing economy, we are already taking a part in this – offering coverage to the car sharing service “Nabobil” launched in autumn of last year (www.nabobil.no). I think it’s very important to actively follow the developments in the market, to test new technological trends and to be “tuned in” in order to understand them.

You previously referred to stability as an important characteristic of If, but at the same time emphasise that you are conscious about the need to adapt in a timely and appropriate way to changes and developments in your markets. How do you ensure you have the necessary flexibility and capacity to innovate and experiment and to collaborate across the organisational boundaries of business and IT?

CIO Kjell Rune: We don’t really like the distinction between “IT” and “business”. In our world IT is business and you will see that reflected in our organisation as well. People from my IT organisation form an integrated part of the leadership teams across the organisation. What we achieve through this, is to stimulate mutual understanding and a shared perspective and mind-set. My “IT people” become concerned about the development of the “business” in the same way that the people from the “business” are. We strive to make a shared mind-set part of the culture and seek to break down and erase the traditional barriers and silos.

As a CIO, I’m also happy for the business to appoint “digital officers” and establish Internet units to drive the development from a business perspective, as long as we have a shared mind-set in place and a set of agreed governance processes, even if the word “governance” perhaps sounds a bit strict.

Agility is a key concept for us and investments in flexible production systems are pivotal to achieving the necessary agility. For instance, the new core system for the commercial area has been built using an agile approach. And while product development and pricing traditionally would require dedicated IT development resources, today these activities shouldn’t require IT development time at all. We seek to build solutions that enable our product teams to configure products and adjust the pricing themselves. The era where you would have to wait for available resources to do weeks of IT development is over.

I think an important aspect of the way we’re working is that we’ve built a culture and an organisation for innovation that start from the top and continuously test new concepts. A core enabler in this is that we have focused on implementing agile ways of working that extend far beyond IT. In my view, working in an agile way has become part of our culture.

CFO Knut Arne: I agree. When I first heard of “agile”, it was seen as an “IT thing”. Now however, in my view this has changed completely. Now, it’s something that characterises the way we do business and develop our organisation – it has a much wider scope and fundamental impact. Getting to this point has been a journey and something that we have built over time, and I think we have come quite far. Now, this is our way of working across the business.

In order to adapt in today’s changing market, we need a culture and an infrastructure for innovation that is integrated with our long-term strategy but at the same time enable a shorter time to market. I think our investment in agile working practices has positioned us well and will prove important in our ability to adapt and meet the future.

CIO Kjell Rune adds: We obviously also follow technological developments closely. It’s clear to us that cloud technology, big data and the Internet of Things provide completely new ways of solving our business challenges and serving our customers in new and better ways. The development towards increasingly individualised pricing and micro tariffing will continue. It’s paramount for us to put in place the necessary infrastructure and processes to access and utilise the increasing breadth of information, and we’re working hard to be in the frontline of this.

To win in the market we also need to create convenience for the customer and this requires customer focus in all aspects of our business. For example, with regards to claims, we seek to automate as much as possible and adapt the claims process “on the fly” depending on the properties of the specific claim.

We are also experimenting with machine learning and robotics to reduce claims leakage and aim to use this as an effective tool to move away from the traditional, work intensive claims leakage studies. In terms of innovation, the car insurance market is the big thing now and of course important to us in terms of size and volume. The fact that a modern car continuously generates about 25 GB of data on all aspects of the car’s movements is enough to understand that it presents interesting opportunities from an insurance-perspective. It’s obvious that this information could be used to price insurance based on actual driving behaviour, and as a consequence it’s also quite easy to foresee subscription-based car insurance pricing.

In general we seek a very close collaboration with the car industry to connect with the developments in the industry as they have an important impact on both claims frequency and cost. If you take an apparently simple example like car glass and windscreens: today windscreens have become high tech, including advanced electronics, and they come in a multitude of variants and degrees of sophistication, something which has important consequences for the complexity and cost of repair and replacement as well.

One area that currently receives a lot of media attention is the concept of self-driving cars. However, nobody really knows what the end game will look like. In our experience, the car industry itself is searching for the right solutions too, in order to find the right path forward, and we have to be there, working with the industry, to be part of these solutions.

CFO Knut Arne: We believe in a gradual evolution and don’t really think that we’ll see overnight revolutions. In the P&C market we currently don’t see any equivalent to the mobile payment market where “Swish” in Sweden, “MobilePay” in Denmark and “Vipps” in Norway have achieved remarkable penetration rates in a very short time.

However, other things may happen and it’s very important for us to be present to experiment, to test new ideas and concepts. We believe there will be new opportunities also for us as insurers. The insurance companies’ future role and place in the ecosystem may well change but we think the capabilities, knowledge and information that we have will remain valuable.

Find out more about our work in financial services.

Contact the financial services team

Knut Erlend Vik

Knut Erlend Vik



Thomas Bjørnstad

Thomas Bjørnstad



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