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Although disruption has been imminent in the insurance industry for a decade or more, it feels increasingly inevitable that one day soon digital platforms will make a direct play to enter what remains a large and profitable sector. As consumers, we expect digital-only interactions that make everything seamless and easy for the user. Google, Amazon, and Apple, already have the capabilities to deliver digital products, they are only a few well-chosen acquisitions, and the application of their AI expertise, away from launching a major threat.
Most insurance companies get this, they all have chief digital officers driving transformations that embrace technology to reinvent everything from customer experience to core operations. McKinsey & Company estimated they were spending $225 billion on IT in 2019, a number that has likely risen significantly since. They are racing hard to digitize the customer experience in the belief that this will insulate them from the threat posed by new entrants. However, it seems improbable that insurance companies can compete with digital natives on digital capabilities. The reason IT spending is so high is that most of these traditional firms are starting with aging IT systems, and transforming legacy architecture, is painfully slow.
If the threat of disruption from digital platforms is real and the response is unlikely to succeed in the long-run, what should the insurance incumbent do? One potential solution is to start by reframing the problem as being not about technology, but customers. It is not creaking IT systems and slow adoption of digital products that makes the industry vulnerable, it is the shallow relationships they have with their customers.
The insurance industry was formed as a way for a community of people to support each other when they faced unexpected events. Its roots go back to the seventeenth century, as a nascent banking industry in the Netherlands and England was developing to support the emergence of global trade. Merchants pooled resources to spread the risk of losing their cargo during long and dangerous sea journeys. Catastrophic events on land, like the Great Fire of London in 1666, expanded coverage to other classes of risk, and companies emerged to both sell insurance to customers and reinsure the losses of those primary carriers.
On the face of it, the insurance industry has developed a great business model since its founding. They need to build a customer base of people who want to limit their exposure to unexpected events, collect premiums to cover customers, assess the risk that the events might happen so that they can set premiums, and invest the money they collect in a way that offsets losses from any claims.
The big problem is that the customer only engages with its insurance carrier when they buy or renew a policy or make a claim. That means that the relationship is based either on the transaction or the critical, high-stress incident. The insurance industry has got better over the years at managing both these customer touchpoints in ways that improve their reputation. It is remarkably easy to manage a motor insurance claim in the USA these days. When someone ran into my parked car several years ago, the repair shop called me to schedule a time before I had even had a chance to file a claim. The quality of administration can be tremendous.
However, I struggle to remember the name of my auto insurance company. I think it begins with ‘M’. I have bought nothing more from them and my only interest every year is to find the most competitive rates. Even with a head-spinning high-quality customer experience, it creates few growth opportunities for them, and limited customer loyalty. The community connection that inspired the creation of the industry has dissipated and been replaced with a largely transactional relationship. Making these transactions more frictionless may improve NPS scores, but it is unlikely to be a defense against the far more digitally adept platform providers. This is the problem that insurance companies need to solve.
Insurers need to deepen the competitive moat by becoming more important to the customers that they serve. That means developing new value propositions that solve problems customers care deeply about. This is the best defense against disruption. Multiple insurance firms are working hard to find a way of being more relevant, including AXA, Generali, Prudential Financial, and our favorite, UNIQA Insurance Group AG, headquartered in Vienna. UNIQA’s CEO, Andreas Brandstetter, talks about making a shift “risk carrier” to “taking care”, and its strategy aims to expand its “relevance and impact in people’s lives.” Through its SanusX healthcare accelerator, UNIQA is building a series of new ventures with the goal of creating a new category of firm that is in the ‘taking care’ industry.
These are some of the problems that we see insurance companies tackling to realize this goal:
Connect with my community – UNIQA is rethinking digital insurance with its CHERRISK Cherrisk offering, currently available in 9 Eastern and Central Europe countries. Cherrisk is a head-to-head with digital startups like Lemonade, offering a digital-only experience, with policies available on monthly subscriptions, claims paid in 2 days, and a differentiating customer experience. However, what makes it stand out is that customers can reinvest a portion of the profits from Cherrisk into local community groups and good causes. It is seeking to reinvent the risk-sharing communities of old.
Help me get from A to B in a safe, sustainable way – Swiss insurance firm, Baloise Group (Baloise CH), are investing in a mobility ecosystem to create new business models that will help them add a new dimension to their current business. As it stands, it is a highly successful insurance firm, but one with an aging customer base. It has helped to build a range of startups solving different mobility problems.
Reduce stress in my life – in a recent podcast with me, Federico Spagnoli from Prudential Financial International explained how he sees insurance companies as needing to take a more holistic view of the stressors customers face. He says they need to realize how financial, mental, and physical stress are all interlinked and start developing services that support that reality. Prudential’s first move was to partner with Vitality to offer wellness services in Latin America. This has now expanded into a technology platform to help customers manage their personal wellness. It is an open platform that uses open APIs to integrate multiple service providers.
Anticipate and prevent illness – Generali is on a journey to offer a range of wellness services, all around the theme of promoting wellness and preventing illness. This ranges from genomic cancer diagnostics to AI-enabled symptom checkers and telemedicine access to mental health professionals.
Help me get access to primary care – AXA Insurance in France has made a massive expansion into healthcare, including building a network of telemedicine access points to improve availability of primary care. Generali have pursued a similar strategy, providing “Teladoc” mental health and primary care services to customers.
Age safely at home – Federico Spagnoli sees an “Aging Industry” developing to serve a range of emerging needs from the developed world’s increasing elderly population. One of the most important is giving them (before long, us!) the ability to use technology to age safely at home. US retailer Best Buy is perhaps the most eye-catching player in this space, retraining its “Geek Squad” of in-home electronics installers to work with people returning home from hospital to learn how to use remote monitoring equipment. Why Best Buy? Because, they have a trusted brand, that people are ready to let into their homes even at times of significant stress. That’s the sort of relationship insurance companies need.
My prediction is that the firms that are successful in building ventures beyond the core insurance business are those that apply three rules. First, innovate by lasering in on problems that matter to customers and then working out how to solve them. Insurance companies need to set aside everything they know about designing insurance products and focus on how their consumers define the problems that matter most to them. Second, have an ambition that is equal to the scale of the opportunity in the market. It is easy to play at innovation, investigating possibilities, funding small scale startups, but never committing to scale. Playing with ideas you never intend to scale is the safe route. Nothing is at risk. Best Buy set an intention to enable 5 million elderly people to age safely at home by 2025, Philips Health has the goal of “improving the lives of 3 billion people a year by 2030,” others set financial goals. Third, leverage the assets of the existing firm to scale faster than a start-up. The access to customers, capabilities, and capacity for scaling is the big advantage that established firms enjoy. They can make this advantage count if they do not think that having assets alone is sufficient for success and so breach the first rule – innovate to solve a customer problem.
There are many obstacles to applying these rules successfully – for example, the demands of the core business, the expectations of investors, and the silent killers of corporate innovation. However, if insurance companies can overcome these, then by the time the big digital platforms finally come to attack their core business, they should find an industry that is valued for more than the ease with which it processes transactions.
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