Crystal balls are too cloudy. Predictions are for pundits. What we need now is a solid memo from the future regarding InsurTech.
To: Insurance Business Leaders
From: The Future
Subject: InsurTech Erased Your Business Model
“It has come to our attention that you may be ignoring the impact of InsurTech on your business, its model and your customer base. There are two possible outcomes that we see on your horizon, and one of them is less than desirable. We kindly request that you get out of the innovation slow lane and take advantage of the InsurTech wave to reinvent our business models before we (future insurance business leaders) evaporate. Thank you.”
Life in the Slow Lane – Optimizing the Existing Business
It isn’t that insurers aren’t moving. Insurers have always been steady promoters of progress, embracing new technologies and ideas. Insurers have focused on operational optimization by seeking better processes, more ways to accurately assess risk and improved methods for using data. At this point, however, insurance movement around innovation and InsurTech disruptive threats is slow. Too many are focused on internal operational pressure points rather than external customer pressure points (which startups are heavily focused on). It is a bit too methodical and way too ‘safe.’ There is very little sense of urgency. Insurers are acting too much like insurers – being risk adverse.
Many think that 55 mph is still okay. They watched InsurTech approaching in the rearview mirror, then they glanced out the side window as InsurTech-fueled startups and some incumbent insurer greenfields were whizzing by — breaking new ground and exploring new markets. Now, they are deliberating. They are considering what it might take to step on the accelerator to catch up. Unfortunately, not everyone in the car has the same sense of urgency.
What is causing the lethargy in some parts of our organizations? Innovation and InsurTech represents an exciting opportunity. Why aren’t we all excited about the business model rethinking, reinvention and transformation that will help us take advantage of InsurTech?
- We think we’re moving faster than we really are.
Motion can be deceptive. It’s relative. Are we looking at the ground or are we looking at the competitor that is passing us? Most insurers are making necessary technology decisions and moves that will optimize their business operations, enhance risk selection and even improve customer experiences. There is danger, however, in thinking that our progress is always enough to keep us competitive.
Consider how slowly insurers began to move. InsurTech really got attention in the market in late 2015 and early 2016. It stalled many insurers’ investments and technology decisions for a year because they were trying to figure out what InsurTech meant. Some thought it would be a “passing fad” or just new technologies being introduced, but quickly found out it was much more. It was about disrupting long-held industry assumptions from how we engage customers, which distribution channels we use, what defines a product, fundamentally challenging us to rethink our business models from Insurance 1.0 to Digital Insurance 2.0. In spite of their new knowledge, the first impressions of InsurTech led most insurers to believe that its overarching goal was to improve internal processes. And, much of it was.
Early on, InsurTech was heavily focused on distribution channels and it has since rapidly expanded to new sources of data, underwriting, claims, servicing and much more — an internal focus. Quietly emerging, however, were the innovative insurers or MGA InsurTech startups that focused on new business models inclusive of customer engagement, products, pricing, and processes from the customer perspective. This has driven significant change and innovation in the decades-old orthodoxies of insurance. These players were sneaking up on traditional insurers, using the knowledge of those orthodoxies to solve the puzzles of customer engagement.
Consider Slice, for example. At some point in time, nearly any P&C insurer was capable of using their existing P&C knowledge to branch out into property and auto insurance for homeshare and rideshare participants. But Slice, an MGA startup, used InsurTech to speed by the industry, introducing a new business model and products that would allow for insurance to be turned on and off with ease. They created a streamlined, digital platform for purchase and service. Now, most P&C insurers sit in Slice’s rearview mirror or looking to partner with them. It isn’t that traditional insurance innovation wasn’t fast enough. It was that traditional insurance mindsets weren’t awake enough to drive faster. Urgency is the order of the day.
The lesson to be learned for traditional insurance is that digital innovations and process innovations begin with future, customer-focused thinking. InsurTechs love to think ahead. Tomorrow is where the money is and there will always be a tomorrow — so where in the future is the ripening market of opportunity? Is your organization stuck on fixing today while a future InsurTech startup is preparing to capture your tomorrow?
The era of Digital Insurance 2.0 requires us to erase the idea that we can ease our organizations into the new era with minor adjustments because the market is changing so rapidly and opportunities can quickly be gone. The demands of agility, speed and innovation are dramatically different at the end of this decade and going forward as compared to that past many decades.
- Leadership may lack long-term (future) focus.
A recent Harvard Business Review article contains some insightful analysis of Board Room behavior that may be a cause for insurer concern. In a survey of over 5,000 board members, only 30% of respondents saw innovation as “one of the top three challenges that their company faces in achieving its strategic objectives and just 21% think that technology trends are a major strategic challenge.”[i]
The surveyors also found a correlation that many will find true within their own organizations. “A focus on innovation tends to go hand in hand with longer-term time horizons. Companies that are organized around creating and enhancing value in the long term were more likely to have boards that prioritize innovation, as compared with companies that are primarily focused on achieving short-term results. Laying the foundation for innovation requires a forward-looking mindset throughout the firm and the board.”
If this is true, then the reverse is also likely to be true. A short-term-looking mindset will foster attempts to achieve stability without the requisite foundation for innovation. Is there a way for Boards to begin to understand how partnerships with InsurTechs, investments in new products, technologies, innovation, InsurTechs and new Greenfield business model development will power their organizations forward to establish their positions as the leaders in a new era of insurance – from Insurance 1.0 to becoming a Digital Insurance 2.0 insurer?
Long-term focus shouldn’t be mistaken for long-term transformation. Rapid transformation with a sense of urgency will help insurers take advantage of InsurTech disruption, instead of being its casualty. It is better to disrupt yourself rather than be disrupted.
Executives and managers at any level can begin to be champions for innovation by paying attention to InsurTech developments, while at the same time keeping the organization apprised of advancements in market engagement and customer-facing technologies. Those who do will become true “future” leaders, consistent trend experts, as well as frequent questioners of the status quo. Their own Memos from the Future have the potential to open the eyes of business leaders and they may help with the cultural shifts that can spur stalled organizations into real action.
- The necessary scope of transformation may be too much for many insurers to fully envision.
This week, A.M. Best released the results of a global insurance survey regarding insurer’s attitudes toward innovation. “Nearly 9 out of 10 respondents from more than 450 insurance companies said that innovation was moderately to extremely critical to their organization’s success.”[ii] But, “Only 25 percent of insurers said they were willing to significantly disrupt their current processes for innovation initiatives.”[iii] This also points to a lack of fully understanding and the strategic urgency regarding innovation and InsurTech. If both Harvard Business Review and A.M. Best are correct, there is a disconnect on the importance of innovation and InsurTech at the highest levels of leadership.
Then, there is a second disconnect between what insurers perceive is important and what they are willing to act upon, creating a widening gap that will become insurmountable. (Majesco covered this “Knowing-Doing” gap in Strategic Priorities 2018: The Digital Insurance 2.0 Gap.) These disconnects will soon be top of mind for insurers because in the A.M. Best report they indicate that “innovation is becoming increasingly critical to the success and long term financial strength of an insurer, as it enables a company to maintain relevance”. Recognizing this, A.M. Best will be reviewing their methodology to consider including innovation explicitly in the rating process.
Insurers are filled with disruption and transformation questions that look daunting: What will it take to move to Digital Insurance 2.0 How many steps or leaps will we need to make? Do we need to abandon all the hard work that we’ve already done? How do we create a new business model for the future while we optimize the existing business? All of these questions are healthy, as long as they are being asked because of the urgency to create the future. In many cases, insurers are realizing that partnership with and acquisition of InsurTech companies will help them to fast-forward.
The A.M. Best survey also pointed out that “Nearly half of respondents…have either formed a partnership with a research group, university or technology incubator or else invested in an InsurTech fund to help them keep up on new technologies, even as they keep their focus on core competencies.”[iv] This is the right response. If InsurTech is truly going to erase insurance business models, let insurers be the ones to craft their own futures by designing their own future models. Let insurance thrive off of InsurTech innovations by using those technologies to craft their own unique products, service offerings and distribution methods.
Shifting into the Fast Lane – Creating Digital Insurance 2.0
A broader vision of trends and deeper understanding of how interconnected InsurTech is with platform development, will help insurers gain the proper perspective to begin planning and creating the future of Digital Insurance 2.0. InsurTech urgency and transformed platforms are a valuable pair.
Platforms can accelerate innovation, support a test and learn environment, leverage new and growing ecosystems, provide scalability for growth and they can be deployed in weeks or months rather than years. Rather than pay the traditional multi-million-dollar license fee for use of the application and related system integration services, insurers of all sizes are now seeing value in paying a minimal up-front cost that comes with ready-to-launch platforms with automated, managed upgrades.
Insurers need to be looking at the shape and direction of innovation and InsurTech from a high level and on the ground. They need to look internally at how they are (or are not) aligning their organizations to take advantage of digital technologies, with reinvented models and platforms, investing in greenfields and embracing InsurTech disruption to disrupt themselves on their terms along a path to the future as a Digital Insurance 2.0 insurer
[i] Cheng, J. Yo-Jud and Groysberg, Boris, “Innovation Should Be a Top Priority for Boards. So Why Isn’t It?”, Harvard Business Review, September 21, 2018
[ii] Best’s News Service, “Best’s Special Report: Insurers Across the Globe Recognize Innovation Critical for Future Success, A.M. Best Survey Finds,” September 24, 2018
[iii] “Cautious Carriers Often Pursue Innovation Warily: A.M. Best,” Carrier Management, September 25, 2018