The conclusion of our #InsuranceMap Series ...
Over recent months, we have taken you the length and breadth of our inaugural Insurance Nexus Global Trend Map, covering the broad industry sea-changes, the technological and functional developments and the regional trends in play across today’s rapidly evolving insurance ecosystem.
Last week, we introduced our concluding Three Megatrends and Afterword, a synthesis of the stand-out developments from across this content series:
- MEGATREND 1: Worldwide low interest rates coupled with soft market conditions
- MEGATREND 2: The complexification of risk in today’s increasingly globalised societies
- MEGATREND 3: Distribution disruption and the insurance industry's customer-centric ‘turn’
- AFTERWORD: Insurtech - Reinventing the Spokes, Not the Wheel
Having presented our third and final Megatrend in our last post, which explored the newfound importance of customer-centricity within insurance and traced it back to its origins in the emergence of digital channels, it is now time for our Afterword on Insurtech– which also concludes this #InsuranceMap Content Series.
Access our Afterword, all 3 Megatrends and much more, by downloading your free copy of the Insurance Nexus Global Trend Map here!
AFTERWORD: INSURTECH — REINVENTING THE SPOKES. NOT THE WHEEL
In the app age, it is no longer clear what is more important to starting a successful insurance operation: knowledge of insurance or experience with doing business web-first. Obviously, having both would be the best-case scenario, which is why there is plenty of mileage in Insurer-Insurtech tie-ups, and this is a theme that has recurred in our conversations with industry representatives across this content series.
This is a debate that is all too often framed with incumbents as protagonists and Insurtechs as antagonists – and admittedly this is a mode of representation we too have not shied away from in this content series! However, as we indicated in our Third Megatrend, looking at Customer-Centricity, everyone is in the same race for the same customers.
And while some Insurtechs have taken a belligerent stance, with an avowed mission to ‘disrupt’ the traditional industry, the destruction of the same is not something they are really pursuing directly; it would be an indirect consequence, and certainly a consequence good enough to sell a fair few news articles and PR pieces, of them meeting their primary aim, which is to ‘delight’ today’s apathetic insurance customers.
In this Afterword on Insurtech, we examine the battle for innovation not just from the perspective of carriers seeking to match the nimbleness of their new-age competitors but also from the perspective of newcomers who, starting with a handful of employees and some seed money, have ambitions to claim a sizeable chunk of a $4.5 trillion industry.
On the question of innovation, one issue facing incumbents that is easily overlooked in the context of industry hype is the Innovator’s Dilemma. In many lines and in many regions, insurers have large amounts of profitable business coming through legacy channels – and we cannot here escape thinking of the agency landscape in the United States.
Carriers are naturally loath to cannibalise these chunky accounts with lower-price, as-a-service products. And even if you agree with the theory that the lower-price model will pay for itself and more, or even if you cast your eye over the industry landscape and conclude that there is no alternative, it still takes a certain amount of conviction to imperil the comfortable parts of the existing intermediated business with a direct channel, for example.
This said, once a few players make moves, it creates a tipping point – though, as we have hypothesised with our ‘disruption wave’ model (see our earlier post on Insurtech Perspectives), this may occur at different points in different regional markets.
One way to assess the relative prospects of the two key sectors in question – incumbentsand new entrants – is to first determine what the future looks like. It is by locating the peak we’re trying to scale that we can best assess the merits of our two competing mountaineering parties. So how will the insurance of the future – regardless of who owns it – look different from the insurance of today? And there is no better way to approach this than to ask how it will stay the same!
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Insurance has many faces and is developing many more, but one inescapable fact remains: for insurance to work, we need a company somewhere in the chain to hold risk on their books. This is an unglamorous side of the industry but one that circumscribes how far it can fundamentally change.
We have seen this with Big Tech’s flirtation with insurance. While companies like Facebook and Google could field definite advantages from a big-data, distribution or customer-interface perspective, they may not have the appetite – nor may it suit their wider business model – to be holders of risk.
The extent to which the abstract concept of insurance can be reinvented is therefore limited. We see this with the misnomer of Peer-To-Peer (P2P) Insurance, a designation that has been strongly espoused by US-based Insurtech Lemonade. While there is a huge amount that can be done to improve the transparency of premium pay-ins and of claim pay-outs – thereby casting insurers as responsible money managers as opposed to greed-fuelled corporate black boxes – the models of so-called P2P insurers operate along strikingly similar lines to those of incumbents, with all payments in and out coming via the insurer as central node (on a client-to-server model).
The models of so-called P2P insurers operate along strikingly similar lines to those of incumbents, with all payments in and out coming via the insurer as central node, on a client-to-server model.
While we can invent rounder and rounder wheels, reinvent them as squares we cannot. Since early 2017, Lemonade has in fact backed away from the term 'P2P', citing AI and Behavioural Economics as being more apt terms to describe the underpinnings of the company (all sources are given in the full Trend Map – download the whole thing here for free).
Insurtechs have a lot to get their teeth into without overplaying their hand, whether they are operating as online agencies or as fully licensed insurance carriers. It is not essential that they reinvent the centuries-old concept of insurance. Where they can be radical is in their reinvention of its delivery, using new approaches and technology to outperform incumbents on all the success-defining criteria: like acquisition, retention, claims/underwriting performance, fraud discovery and operational cost.
Where Insurtechs can be radical is in their reinvention of insurance delivery, bringing new tech to acquisition, retention, claims/underwriting performance, fraud discovery and operation cost.
Across this series we have often looked towards another disrupted industry – retail and logistics – as a touchstone (particularly as this industry is further down the road of transformation than insurance). We see nowadays that most e-commerce resembles Amazon, and it is safe to assume that most insurance in the future will, on a component-by-component basis, resemble the Insurtech of today.
What we also see in retail is that Amazon, far from being just a trend-setter, is also a monstrous player in its own right and continues to run retailers ragged. Against this backdrop, the question we ask ourselves is: will we have an Amazon of insurance? Or, phrasing the question in different terms: can new entrants scale faster than incumbents can pivot?
Insurtechs certainly have a clear win as far as upgrading the customer relationship and interface is concerned. The extra trust this engenders can facilitate the mutually beneficial exchange of data between insurer and insured, as we see already with Usage-Based Insurance (UBI) – but at the end of the day, this is not because Insurtechs have invented the notion of data-driven insurance but rather because they have established a better, more sustainable model for acquiring data (one which puts the customer, and customer trust, at the centre).
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However, even bearing these advantages in mind, it is too early to tell how a great many start-ups will fare longer-term, as regards the numbers. For example, how well will new P&C players stand up in the event of a major natural catastrophe that puts their balance sheets and claims-handling capacities to the ultimate test?
While the traditional industry is in many ways suboptimal and has multiple sources of inefficiency, this is not always gratuitous; many of the much-lamented costs are there for a reason and do not represent legitimate sources of streamlining for iconoclastic new entrants. Regulatory compliance is one area where such new entrants cannot afford to scrimp – although they may well find it easier to comply with regulations due to their lack of legacy hindrances.
Solvency requirements are another key area. To illustrate this, there are many lines in which a healthy underwriting profit most years in no way represents corporate bloat – take the P&C market in catastrophe-prone regions for example, where it is essential to put the good years (marked only by attritional claims) to use in preparing for that one year of catastrophic claims with the power to bankrupt. New entrants may find all manner of ways to deploy customer premiums more legitimately and profitably, but they will need to remember that the existing industry – within an admittedly customer-unfriendly, market-limiting context – is doing a lot of stuff right.
Healthy underwriting profits don't necessary represent corporate bloat: in catastrophe-prone lines in catastrophe-prone regions, it is essential to put the excess of good years to use preparing for that one catastrophic year with the potential to bankrupt ...
Looking at Insurtech in a vacuum, we can see that, as winning as the premise may be, the road to the top is long. Even if it at first seems opposed to their anti-establishment animus, the Insurtech that gets there first – and in doing so captures the market – may well be the one that makes use, in some way, shape or form, of the existing insurance industry.
Incumbents bring scale to the table, in terms of capitalisation and in terms of data – and both these things could be telling advantages if coupled with the fresh feel and strong customer credentials of an Insurtech. This is not to imply that incumbents are gathering as much data as they could be, nor that they are making the best possible use of it. But the fact is that new sources of customer data – sources successfully tapped by Insurtechs – will deliver the most value when combined with other data silos within a larger ‘stack’.
The aim of the game, ultimately, is not to make a virtue out of 'disruption' but to capture market share.
A partnership with incumbents could therefore be expedient for new players from a capital and data perspective – and the aim of the game, ultimately, is not to make a virtue out of disruption but to capture market share. Incumbents also offer a ready-made distribution network, although one that they are trying hard to evolve into something new via both direct plays and affiliate partnerships.
We note that a substantial portion of IoT-enabled insurance (such as the connected home, for instance) may be better sold as a bundle with the kit (i.e. through the insurer partnering with the manufacturer) than as a separate product that the insurer must market in parallel. In these cases, Insurtechs – in addition to various outside-of-industry players – can potentially leapfrog insurers in the race for affiliate distribution.
So, while it’s clear that a lot of insurance will, in the relatively near future, resemble the Insurtech of today, this does not mean that we will be dealing exclusively with companies unknown 10 years ago, staffed by entirely new individuals.
Many of our commentators in the course of this content series have pointed to the collaborative model as a probable winner, although we are bound to see success stories in pretty much every category. This model represents a sliding scale as well, and can in any case be seen as an extension of federalisation already present in the industry.
Reinsurers remain firmly anchored at the one end of the value chain in their accustomed position as the ultimate guarantors of risk. Their more recent role fostering a broad base of innovation (witness the much-publicised investment activities of giants Swiss Re and Munich Re) is understandable in this context; if their ultimate aim is to grow the pool of (indirectly) addressable risk, then it is not necessarily that important whether this happens through traditional insurers or through new players.
At the opposite end of the value chain, we find a menagerie of different distribution formats: agencies, banks, digital-direct plays and affiliates. In between these two extremities of the ecosystem – reinsurance and distribution – there is potential for a lot of flux, with traditional insurers plugging into other players, and being plugged into by other players in turn, via APIs and partnerships. The situation is further complicated by the move, by no means limited to insurance, away from owned or proprietary systems towards as-a-service offerings; the work itself remains much the same but the ways in which it is accounted for are blurring.
Several of our commentators have extolled the virtues of the ‘API culture’ or toolbox approach, and we are already seeing a more federated, less monolithic approach to innovation in the growing use of accelerators, incubators and sandboxes, in which incumbents, start-ups, VCs, regulators and government are brought together. There is no reason to believe this approach will be limited to early-stage investment and growth, and we can easily imagine a future of mature insurance businesses operating along similar lines.
The positive for all players in the ecosystem – and some are currently more spooked than others – is that there are plenty of categories of work, some old, some new, that need filling, and there are countless places any player could take an innovative idea. The degree to which the expanded scale we are likely to see over the coming years can offset the technology-driven streamlining of the industry remains to be seen (for a discussion of scaling prospects and commoditisation threats within insurance, see our First Megatrend on worldwide low interest rates coupled with soft market conditions).
In short: there are bound to be losers, and many of today’s players will have to don different hats from the ones they currently wear – but this is certainly a fascinating time to be involved in insurance.
Carriers are often – by the nature of their business, which is the spreading of risks – highly diversified companies. This means that the fears and prognostications relating to particular lines of business, which are in ample supply in the mouths of pundits and the industry press, often cannot be generalised to whole companies.
Currently, most disruption is occurring in retail or B2C insurance, leaving commercial lines (a sprawling area!) comparatively untouched. Among the B2C lines, Life is also relatively quiet, and this is an impression borne out by the stats we have presented across this series.
Both these areas – Commercial and Life – involve complex products, big risks and large volumes of money, diminishing the relative importance of distribution options and customer experience. The fresh new approach of Insurtechs still stands to transform these lines eventually, and all the stand-out technologies – AI, IoT, Blockchain and Smart Contracts– have a role to play here. Witness, as a recent example, US-based online agency Insureon’s update on small-business insurance.
However, it is also true to say that many of the candles of traditional insurance will take some time to burn down, affording incumbents some leeway when it comes to re-imaging their business. 2018 is a key year, with most ecosystem players (some more belatedly than others) having grasped the opportunities, the threats and the ground on which things will be decided (namely the customer relationship): we are entering the middlegame, so to speak, of the Insurer-Insurtech confrontation.
And that concludes the #InsuranceMap Content Series! We hope to update you on the progress of all the trends and developments in our next Trend Map, and at our on-going industry summits in the meantime. And, if you'd like to recap on any of the topics presented in the 34 posts of this series, then why not simply download the full Insurance Nexus Global Trend Map here (it's free!). Thanks for reading!
For any inquiries relating to the Insurance Nexus Global Trend Map, this on-going content series or next year's edition, please contact:
Alexander Cherry, Head of Research & Content at Insurance Nexus (email@example.com)