Positioning for New Business Models
In 1494, Luca Pacioli, a Venetian friar and mathematician, published a textbook that described the use of double-entry bookkeeping. Drawing upon his knowledge of Venetian merchants, Pacioli showed how this type of accounting kept an accurate record of accounts. This gave merchants a much clearer picture of their financials and business. With the clearer picture, merchants would both avoid loss and feel more confident in the use of funds to grow. Double-entry bookkeeping was a tool for improving earnings and profitability.
Today, earnings and profitability are still a priority. Earnings keep insurers in business. Just as merchants during the Italian Renaissance were looking for any way they could get ahead, today’s insurers are seeking new methods and tools that will power their growth, earnings, and profitability. The questions remain the same. “What will cause us to lose less of what we have earned?” “What will impact our growth and profitability?” As we explore the new Insurance Renaissance, we are finding that many of yesterday’s answers are apropos to today’s questions.
A matter of models
For insurers, one model has worked for years. It centers on claims. If we keep claims loss ratios healthy within product portfolios by proactively reducing the claims cycle time and keeping expenses under control, then insurers meet their obligations, regulatory mandates and can make a profit. This model has been effective. It has incrementally improved over time and experience. But taking an alternative model for claims in light of new tools and methods can radically improve the claims environment and financials.
Why should insurers look at alternative models? Like Pacioli sketching out the best “new” methods of bookkeeping, we can also sketch out the best ways to think about new insurance models. For insurers, the best new models will positively impact claims and expenses…and more importantly enhance the customer relationship and experience. We can start with the assumption that claims on any of our products are higher than they could be and that the cost of administering the business is also higher than it could be. These concepts are basic and they are nothing new, but innovative models often begin with the most mundane truths.
New business models will lower claims.
No matter what form of insurance you sell, technology-led opportunities for risk prevention and even elimination have never been better. Connected devices in cars, in homes, on wrists and in pockets are giving insurers data that will allow them to know their customers and push them toward safer and healthier behaviors. New data streams will supplement insurer knowledge with “outside evidence.” The organization that places its focus on prevention and elimination, instead of payouts, will grow very adept at using data to enhance the customer relationship and experience, while fundamentally changing the claims model. It will provide greater event predictability and proactive management. Fraud will improve. Costs will decrease. Risks will grow much clearer.
How low can claims go? Zero is certainly not attainable, but dramatic claims reductions are likely to occur as homes, cars, buildings, fleets, people and much more grow more connected. Insurer branding may shift to the point where insurers are considered prevention and elimination companies…providing real and valuable risk management services and capabilities. Their value proposition will be less about claims support and more about customer risk management and experience. This kind of business model will require a new financial model to accompany it — not unlike paying for a home or property security system. The offering will be in prevention and elimination, not in payout.
New business models will lower expenses.
The sharing economy has arrived. Office space, server space, vacation space, tools and rides are all sharable. It makes sense then that the new models of business and technology will find the reusable and the sharable and put them to good economic use. Insurers have existed as operational islands for decades, in some cases to protect the company’s proprietary information, and in other cases just to maintain control. Today, it is possible to have greater control, more flexibility and greater security while operating in a shared cloud environment. Cloud lowers expenses and gives insurers greater investment capability, often while improving speed to market, decreasing total cost of ownership and providing greater agility to respond to change. Creating a new insurance model with the use of cloud services will allow for agility to adapt with ease, innovation to reimagine the possibilities and speed to seize the opportunities for entrepreneurial testing and long-term success.
New business models will open new revenue streams.
Cable television had a high hurdle to surmount when it proposed to charge households for TV service — a service that was still available for free. It had to prove its value before the return on investment would be clear. It had to show that it could realize income from both advertisers and subscribers. Today, cable providers, internet companies, and phone and mobile providers have entered a perpetual model flux where following consumer trends and providing new offerings are the only sure path to steady revenue, growth and customer satisfaction.
Insurers may be on the cusp of a similar model flip, where models are continually in flux and unstable. An insurer’s outside income may not always be premiums. An insurer’s stability will be found in its capacity to adapt quickly, mining the opportunities to be found in value added services, relevant partnerships and innovative offerings. These new revenue streams MAY lower the need to focus on claims ratios or they may simply improve combined ratios overall. Will people pay their auto insurer for deeper automotive care that may extend the life of the vehicle? Will they pay their home insurer for connected home monitoring if it lowers their insurance premium and manages their risk proactively? Could a life insurer offer variable premium products based on data gathered through an individual’s mobile phone regarding lifestyles, travel, activity and perceived stress levels?
Anything is possible, and that’s the point. For insurers, new models are on the rise that will help them enjoy their own Insurance Renaissance. Preparing to meet the new economy with a Renaissance-ready infrastructure will turn the opportunities into real solutions…and real customer value.