The Role of Ecosystems in Insurance – Boston Consulting
Article Synopsis :
The emergence of ‘ecosystems’ could threaten insurers all along the value chain. A digital ecosystem is a network of companies, individuals, institutions and consumers that interact to create new services and value.
This paper, ‘The Role of Ecosystems in Insurance,’ from Boston Consulting Group with an assist from Morgan Stanley Research, defines three distinct types of emerging insurance ecosystems, the catalysts for their growth, and the risks to slow-movers as well as the opportunities for those who respond.
The report sees three types of ecosystem models emerging, in many cases driven by technology-enabled new entrants:
- Segment of One: Delivery of personalized offers based on deep customer insight. Often driven by e-tailers (e.g. Alibaba) or start-ups.
- One-Stop-Shop: A broad set of services offered around an integrated set of customer needs (e.g., everything I need to lead a healthy lifestyle).
- Connected Object: Real-time monitoring propositions around key risk objects such as cars or homes.
Although there are inhibitors to ecosystems (e.g. privacy), the authors see three catalysts accelerating the trend:
- Consumer expectations: 50% of consumers are willing to switch to new insurance models, based on the author’s research.
- Technology adaption: Device connectivity is growing at an exponential rate.
- Regulation: Safety regulations are proliferating, e.g. the eCall EU initiative in Europe requiring all cars to have emergency call capabilities by 2017.
Ecosystems represent three threats for insurers across the value chain:
- Distribution: A shift to non-traditional insurers with deeper levels of customer engagement.
- Underwriting: Better data-driven decisions with inputs from new sources, such as connected devices.
- Claims management: A shift from reactive claims handling to proactive management of exposure and risk in collaboration with customers.
There are five key actions insurers must take to compete:
- Understand the economic opportunity and threat.
- Prioritize offerings based on company strength.
- Transform the operating model to foster innovation.
- Form strategic partnerships (with unconventional partners).
- Test ideas in the market and scale up quickly.
Perhaps the key finding in the report is based on a survey of the motor and home insurance segments across twelve countries; the authors foresee potential risk pool shrinkage of $32 billion in motor and $29 billion in home. If scaled globally, risk pools could shrink $62-$102 billion – equivalent to 5-9% of global non-life premiums.
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Digital Insurer's CommentsWe agree that technology trends will, over time, drive a profound shift in risk pools. Though new classes of risk are emerging (e.g. cyber risk) greater loss prevention in traditional lines of business will lead to a sharp contraction in overall non-life premiums.
We’re already seeing it in auto with usage-based-insurance (UBI), where, depending on the geography, UBI customers are enjoying premium reductions of 10-20%.
As a rule, technology will make risk less – not more – expensive over time. Insurance, after all, is in most cases a mandatory purchase. It’s financial overhead. Ecosystems are emerging to offer policyholders new ideas, better ways, creating new forms of value, often expressed in terms of reduced premiums.
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