The Bundling and Unbundling of Insurance
by Anna Vogel and Felippe-M. Wick
For decades, the insurance industry managed to tiptoe around the ‘digital’ elephant in the room. And suddenly, things seems to change rapidly: insurance is finally at the beginning of evolving into a digital business. Some of the biggest trends in the insurance space right now are changing consumer expectations regarding the delivery of insurance, shifting and emerging risks that need addressing, and the growing relevance of ecosystems as the means of distribution.
“There are only two ways to make money in business: one is to bundle; the other is unbundle.” – Jim Barksdale, former CEO and President, Netscape
From a technological point of view, the digital transformation of insurance is following familiar patterns. The bundling and unbundling of products, services, and entire value chains is such a pattern known from other industries. However, it is a change of paradigm that will alter the insurance landscape forever.
The unbundling of services is the result of increased specialisation, innovation, and technological progress. A specific product or aspect of the value chain is split up into multiple smaller offers. Or as anyone in media would explain it: Instead of a whole newspaper, you can sell single articles online.
However, this is not a one-way process. Unbundling and bundling are two interdependent forces that influence each other. The more an offering is unbundled (not as easy as it sounds btw), the more opportunities for bundling arise. Then each of these ‘new’ bundles then can deliver entirely new services, potentially creating lean, innovative offerings, ready to be quickly tested in the market.
To gain a deeper understanding of the current state of innovation in insurance, it is helpful to take a closer look at what enables and what blocks these two movements.
Unbundling
Especially front- and middle office IT systems of the insurance industry are in the process of unbundling. The recent surge of insurtech companies entering the market means that the traditional multi-line carrier model is being dismantled by a variety of highly specialised niche players.
Powered by new technology, agile entrants are doubling down on selected lines of business processes, insurance products, improving the customer experience and value creation. Some are focussing on optimising a part of the value chain (e.g. claims), others on creating enhanced products for specific customer segments (e.g. gig economy), or bundling insurance with other services to create entirely new offerings (e.g. usage-based models).
Even more so, the unbundling process has enabled and invited players outside the insurance space to enter the market. While health and life insurance still seem too complex to be easily unbundled, car manufacturers like Tesla have already started to sell car insurance together with their products. The same is conceivable for Apple selling insurance for their smartphones, laptops and watches.
As a result, born-digital companies and platforms like Alphabet or Amazon aren’t just distribution channels. Both companies are either selling insurance (Alphabet’s Verily) or are threatening to do so in the near future, and it is those companies that are often perceived to be the biggest challenge to traditional carriers.
The technology tree
The current unbundling process is enabled by technological progress. To be more precise, it follows the trajectory of disaggregation within enterprise software: The mainframe used to combine both software and hardware. As a next step, software moved to the Cloud and was split into different applications. Today, some industry have already gone a step further and disaggregated monolithic software applications into a multitude of flexible APIs within agile microservice architectures. It feels like ordering food from the versatile menu of a Chinese restaurant: You can pick and choose capabilities with the utmost flexibility. Insurance was late to the dinner, but it has joined the table now and is ready to catch up.
From the perspective of the insurance industry, the use of microservices and APIs is in its infancy. But don’t fret. They will play a leading role in insurance’s digital transformation at scale. Contemporary software architecture has the ability to accurately isolate and map a specific service or step in the digitalised value chain and apply it somewhere else.
For the service in question, this unlocks huge potential. Now it can add value to an entirely different customer journey, i.e. when buying an electric car. In addition, microservices can be consumed more easily across and outside of an organisation. This makes it easy to partner with tech companies or explore new distribution channels for new use cases.
Under pressure
With increasing technological progress, the pressure to innovate is mounting. Insurance is feeling the need to lower its prices and to commoditise its products. (The commoditisation of insurance is certainly worth a closer look and warrants an article of its own.)
The friction created by aged, bespoke legacy systems is even more pressing. As of yet, the IT systems of many incumbents clash with the expectation of the customer to interact with insurance the same way they shop, consume news, or book a holiday. Soon, this will start to have a serious impact on the bottom lines of insurance companies.
“API platforms are the next major era of cloud software.” — Glenn Weinstein, Chief Customer Officer, Twilio
Microservices can help bridge this gap and push beyond what the industry had hoped to get from the Cloud and SaaS. Because microservices go beyond the digitisation of existing processes, they can deliver true disruption.
Bundling
The more the unbundling process advances, the more opportunities arise for the reverse trend — the bundling of services and products.
Some 20 years ago, aggregators started to serve as a single point of engagement for consumers. The emergence of websites such as check24 in Germany and GoCompare in the UK has been credited to be the last major innovation in insurance. Their idea was to bundle products of different carriers under a new brand while leveraging market share and distribution power.
In addition, bundling is not limited to aggregators or platforms. By combining a wide range of services in a single application, super apps are becoming increasingly important too. Shopify for example is already offering financial services. Following the example of Tencent’s WeChat, it is integrating ever more customer experiences into its app.
US big tech and other players are working on comparable environments hosting a range of interconnected user experiences and value-added customer journeys. By delivering seamlessly integrated experiences and maximising the power of data, these new distribution channels meet changing customer needs in a single familiar user interface.
Again, insurance is more than likely to follow suit. The sale of property and casualty protection through a multitude of apps and platforms — comparable to commodities like books or fashion — is not a distant future or fantasy anymore. It is happening right now.
The common denominator of these game-changing apps and developments? APIs and microservices are laying the technical groundwork for this to happen. Accordingly, the bundling of insurance products around the core value propositions of other verticals will become a normality.
Then and now
Gone are the days of service-heavy software packages that were acquired or subscribed to in full, often after never-ending RFP processes. Former 360° solutions — usually housing an unnecessary overabundance of functions — no longer bridge the technological gap between insurers, distributors and the reality of contemporary consumers.
True digitalisation means integration across all levels and departments of an organisation. As a result, it’s simply impossible to build everything yourself these days. Even big tech uses a strategic mix of partnering, acquiring, and building.
Yet, the technological shift behind it all is still met with unease amongst traditional insurers and distribution partners. Adopting APIs and microservices means trusting and being dependent on an array of 3rd-party vendors that follow their own agenda. And that agenda might only loosely be connected to insurance’s core business.
Nonetheless, the current wave of innovation in the form of unbundling/bundling strategies comes with a lot of opportunities. Existing and new customer segments can be reached across a variety of established and emerging channels. Instant feedback loops can be established. New sources of data can be harvested. As an API-obsessed start-up in the InsurTech space, we don’t have easy answers or hold the key to a magical digital insurance world, but we are happy to be part of the conversation and contribute to the innovation in an exciting sector.
Learn more about us on koble.io.
