As Digital Disruption Arrives in Earnest, Insurers Look to a Platform-Based Future
Capital reallocation toward the platform-based insurance business model could approach $1.2 trillion in the next 2 to 3 years
A combination of regulation and product complexity have, to a certain extent, kept digital challengers from the gates of traditional insurers.
Not for long: as one report by McKinsey analysts notes, the notion that insurance is a low-engagement, disintermediated category in which customer relationships can be delegated to agents and brokers is increasingly obsolete: digital disruption is arriving hard and fast.
As a result, insurance now ranks in the top quartile of sectors likely to be disrupted in the next few years, one expert, Jean-François Gasc, says. Digital disruption may have not arrived at the gates, but it is throwing ladders against the walls and climbing fast.
Gasc notes: “We calculate that the approaching shake-down could cost some as much as 40 percent of their traditional risk-protection revenues. This could happen within five years. Insurers need to react quickly to protect themselves. Those that move swiftly can gain the upper-hand over their more sluggish competitors. They’ll not only be able to preserve many of their revenue streams. They could also tap exciting new business opportunities”.
Insurgent Insurtechs Pose a Threat and Teach Lessons
Changing market dynamics and the growing impact of insurance technology startups called insurtechs are, meanwhile, forcing traditional insurers to move from a product focus to a customer-centric philosophy. As insurers examine new business, operating and organisational models, industry leaders are embracing insurtechs rather than competing against them.
As McKinsey puts “digital technology and the data and analysis it makes available give insurers the chance to know their customers better. That means they can price and underwrite more accurately, and better identify fraudulent claims. They can also offer clients more tailored products—and they can offer them in a more timely manner.”
IBM’s Stefan Riedel, Vice President, Insurance and Insurance Solutions Europe agrees: “The proliferation of usage-based services, such as hourly car insurance, mobile microinsurance and hotel-rental coverage also reflects the shift away from traditional risk-calculating insurance product lines and organizations toward richer and more personalized options. As instigators of many of these changes, insurtechs have become a crucial source of innovation for the global insurance industry. Insurers that don’t embrace the power of insurtechs may find themselves threatened not only by insurtechs themselves, but also from entrepreneurial insurers that employ insurtech services.”
Yet as a recent whitepaper from IBM that Riedel co-authored warns, “inflexible existing systems hobble the ability of many insurers to move forward.” To succeed, IBM notes, insurance companies need agile platforms, technologies and tools to move successfully into the future.”
Taking insurance from a product orientation to a client-centric model can be facilitated by a transition from traditional to platform business models.
Because platforms enable connections between producers and consumers directly, they enable organizations to reduce constraints to growth, and generate higher profits. By providing innovative services to customers through new channels, new digital offerings, in turn, also can provide insurers with new insights into the customers they serve.
According to the 2018 IBM Institute for Business Value C-suite Study, organizations across every industry are now investing in platforms. Of those with a strategy designed to disrupt, 57 percent are builders or owners of a platform business model. Although only 7 percent of Insurance CxOs surveyed currently operate platforms, 26 percent are experimenting with the concept and 21 percent intend to reallocate capital to build or expand platforms.
In every industry, organisations are investing in platforms, and the IBM Institute for Business Value estimates indicate that capital reallocation toward this business model could approach a huge $1.2 trillion in the next two to three years.
As IBM’s Riedel puts it: “Whether or not insurance organizations ultimately choose to operate or participate in new platform business models, they are increasingly likely to be competing with them. As platforms proliferate, every industry seems likely to experience what’s often been called the Amazon effect: the endless evolution and disruption of its markets. The choice of whether to own or participate in a platform, or do both, isn’t something organizations should postpone. Insurers that opt not to participate in a platform will either miss out on the complementary services the platform provides or will have to supply those services themselves, which may prove difficult or impossible.”
The company thinks a development platform for the insurance industry would require these features:
- Automated, agile “build and deploy” processes with the ability to constantly update the software weekly.
- Access to and use of data for personalization and optimization of products and services. –
- Co-creation and joint development with an open and “ready-to-use” environment that has a flexible composition of service packages.
- The ability to incorporate a network of partners so the respective strengths of individual service offerings can be bundled.
- Streamlined integration with minimal setup and scaling challenges through provision of ready-to-use adapters
- Compliance with high security standards, including encryption, authentication and backup procedures
One thing seems clear: digital disruption has belatedly come for the industry and to meet today’s challenges, insurers need to look at ways to increase agility and innovation, so they can better engage with their customers. Traditional insurers need to capitalise on their innate capabilities, such as risk management, and combine them with the flexibility and speed inherent in platforms. To learn how they can do so, see IBM’s whitepaper here.
