Last week Manish Shah and I attended SVIA’s Digital Insurance Leadership Series: On-Demand Insurance in Palo Alto, California. Attending with us were a number of industry leaders who are instrumental in the planning, experimentation and scaling of this new type of insurance. What is on-demand insurance?
- It provides micro-duration coverage for smaller or episodic risks (i.e. turn on and off as needed, like travel or events)
- It’s insurance coverage for the gig and sharing economy participants who have "periodic" risks for home, auto and work
- It uses continuous underwriting based on dynamic, real-time customer data to update the risk profile, terms and pricing
- It crosses all lines of business from L&A to P&C
While relatively small in terms of premium, the on-demand market is poised to rapidly grow. Why?
Economic and demographic shifts are accelerating the demand for on-demand products and services, offering tremendous growth opportunities. Consider the following market statistics:
- The sharing economy revenue is expected to increase by 22x between 2013 and 2025.[i]
- Usage-based insurance market size could reach $190 billion by 2026.[ii]
- As we have shared in our research, Millennials and Gen Z will overtake Baby Boomers and Gen X in the 30-60 year old insurance buying “sweet spot” within the next 6 years.
There’s a common theme here … six years. Each of these statistics shows a major shift in six years. That may seem like a long period of time, but not if you want to be a market leader.
New Business Model for the On-Demand Era
Unprecedented insurance transparency has resulted in a trend that is changing the nature of the insurance contract. Digital data, advanced analytics and mobile technology are the solvent that now lets customers break apart the standard lengths of insurance policies into flexible, non-contiguous “chunks” of coverage whenever needed … creating on-demand insurance. More importantly, it reinvents the business model for how insurance products are created, underwritten, priced and distributed.
To compete, insurers will need to re-think their business, technology and partnering strategies. It will require a resetting of the customer experience to match their expectations, creating a new competitive landscape. It requires a shift from the traditional 30-year-old business model to a new digital model. Elements of the shift include: Moving from fixed duration to episodic; from point-in-time to continuous underwriting; from high premium to low premium; from bundled offerings to itemized coverage; from static to dynamic pricing; from low to high touch; from systemic risks to dynamic risks; and from mature, incremental growth to emerging, high growth.
The products that fit this shift include:
- Microinsurance – Typically smaller risks that are for a specific period of time, event or some other episodic parameter. These include travel, event, and the coverage of high-value assets for a specific period (like when on vacation with a high-end camera).
- Sharing Economy – Typically covers assets that you may be sharing the use of with someone else. These include homeshare (Airbnb), rideshare (Uber, Lyft), bicycle sharing (Ofo, Mobike), and time and skill sharing (Task Rabbit, Fiverr).
- Continuous Underwriting – Constantly updating the risk profile of an individual or thing that changes the terms and pricing. This is influenced by the continuous flow of data from IoT devices like wearables, telematics from autos, home IoT devices and cyber risk assessments.
Are Insurers Ready?
This is an interesting question. Some insurers are ready, but too many are not. In our research report, Future Leaders Setting the Bar, we found that InsurTechs and incumbent insurers who are defined as Leaders are relatively aligned to the emerging demands and expectations of customers for on-demand insurance. In particular, we found that insurance Leaders and InsurTechs are well ahead of Followers and Laggards. Specifically they are aligned with Buyers by:
- Developing products and services for the Sharing and Gig economy
- Creating new customer digital engagement capabilities
- Developing on-demand products
- Developing and using IoT devices
- Embracing partnerships and ecosystems
However, we found that InsurTechs are generally more aligned with Buyers than incumbent Insurers, giving them a market edge. A key reason for this is that InsurTechs’ outside-in and customer-first approach is highly aligned to Buyers—a winning strategy that Incumbents must rapidly learn and adapt to. Follower and Laggard insurer blind spots around on-demand insurance increases their risk of becoming irrelevant and uncompetitive in a new future of insurance.
New Business Model Requires New Technology Platform
Insurers need to shift their focus from internal, operational efficiencies to an external customer viewpoint across the value chain through product innovation such as price, ease of access, engagement and unserved or underserved markets. This customer focus is a foundational and differentiated approach used by most InsurTechs and by emerging insurance leaders who have capitalized on the new market opportunities. These leaders are setting the bar higher for those insurers who follow.
The on-demand business model requires a new technology and operating platform that will enhance customer loyalty, reduce customer acquisition costs, reduce the expense ratio with large transactional volume and small per-policy premium value, and effectively manage loss ratios for new and dynamic, changing risks. The new on-demand platform requires new capabilities, including:
- Microservices and API-based platforms that enable redefined new business processes
- Multi-channel access with mobile apps and portals for customers and all channels
- Robust data and analytics capabilities that ingest and analyze data from the platform and external sources to support the dynamic nature of on-demand, from initial and ongoing underwriting through claims, including prevention
- Partner services that bring new capabilities and data to the business model and process, creating added value
Overlaying this new business model and products onto your current, traditional core system will not work because both the existing and new business will be sub-optimized. More importantly, the cost structure and operating model between the two is dramatically different. Majesco is at the forefront of creating a new technology platform for the on-demand insurance business model. Our Majesco CloudInsurerTM, P&C Core, L&A and Group Core and Digital1st InsuranceTM platforms are exposing insurers to new markets, new products and new paths to growth. We already have customers using these solutions to introduce new rideshare, cyber and on-demand agriculture products … in 12 weeks or less.
Creating the On-Demand Future of Insurance
Rapid changes in insurance Buyers’ behaviors, risk needs and expectations require insurance companies to adapt and change with speed. Change is no longer following a predictable linear path. Its course is now on an exponential growth curve—accelerating and intensifying. On-demand insurance is on that exponential growth path based on the market statistics discussed previously.
Successful management of the existing business and reinvention of the future business requires making a bet—one that can overcome the drag of the old way of doing things. Making that bet requires a deep understanding of your customers in terms of what they expect. It also requires a constant understanding of challengers like InsurTechs, traditional competitors and potential competitors.
Encouragingly, a growing number of InsurTech and incumbent insurance leaders are proactively experimenting and introducing new on-demand products to market, helping accelerating their path to the future of insurance and market leadership. We saw this during the SVIA workshop. Some are further down the path; others just beginning. Regardless, they are actively engaged in defining their on-demand business model and products. They are proactively creating the business for the future to capture a new generation of customers with significantly different needs and expectations.
Getting out ahead of the curve is more important than ever. Leadership, responsiveness and speed matter.
[ii] “Usage-based Insurance Market Size to Hit US$ 190 Bn by 2026,” Acumen Research and Consulting, May 16, 2019