Unbundling of the Insurance Value Chain
Digitalization is changing the insurance industry; the value chain of Dutch insurers is unbundling due to newcomers. While these start-ups expand their business, insurers compete over an ever diminishing and more fragmented market. How can insurers stop this downtrend and regain their lead?
During recent years billions of euros have been invested in FinTech companies. And it is not hard to understand why investors are so keen to do so; the financial sector makes phenomenal profits while using outdated technology in large, cumbersome organizations. Also FinTech start-ups are not just eating away on their market share, but are fundamentally changing the value proposition while they do it.
When it comes to finances, trust is important and established brands as well as high regulatory barriers to entrance have kept the financial sector largely from being digitally disrupted. After the financial crisis however, trust has disappeared and been replaced by an unprecedented willingness of policymakers to change the financial system. And since it is the banks who are under scrutiny of the general public, insurers worldwide seem to think they will dodge the bullet. However when we take a closer look at the insurance value chain, this sector could prove to be the next victim of digitalization that is still in denial.
Simply put, the traditional insurance value chain can be dissected into various activities (as seen in figure 1). This also shows a selection of the newcomers, claiming their share in the traditional value chain and uproot the traditional value proposition of insurers.
Unbundling of the value chain
This unbundling has gained momentum during the last years. When looking at information & orientation in the value chain, (social) media, internet and finance authorities are bombarding the consumer with information. Especially for non-complex insurance needs, consumers will skip advice since newcomers operating in the ‘Compare’ part of the value chain offer detailed and easy accessible interfaces. More complex (business) related products are still often outsourced to specialized insurance brokers, who will often do the comparing, execution and customer service as well.
The number of intermediaries aimed at private, non-complex products has been greatly reduced in the Netherlands during the last years, while (or, because) the popularity of comparison sites skyrocketed. And this only signals the beginning; over the years many of the newcomers have expanded their businesses. Independer.nl for instance started as an informative site, but is steadily expanding its business and is taking over a share of the intermediary when it comes to comparing prices, providing advice as well as the execution of policies on non-complex insurance. For free.
Insurers are still able to excel at the administration, data & risk as well as customer service. Recent cost cutting initiatives however means administration has been digitized and often (partially) outsourced. Billing, declarations but also internal processes like payroll and document handling; newcomers offer specialized services even larger insurers cannot compete with. But also when it comes to data & risk, a field eminently suitable for insurers, customers have hardly seen any products related to the incredible amounts of data insurers are able to gather. If you are lucky, your insurer might have started to experiment with car insurance pricing based on driving style. But brake hard and you will be penalized for dangerous driving, even if it is to avoid a collision. In the meantime, Palantir analyses data to detect fraud at insurance companies, helps biotech companies to find new cures for life-threatening diseases and track terrorists worldwide. Also PredPol does not just help police, but can accurately predict when and where a next crime will occur, using data analytics. Why then, seem insurers to be unable to come up with better products? It would seem obvious that any head start insurers may have had when it comes to data & risk, they have lost it a long time ago.
This lag in tech-savvy solutions also shows in the customer service most insurers offer. While greenfield InShared has automated its entire claim process (including claim assessment), many insurers still require their customers to call them (see also our recent article). In our shift to a digital-first self-service, this does not live up to customers’ expectations.
The value proposition
When looking at the value chain and the corresponding competitors that outperform insurers, one question arises; where can the traditional insurer add value? Currently the brand, customer base and ingrained habits of customers form the legitimacy for traditional insurers’ existence. But this will slowly decay when start-ups will come with better products and services. It is time to conclude that although insurers try to keep their value chain intact, they cannot compete on all the components.
Therefore during the next years, insurers will have to decide what their value proposition will be – what part of the value chain, or what market will they focus on. Will you be the cost leader, the excellent service provider or the data & risk guru? Or will you focus exclusively on certain customer segments and tailor products to their needs? Of course focusing on one proposition is a more risky strategy than focusing on various components of the value chain; if you have chosen the wrong strategy or your more specialized competitor has a better proposition, there are no other components left to soften the blow for your company. How to mitigate this risk?
Preparing for a new reality
Luckily insurers can cannibalize on their brands and customer base for some time, and most insurers are making efforts to adapt to the new reality. Neither is the situation so dire that immediate revolutionary actions are needed. But insurers must realize they have already lost their head start, and the current pace of development is only increasing their arrearage. So in order to find their own competitive advantage, insurers have to pick up the pace in order to prevent drastic, high risk measures in the future.
In order to prepare for this new reality, companies can adopt various measures. Generali invests in hedge funds aimed at tech start-ups, claiming it is time to “change or disappear” for the insurance sector. A common tactic in the Dutch insurance sector is to create a spin-off brand to test the waters. Once the spin-off proves successful, it can be re-incorporated in the organization and can serve as a best practice as well as a cultural change catalyst for the entire holding. Various insurers have founded their own start-up booster (i.e. Allianz Digital Accelerator), where insurer and start-ups can benefit from each other’s strengths. Or organize your own corporate garage in which various (lean) start-ups are created and tested (Aegon’s Kroodle).
The how in this matter is still subordinate to the why & what. There is still time to discover the necessary tools and knowledge needed for your future organization. And when (inevitably) the time has come that your traditional insurance value proposition has become obsolete, your organization will know what to do, and why it is the most viable strategy for your company. After all, you have done it before. But only if you start experimenting while you still can; FinTech is not waiting for anyone.