Is the insurance organisation ready to burn the boats?

Changing the insurance organisation is a leap of faith

One reason that insurers have felt insulated from fundamental change is that the threat from competition has only come from within. The large, established incumbent brands have believed that ‘high barriers to entry’ is the moat that protects the organisation from outsiders.

Whether you believe that, or see it as arrogant complacency, is frankly irrelevant. What cannot be denied is that the insurance industry has an Achilles heel. It has continually failed to deliver high levels of trust and satisfaction amongst customers whilst also failing to address a fragmented value chain and horrible levels of inefficiency.

This was exactly the same scenario in the US home delivery market that Bezos saw two decades ago. Now, Amazon is the default organisation and there is no going back to the days to 5-day delivery cycles paid for by the customer. To say the same levels of impact and disruption won’t happen to us in insurance is no longer the sustainable mantra.

Lessons from Fintech

Insurers can learn a lot from the Fintech impact on their financial services brothers and sisters in banking. One of the best source of insight on Fintech and the disruptive forces in banking is The Finanser from Chris Skinner. He recently wrote about WeBank, a 100% digital platform in China that runs customer accounts for the unthinkable cost of 50 cents a year. Built on ABCD (AI, blockchain, cloud and data), over half the staff in the organisation are techies (which is remarkably similar to the insurance equivalent at ZhongAn).

In this July 2019 survey of the Financial Services and Insurance industry from NTT Data, almost 4 out of 5 execs (78%) expect the industry to look very different in 5 years’ time. The survey also found that;

• 9 in 10 global FS&Is “believe in the need for transformational change”
• 61% are “shifting from traditional business models in response to new digital tech, new competitions and new customer expectations”
• 84% of firms report that “industries outside of FS&I are providing a significant influence on the direction of the market”, and
• 83% believe “new entrants could become major competitors in offering financial products”.

Moving away from the traditional insurance model

One of the stats I found most interesting in the NTT DATA survey study is “digital disruption is forcing 61% of financial services and insurance companies to move away from traditional business models”. That is almost 2/3^rd of the firms surveyed are changing their strategy to organise themselves very differently.

“digital disruption is forcing 61% of financial services and insurance companies to move away from traditional business models” NTT Data

What is more interesting is that nine out of 10 global FS&Is say the “time is now for transformational digital change”. By that they mean fundamental change to the insurance organisation, not just superficial digital niceties.

However, one of the biggest constraints is the dependence on legacy technology, both in terms of cost and (lack of) flexibility. Which is why the drive towards InsurTech platforms is so prominent, and a subject you can read more about in next month’s InsurTech Insights!

(Source: NTT Data Survey 2019)

How will insurance be organised in the future?

It goes without saying that the insurance firm of tomorrow will be significantly more tech-driven and enabled than it is today (think ABCD – AI, Blockchain, Cloud, Data).

New technologies such as AI and machine learning together with new sources of data from IoT, telematics and wearables will significantly increase levels of automation in insurance. Cloud-based platforms exploiting blockchain and distributed ledger technologies will replace the reliance (dependence) on rigid and inflexible legacy infrastructures.

By definition, the adoption of these new technology-driven business models will be built upon lower cost and personalised predictions from data-driven insights. As I’ve said many times, the personalisation of insurance is an inevitable outcome of this technology-driven shift, but it will need to be matched by much greater levels of flexibility in the insurance products.

The hybrid insurance model combines automation and human expertise

That isn’t to say that core competencies will not continue with human talent. Take the role of the digital actuary, albeit more data scientist than in the past. In this recent post, I discussed the issue with Mark Farrell, who told me, “The advantage that the actuary generally has is that they are not just a modeller, but also a business risk expert that really understands insurance or business in great depth, especially in relation to regulation.”

But it will be more than just a greater reliance on digital technologies and redefined human talent. Insurance organisations are going to respond and react to the influences from non-insurance players. By this, I mean the likes of Amazon in the West and Alibaba in the East. These are core brands with high levels of customer loyalty and (more importantly) high levels of customer trust. (Remember what I said in the opening of this article?)

They also know data – how to get it, use it and exploit it – a million times better than any insurance incumbent will ever be capable of. As I will explain later, it is these trusted consumer brands that will form the basis for new entrants capable of overcoming the incumbent’s moats.

The new world insurance organisation will be digital, mobile and agile

The design of the insurance organisation is changing. This is the result of the shift in consumer behaviour resulting from digitisation…and InsurTech is the enabler.

Up until now, the traditional insurance organisational design model has been linear and siloed. Money and risk has flowed front to back in a linear, intermediated model. From the brokers at the front, through MGAs, carriers to the reinsurers at the back, who are ultimately holding up the industry. Along the way, silo’ed operational units perform their specific and ring-fenced set of tasks, whether that is distribution, product design, underwriting or claims.

Effective in an analogue world, horribly inefficient in a digital one! 

The digital shift to the holistic insurance model

IMHO, the organisation of insurance will move from being a linear model, where margin and risk move front to back with every intermediary taking their piece, to a holistic model built on 3 pillars – Digital Brand, Digital Platform and Risk Capital.

Pillar 1 – Digital Brands

The shift to a new organisational model will see customers engage with trusted brands, like Amazon and Apple in the West and Alibaba and WeChat in the East. In time, this will include brands that are not traditionally linked to insurance, such as, for example, BMW, Mercedes or Tesla. Consumers will increasingly move away from commodity brokers or the price comparison sites as they increasingly engage with their trusted brands.

In return, the trusted digital brands will provide personalised insurance coverages that closely match the customer’s needs based on the brand’s personal insight, i.e., your data (notwithstanding the outcome of the public issue debate on data privacy and, ultimately, its transparency). My point is that this will signal the end of the one size fits all insurance products that offerIf it can sort out its fragmented supply chain, I believe this is a great opportunity for the motor industry. With all the manufacturers fighting for market share and an increased share of customer wallet, imagine if your insurance requirements were covered in the price of your new car. Musk has been talking about it for Tesla (although that is largely because insurance for Tesla cars is still a challenge). But it makes sense doesn’t it, for the auto manufacturer to provide a repair and replacement safety net if your car is damaged or stolen, given the amount of technology in the car to prevent these things happening in the first place. The manufacturer then adds reinsured 3^rd party liability cover for the infrequent larger indemnities.

Add in blockchain and distributed ledger tech together with telematics and IoT data from the car and you have the basis for a truly dynamic and personalised auto insurance product, as demonstrated here in this bIOTAsphere video.

Pillar 2 – Digital Platforms

Out are the silo’ed legacy systems designed for an analogue, pre-Internet world. Replaced by a platform approach that is function-rich and infrastructure light, the 3 Pillar insurance model is not hamstrung by the ties of legacy technology.

If you want to see this in action, then look at the recent announcement that Lloyds Bank (the UK’s largest bank by customer accounts) is to run its insurance products on the InsurTech platform from Trov.

Regular readers know that I’ve been a fan of Trov since I first wrote an article with founder Scott Walchek back in 2015. The thing about Trov is that they are known as the pioneers of on-demand, episodic insurance. What is less understood is that behind their beautifully crafted mobile app, Trov has built a fully functioning digital platform, capable of being white labelled without any reliance or integration with an existing legacy system.

In the NTT survey I referred to earlier, they found that 23% of financial services firms who had adopted a digital platform approach were already reporting benefits. The survey reported;

• 46% provide a better customer experience
• 44% respond faster to market needs
• 44% grew revenue
• 41% increase customer retention
• 24% are able to expand the number of partners in their ecosystems

Digital platforms is the subject of next month’s InsurTech Insights and I will look more closely at the platform approach and projects such as the Open Insurance Initiative

Pillar 3 – Risk Capital

The third pillar in the new insurance organisation is risk capital, providing a balance sheet and the provision to pay out on claims. In this space, it is the reinsurers that will dominate. Some level of underwriting risk will be carried by the digital brands and/or by the digital platforms. But it is the reinsurers who know better than anyone how to play the risk capital game.

The reinsurers role is more than simply building an insurance balance sheet, they also provide the regulatory architecture to meet the legislative and regulatory conditions for the markets the insurance products are provided. It is this insurance industry heavy lifting in the background that will enable the digital brands and digital platforms to focus on the customer.

Munich Re is a great example of this in action. They saw the InsurTech writing on the wall early. They knew that they had to prepare themselves for the next generation of insurance businesses, even if that meant cannibalising existing business lines. As a result they created Munich Re Digital Partners, both as a means to build a whole new insurance business model, but also to experience the changes to organisation and cultural that come with the new digital business models.

Ignore the inevitable at your peril

We know that the half-life of obsolescence, particularly when it is tech-enabled and digital, is continually reducing. Far from being snake oil, the promise, threat and opportunity from digital transformation will be felt across the Insurance industry well into the imminent start of the next decade.

Where many of the old school insurers go wrong is that they see digital transformation as (simply) an exercise in changing the means to access insurance. Being able to buy the same old underlying insurance product through a mobile app or through interaction with a chatbot on Messenger is not going to cut it in the next decade.

The thing that will distinguish the winners from the losers will be the extent to which they (the incumbent insurers) become digital. New generation digital-only insurers like  ZhongAn and Lemonade have shown that it’s possible to build your own technology stack from the ground up and become both the Digital Brand as well as the Digital Platform. Just as the supply-chains of many industries have changed in the Internet era, so will the organisation of the insurance industry. It’s no longer a question of “if”, but “when”.

The author, Rick Huckstep, is the Chairman of The Digital Insurer and an InsurTech advisor, investor and thought leader.