Over the past decades, digital technology and innovation have been disrupting businesses across the world, bringing change to even the most staid industries. Digital revolution has already changed the face of the banking industry, and now insurance technology companies, insurtechs, are challenging the traditional boundaries and long-held monopoly of insurance companies. These new players mainly focus on redesigning (parts of) the insurance value chain, making it faster, simpler and more customer oriented. Insurers know they are facing rapidly changing circumstances, forcing them to readjust. However, compared to banks, their technological and innovative adoption rate is fairly low and change within the insurance industry seems to be lagging behind. So, why this inertia? What’s happening?
Smells like Lemonade
It is not that nothing is changing at all in the insurance market, for the number of insurtechs continues to grow. According to McKinsey, annual funding in insurtech is increasing by 36%. During recent years, some promising startups have been emerging. One of them is Lemonade Insurance Company, a textbook example of digital disruption in the insurance sector.
Lemonade is an American non-life insurer that focuses on home insurance. Nothing fancy or disrupting so far, but what makes this company unique is the way it touches the very foundation of traditional insurers. One of its commercial statements summarizes it all: “If something happens, we pay superfast. That’s what you get when you have bots instead of brokers and algorithms instead of paperwork.”. The process from submitting a claim to cashing out takes about 90 seconds. 25% of the claims are even settled in 3 seconds. Imagine that. The introduction of technological innovations such as artificial intelligence (AI) and machine learning not only delivers significant administrative savings, it also takes the customer experience to the next level.
However, Lemonade does more. One of the most important aspects of its value proposition is a proactive trusted transparency with a social twist. They charge a fixed fee of 20% of the premium to cover their own costs. 80% is reserved for claims and reinsurance. The money that remains is donated to charity. This way, Lemonade gets to the nub of the matter and dissolves the opposite interest between the insurer and the insured: the insurer is afraid of fraud and the insured is afraid of not being paid out, he is frustrated with long lead times, often due to the lack of trust.
Lemonade is still relatively young, and time will tell how its innovative business model will impact the insurance sector. Fact is that companies are experimenting to see what works and what doesn’t. Some will succeed, others will fail and learn from it. But despite of all these upcoming insurtechs, change still isn’t really booming in the insurance industry.
The reasons why insurers are often idling are a result of different dimensions: from ideological obstacles – too big to fail; people will forever need insurance, over technological ones - legacy systems hinder innovation, to talent, generational, ’first we need a new organization‘ and system lock-in issues.
Time to overcome the insurance inertia and challenge the status quo towards more trust
So, market disruption remains pretty modest until now. Even though customer expectations are shifting fast, particularly among the younger generations who expect innovative services and an optimized user experience, most insurance customers remain at their existing insurance brokers. So, for the majority of insurers there is no immediate need to adapt. Which actually is a twisted paradox, impacting their relevance and existence within the industry. For digital disruption tends to produce new winners rather than redistribute the power among the laggards. So, time to challenge the status quo and embrace a customer first attitude.
Traditionally, insurers have a limited and rather passive relationship with their customers. They have long relied on two customer touchpoints: at the time of sale and at the time of claim, which means that capturing data often is a one-time event. Our relationship with an insurer often is reactive rather than predictive or prescriptive. However, as the world is getting increasingly data-driven and connected, the current data void between these two touchpoints is about to be filled thanks to new technologies that could possibly shellshock the insurance industry.
One of these innovations is IoT. Think about a black box in your car for example. Some companies already experiment with this idea and show some promising results. The insured will get frequent updates on his driving behavior and even feedback on how to improve his driving skills in order to receive a lower premium. This will undoubtedly change the role of insurers as well, from risk mitigation to risk avoidance. Other technologies which will have a bright future in the insurance industry are AI and machine learning, blockchain and quantum computing.
Question is how and where technology and the need for human interaction will intersect and which business model will have the most success. In other words, what is needed to create (r)evolution in insurance and to obtain a truly outstanding customer satisfaction which will result in more trust from the customers.
One of the things that are trending, is the fact that it doesn’t necessarily need to be an insurance company that sells insurances. Here is where the cooperation buzzword comes in. So maybe, instead of talking about optimized insurance lifecycles, the conversation should actually be one of collaborative/cooperative markets.
Rethink in order to win
Insurance companies need to rethink their current insurance business models and think of themselves as a Services Platform Business instead. An insurance company that thinks that way understands that it is in the business of matching those that need services (customers) with those that provide the services (such as auto body repair, health care providers, …). Which is a complete 180° from what insurance companies do today.
Platform thinking enables the introduction of many types of products from a variety of categories or adjacent industries. Uber started selling rides and is now selling food delivery services. In addition to accommodation, Airbnb is now selling experiences. O2 UK started with selling smartphones, now they are selling car insurances based around an app on these smartphones.
So why not do the same in the insurance industry? According to Deloitte, one of the business models that will gain momentum by 2025, will be the one where insurers think beyond their core business and offer additional services, thus raising the customer journey to a next level and gaining trust. According to their research, the first ecosystems will develop around three areas: mobility, healthcare and smart buildings.
Sounds logical. After all, in essence, insurances are no more than a by-product. You book a trip; you take a travel insurance; you buy a car; you take a car insurance. But actually, what we really want is a solution to our problem when it arises. In case of car damage, we want a mobility solution, in case of a water leak, we want damage repair. Banks have already gone through a digital change process, now it is up to the insurance business. So, Let’s Go For It.
Last but not least: don’t let apparent digital paradoxes compromise your relevance
We talked about challenging the status quo, but how do we cope with the apparent digital paradoxes in the insurance industry? For challenging the status quo implies looking at the future, but what about today? How do you choose between opportunities in becoming future-proof and daily priorities? At Realdolmen we believe in ‘both-and’-thinking, in optimizing for today and innovating for tomorrow, and getting your company into a digital flow. Meet our insurance specialists and engage with them in dialogue about your digital paradoxes.
This blog is the first one in a series on digital disruption in insurance. In the following edition, we will have a closer look at the legacy conundrum.