In this article The Digital Insurer explores the potential for “game changing” innovation that could lead to turmoil and disruption in the insurance industry in Asia.
Learning from outside our industry
Let’s start by reviewing how the digital revolution is progressing in other industries. Digital transformation has been particularly marked when the products and services are capable of being digitised – music, books and videos being the obvious examples where bricks and mortar distributors have been reduced to specialist / boutique shops in less than a decade.
Learning from the strategists
McKinsey recently released a thoughtful article, Measuring the full impact of digital capital, which highlights the importance of digital capital from a strategic perspective. They hypothesize that “much of today’s digital spending could pay for long-lived intangible assets that will define the competitive landscape going forward” and estimate that perhaps as much as one-third of global growth is accounted for by digital capital. It is quite easy to conclude that a sub theme of their argument is that business leaders including CEOs and CFOs need to embrace digital capital even though it often defies measurement by normal accounting methods.
If you are making decisions on digital capabilities with an “operating cost” mindset when others are treating it as an investment then you are at a handicap before even starting to prepare the business case. And from an insurance perspective it is important to take into account the possibility that non insurance companies with strong digital capital may be better placed to redefine insurance than the incumbents.
Learning from the technology specialists
Accenture published an interesting and forthright article on big bang disruption in the second quarter of this year – its first sentence is “Nearly everything you think you know about strategy and innovation is wrong”. It is worth a complete read but for the reader short on time I have attempted to summarise and extrapolate what I see as the key points of relevance to the insurance industry in Asia:
- Disruption is 3 dimensional. Digital disruption allows business models to move simultaneously on three dimensions to offer completely new business models – new product, lower price and better customer satisfaction – or alternatively cheaper, better and highly intimate. Traditional strategies that suggest focusing on only one of these dimensions simply no longer apply.
- Digital has reduced friction. Essentially digital models have significantly less friction and offer straightforward convenience / value / product propositions. And success is amplified quickly by on-line users. The hard reality is that many industries, insurance included, rely on market friction (“market imperfections” for those readers with an economics background).
- Information as a tool for disruption, regulatory barriers an opportunity not a barrier. Accenture identify that information is increasingly the last source of competitive advantage – and it is the big bang disrupters who take advantage of this to create new models. They also point out that highly regulated industries, including insurance, are especially vulnerable to big bang disruption.
- Creating big bang disruption needs a “truth teller”. Accenture defines these truth tellers as “industry experts with profound insights into new technologies and customer behaviors, who can predict earlier than anyone else when small tremors signal imminent earthquake”.
The case for “big bang” digital disruption in the Asian insurance industry
The four main arguments for a big bang disruption in the Asian insurance industry:
- Insurance is intangible. Just like many of the other markets that have been disrupted it does not take a huge leap of imagination to see how the entire value chain can be digitised.
- Reference models exist outside of Asia. The emergence and power of aggregator sites in Europe (most notably the UK) provide a clear signal for the disruption that will occur in Asia.
- Structures for innovation exist. The existing insurance broking frameworks are, in most markets, sufficient to allow low-cost experimentation and innovation to occur.
- Asia already has digital assets. There are a number of “massive” digital databases that can be leveraged from both global and local companies within Asia.
The case against
- Regulation as a barrier to innovation . There is always a chance that regulation becomes industry focused and results in regulations that hinder digital innovation. Examples of this include regulations in India which have throttled emerging aggregator models and regulations in Singapore which slow down the adoption of cloud based models. However, as government themselves become more consumer focused it is likely that this will change – a recent example is again in Singapore where the FAIR review has recommended the set-up of an on-line price comparison service that could be a catalyst for innovation. The Digital Insurer is not as optimistic as the authors of the Accenture article that digital disruptors will find a way to transform heavily regulated industries on their own.
- Complexity, trust and knowledge. Even with the simplification and presentational advantages that digital offers to consumers there will, for many insurance products, remain complexity that requires both trust in the provider and a “human” touch. Whether the “human” touch could be automated remains to be seen – the innovation occurring in intelligent virtual assistants (IVA’s) should be monitored.
- Natural resistance for change . Incumbents are likely to look first at protecting existing channels – precisely the wrong strategy if big bang disruption is about to happen. “Channel conflict” has been bandied around for too long as an excuse for lack of innovation.
- Capacity to change . New skills will be required – including hires from outside of the industry. CEOs need to be incentivised to think long-term – if your expected tenure is only 3 years as the CEO then it is hard to imagine them prioritising investments that are high risk, need extensive planning / preparation prior to launch and whose rewards will only be seen by their successor. Organisational structures need to change to less hierarchical models – but how often do you see someone who has spent their career in a hierarchy switch willingly to a flatter, centre of excellence based approach? Insurance as a conservatively run industry faces significant internal barriers to change – external digital disrupters tend to have a different mindset and a different culture.
What is the impact for Digital Insurance in Asia? The Digital Insurer makes some predictions
Within Asia there will be clearly different adoption rates for different market segments and different countries . Historically the speed of transition has been slower than expected and the agency distribution model has proven to be more resilient in Asia than in other regions around the world. The Digital Insurer believes there are two broad digital opportunities in the insurance industry in Asia:
- Incumbent insurers with large proprietary distribution and large customer bases can / must embark on customer centric digital transformation strategies that have the potential to transform the economics of the business (particularly face-to-face channels)
- New entrants with formidable digital assets and large customer bases can leverage those strengths with new digital business models moving quickly to experiment with broker models or partnering / acquiring those insurers who currently have small distribution footprints or who struggle to make the digital transformation needed. Insurers with small traditional distribution channels will be willing partners for these new models.
The table below attempts to capture some of the trends and opportunities across the digital insurance eco-system in Asia that The Digital Insurer believe will shape the insurance industry in the next 5 years:
Although it is difficult to spot the individual “digital winners” in the Asian insurance industry, mainly because they are yet to emerge, it is a relatively simple task to assess whether incumbents and new entrants are adopting the right strategies to give themselves a chance to be one of the winners.
The emergence of new digital models in Asia will probably take longer than expected. But there is no doubt that they are coming – and there are successful business models in other parts of the world that can be adapted for Asian markets as well as plenty of opportunity to experiment with new models using resources within Asia itself. The driving force will be consumers increasing demand for transparency and the increased ability to check out solutions on-line before purchase. If incumbent insurers are unable to meet this demand then new entrants will surely do so – and regulators need to allow, perhaps even be the catalyst, for such innovation to occur. One lesson to be learnt from Asia is that those incumbents with “agent only” models who were late to enter the bancassurance distribution channel have suffered. Banks, who typically have more impressive digital capabilities, could also be a catalyst as they demand more from their insurance partners.
This time the opportunities and dangers are two-fold – transform your existing channels and prepare for new digital models. The “head in the sand” approach is without doubt the highest risk position to adopt and The Digital Insurer believes the contours of the new landscape will emerge within 5 years. And relative to the pace of change usually seen within the industry this five-year window is indeed a “big bang”. The Digital Insurer is interested in stimulating a debate on the models that will emerge in Asia and is actively participating in that transformation through its commercial activities.What are your views on the digital opportunities in Asia? If you had US$10 million to invest in digital insurance where would you invest it? How would this view differ if you were the CEO of a large traditional insurer or the CEO of a telco or airline business ? Or a broker?
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