Clever financial products have been developed — such as catastrophe bonds and sidecars — which are attractive to this non-insurance capital.
These innovations make it possible for investors from outside the industry — pension funds, hedge funds and others — to dip in and out of the insurance market, creaming off the best of the profits when rates are high; leaving the industry to suffer when it all goes sour.
This is competition, moreover, which seems prepared to insure at rates much lower than even hard-bitten industry professionals of the stature of Warren Buffett think make sense.
Those pressures alone would be enough to disrupt an industry but regulation has taken its toll too. Insurers were not to blame for the financial crisis but they got caught up in the backlash, and regulators became fearful that they might cause the next one.
As a consequence the past five years have seen more proscriptive and costly restrictions on what the industry can do and how it must do it, than were developed in the previous 50.
It is little surprise, therefore, that the CSFI Insurance Banana Skins* survey of the risks facing the industry which is published this week, finds executives more anxious about the future than at any time in the past 10 years.
However, the major concern is none of the above, on the basis that people are learning to live with those challenges.
Instead, the major worry is whether firms will be able to manage or will be engulfed by the change which is about to overtake the sector under the impact of artificial intelligence, machine learning and digitalisation.
Uber, a taxi firm which owns no taxis, or Airbnb, a hotel company which owns no hotels, are examples of technology companies which have transformed the way business is done in their sector.
The insurance industry has yet to find its Uber, but what will happen to the traditional firms in the sector when it does?
The amount of money flowing into what is now known as Insurtech suggests it might not have to wait long to find out, except for the fact that most of it is at the front end — trying to apply the rules of e-commerce to the selling of insurance.
This means most of that money will be wasted because it overlooks one simple fact: e-commerce has been successful when it makes it quicker and easier to buy a product people already want.
But no one wants to buy insurance; they do so reluctantly because they feel they have to. This negativity is deeply entrenched and will not easily be changed by e-commerce.
But that is only a small part of the story. Technology makes it possible to tailor products to the individual.
Instead of buying motor and travel and home contents and health and life cover all as separate products, the day is coming when the individual person will be insured and cover will kick in and be paid for automatically only when needed — motor only when actually driving, for example. But that will force a grinding re-think within companies on the way insurance products are designed and sold.
But there is also a downside. As the industry learns to process the vast amounts of data which are now becoming available from non- traditional sources, its underwriters — or their computers — will find new ways to assess risks.
They will become much better at identifying those who are most likely to have a problem and who actually need the cover most.
Expect these unfortunates either to be excluded or be told they must pay significantly more. Technology will most definitely not make things cheaper for everyone.
*Insurance Banana Skins 2017: published by the Centre for the Study of Financial Innovation.
