Insurance Ecosystem Building: The market beyond apps
An ongoing drive toward digitization has put the insurance industry on the verge of a paradigm shift. The pace of change has accelerated thanks to tremendous increases in the volume of electronic data, the ubiquity of mobile interfaces, and the growing power of artificial intelligence. In the early years, companies that digitized were at the forefront of the industry. Today, digitization has permeated every level of the competitive landscape. Society’s growing reliance on digital technologies is not only reshaping customer expectations but also redefining boundaries across industries. Insurers cannot avoid this phenomenon: as traditional industry borders fall away, the future of insurance stands to be greatly influenced by platforms and ecosystems.
A platform is a business model that allows numerous participants (producers and consumers) to connect to it, interact with one another, and generate and exchange value. Alibaba, Amazon, and Facebook were all built on platform business models. Meanwhile, an ecosystem is a linked group of services that enables consumers to meet a range of demands in a single integrated experience. Consumer ecosystems that are now forming throughout the world tend to focus on requirements like travel, healthcare, or housing. Business-to-business (B2B) ecosystems are often centred on a single decision maker, such as marketing and sales, operations, procurement, or finance specialists.
A global report anticipates 12 unique and enormous ecosystems to emerge around core human and organizational requirements by 2025, as this change accelerates (Exhibit 1). By 2025, these 12 ecosystems will generate $60 trillion in sales, accounting for about 30% of total global revenue. The exact structure and composition of these ecosystems will differ by nation and location, both as a consequence of regulatory influences and more subtle cultural practices and tastes. While insurance could be featured as the risk-mitigation service for each of these 12 ecosystems in this new world, there’s no reason why insurance companies couldn’t form their own sub ecosystems that cater to individuals and institutions.
Typically, ecosystems produce three sorts of value:
1. They serve as portals, eliminating friction when clients transition between linked services. For example, Facebook Messenger allows users to purchase, check into a hotel, message a friend, read the news, and speak with a doctor all from a single interface. Users do not need to switch between portals, handle several log-ins, or use mental energy managing different services.
2. They take use of network effects. Google Nest, a creator of a smart-home ecosystem, sends its clients a monthly report card that highlights their energy consumption and compares it to that of their neighbours to put the data in context. At the same time, the organisation adds value to utility providers by providing unified demand information to assist them in optimising output.
3. They connect data from many services. One healthcare-data firm pulls high-quality data from the healthcare ecosystem and applies it to the lives of patients to improve human health.
Shifting from an industry to an ecosystem approach necessitates a substantial adjustment in how insurers understand their position in the economy. At the moment, insurers essentially serve as risk aggregators. They have a passive and restricted contact with clients, putting them at risk of disintermediation, disaggregation, commoditization, and invisibility. If insurers lose distribution and client ties, they will have limited choices for reinventing their business models. Adopting an ecosystem perspective: re-evaluating the existing business model and contemplating collaborations with both internal and external industry players - could revitalize insurers’ digital strategy.
The shift in the Value Pool
Although digital leaders have made inroads into several sectors based on their ability to dominate the technological roadmap, other concentrated initiatives may provide opportunities for insurers as they examine ecosystems.
Customer relationship ownership: Because digital natives have effectively proved that control of the client connection is a stepping-stone to an ecosystem play, distribution has become the target of disruption. Because of their regulatory expertise and large capital requirements, insurers have a competitive edge in the insurance sector. In 2015, the Economist saw a similar pattern between banks and fintech companies: “If fintech doesn’t destroy banks, it may instead erode the sector’s profits. A future as a type of financial utility — ubiquitous yet tightly regulated, unappealing and slightly profitable — is hardly a satisfying end for banks.
While Google’s search engine has perfected the human-computer interface and irrevocably altered the customer environment, Amazon’s Alexa is poised to profit on the next frontier of interaction — voice. Companies such as Liberty Mutual have already begun to deploy Amazon Alexa solutions in the United States. Users may utilise these tools to get insurance quotes and advise on typical seasonal home and car concerns. Amazon Protect, which extends manufacturer warranties for devices such as mobile phones and washing machines purchased on Amazon’s website, debuted in Europe last year.
Strong customer connections not only immediately add to the user experience, but they also enable access to customer information, which is the Holy Grail of data and an imperative requirement in the ecosystem world. Insurers may leverage consumer acceptance of IoT to provide chances for better and more frequent customer contacts (through wearables, for example) and enhance efficiency through sensor-based automation (such as trigger-based claims payments and apps).
Analytics and the risk engine: When compared to their colleagues in other sectors, insurers have significant analytics skills; analytics has long been a key component of the traditional insurance business model. Traditional insurers may utilise analytics to innovate and grow their business models thanks to digital ecosystems. They might help current insurance firms evolve by upgrading risk assessments, for example, by incorporating safety measures like connected-home solutions. Analytics may also be used by insurers to improve pricing and risk accumulation control.
Risk management will continue to need increasing quantities of data modelling and sophisticated analytics as various firms create increasing volumes of data. Insurers in new digital ecosystems can supply analytics-as-a-service to other industry participants due to their proven analytics skills.
Risks are changing, and new markets are emerging
The risks that must be covered are changing dramatically for two main reasons. First, as tracking and forecasting technology improves, uncertainty will be minimised. Connected automobiles, for example, have fewer accidents and breakdowns, predictive maintenance decreases work interruptions, and wearables contribute to a better lifestyle. Second, significant changes in risk distribution and actuarial models (due, for example, to an increase in the frequency of long-tail hazards) are exacerbating this trend. A consequent demutualization might shift the emphasis to forecasting and controlling individual risks rather than community hazards. As a result, premiums are likely to fall, diminishing what have previously been rather reliable cash sources.
Creating and implementing an ecosystem plan will need ongoing effort and commitment. Executives that want to launch an ecosystem strategy should concentrate on a few topics. First, not all of the total wealth at risk will be available to all distribution economy participants. As a result, all actors must identify and prioritise the ecosystems in which they can succeed. Second, a high performance across various dimensions, including as culture, technology, and customer interaction, is required for an ecosystem approach. Insurers should identify the important competencies that will serve as differentiators in an ecosystem and analyse if their business has enough horsepower in these areas.
A great potential for insurers who can respond quickly.
The growth of ecosystems is one of the greatest potential, greatest risks, and most difficult difficulties of digitalization. Not all industries and players are equally well placed to capitalise on this opportunity, and organisations who jump in may not be able to capture the full value at stake. Large, on-the-ground insurers are better placed to grow into orchestrators. However, this surge of ecosystems does give an opportunity for certain businesses to refocus goals and ambitions, leapfrogging the competition.
Becoming an ecosystem participant needs considerably more than just technological expenditures. In order to verify that their investments are in line with the regulations, insurers must take a 360-degree picture of the business across numerous dimensions. Answering a few crucial questions can help influence the conversation:
Strategy: How important is ecosystem strategy to the organisation?
Customers: What is the organization’s approach to customer ownership, access, and engagement?
Partnerships: Does the organisation have a strong network of partners that will allow it to expand beyond the constraints of traditional industry?
Is technology viewed as the fuel for the organization’s strategy?
Is the company well-positioned to recruit and retain the most creative and entrepreneurial talent?
Culture: Is the consumer at the heart of everything the firm does?
The natural effect of digitalization is the emergence of ecosystems. Adaptability will be used to advantage by organisations that place it at the heart of their design and strategy. Evolution has taught us that the most adaptable animals survive, rather than the most powerful.
References:
- https://www.the-digital-insurer.com/library/insurance-beyond-digital-the-rise-of-ecosystems-and-platforms/
- https://www.bcg.com/publications/2020/bionic-insurance-could-be-the-future-of-insurance
- https://dxsherpa.com/blogs/building-a-digital-foundation-in-the-insurance-industry/
- https://www.acko.com/digital-insurance-trends-and-benefits/
- https://www.mckinsey.com/industries/financial-services/our-insights/ecosystems-and-platforms-how-insurers-can-turn-vision-into-reality
