Can outsiders redefine the insurance industry?


Jul 23, 2018

Today’s insurance industry faces a daunting set of challenges including deteriorating trust, information asymmetry, misaligned incentives, legacy systems, fraud, and new risks like cyber that are difficult to price. This climate has created opportunities for insurers to rethink their business models, as well as opportunities for new companies to enter the insurance sector. Often dubbed “InsurTech,” these technology-led companies provide a number of services including marketing, customer service, and risk analysis.

Insurtech companies have received a lot of buzz for their potential to transform the industry.  In reality, these companies are actually maintaining the status quo, serving to make the existing value network more efficient (the suppliers, distributors, and channel partners who work to respond profitably to the common needs of a class of customers). We believe industry transformation is more likely to emerge in the context of an entirely new value network, whether initiated by an industry leader or from an ecosystem outside of insurance.

A value network is the context within which a firm establishes a cost structure and operating processes. Oftentimes a single company may take on multiple roles, so it’s helpful to think of a value network as a collection of activities. In insurance, the value network can be represented as:

  1. Marketing related activities which involve building the brand and selling policies via agents, brokers or through direct channels such as the internet
  2. Service related activities which involve customer service, administration of premium and claims settlement for the insured
  3. Infrastructure related activities which involve product development and packaging, risk analysis and underwriting, and investment management and reinsurance

According to a recent study, 61% of InsurTech entrants are providing service or infrastructure solutions to incumbents like improved claims management or risk profiling capability. 30% are acting as brokers and agents, using innovative ways to find new customers. Both of these types of InsurTech entrants help incumbent carriers improve their profitability by reducing administrative costs, improving risk underwriting, or improving distribution.

The remaining 9% of new entrants are licensed carriers who write premium and retain risk. Yet these entrants still have to rely on a reinsurer to cap unusual losses. Most of the licensed InsurTech carriers either get acquired by a primary insurer or link to an existing value network of a reinsurer. In either case, these new carriers are unlikely to revamp the industry because they just improve the profitability of the existing value network(s).

Some innovations require a brand new value network in order to thrive, and we believe this may be necessary in insurance. To understand when a new value network is vital to an innovation’s success, let us study the case of Honda motorcycle.

When Honda began its disruption of the North American motorcycle market with its small, cheap Super Cub motorized bicycle, the fact that it could not get Harley-Davidson motorcycle dealers to carry Honda products was good news. The salespeople in the dealerships would have been able to make higher commissions selling Harleys instead of Hondas, so they’d understandably focus their efforts on Harleys. The existing value network was incentivized to continue business as usual, churning out higher-end motorcycles for greater profits.

To get around these “gatekeepers,” Honda had to create a new value network to deliver its innovative bikes to the North American market. Its business took off when it began to distribute through power equipment and sporting goods retailers, because it gave those retailers a chance to migrate toward higher-margin product lines.

Likewise, in insurance, there are gatekeepers who may cause roadblocks for innovative companies. For example, the top 10 insurance brokers in the U.S. control the vast majority of premium written. So, innovative insurance offerings may be hindered by an inability to gain distribution through the existing value network. And this challenge isn’t limited just to entrants—industry leaders looking to break the mold by launching innovative offerings can also be stifled by peers or even themselves in the existing value network.

To that end, we see two ways in which new value networks may be created.

Scenario #1: Incumbent insurance carriers could themselves create new value networks by capitalizing on new types of data

Given the need to turn a profit in an industry plagued by poor performance, incumbent insurers may be able to create new growth businesses based around technologies that collect data. For instance, in auto insurance driving data from sensors installed in the car may enable carriers to more accurately assess risk and minimize losses as they learn about their clients’ driving behavior and monetize that data through emerging value networks seeking to capitalize on consumer behaviors and trends. By leveraging these technology solutions, incumbent carriers will not only experience new growth through the sale of these value-added services, but they’ll also be better positioned to profile and price risks.

Scenario #2: Non-insurance players could integrate insurance premium into their products and services

An alternative scenario is that non-insurance players bundle insurance into their offerings, effectively bypassing primary insurers altogether. This is most likely to occur with risks that can be most easily modeled and priced like auto insurance. For instance, an automotive company may partner with roadside assistance companies to provide the mandatory or “third party liability” portion of a car buyer’s auto insurance (Volvo USA is already doing this).

Notable barriers are certainly capital and regulation. However capital requirements may be met through alternative capital sources like insurance linked securities. Regulatory compliance may be managed through RegTech services, an emerging cohort of technology services that helps companies adhere to changing regulation.

It will be interesting to watch the future for insurers unfold. Will incumbents successfully create multiple new value networks and compete directly with tech? Or will non-insurance players eat into their share of insurance by integrating services into their products and services? Regardless of how things shape out, one thing is clear: these new networks will breathe new life into the insurance industry. By breaking with the status quo, the industry may be better equipped to tackle the many challenges it faces today, including providing customers with peace of mind.

As a visiting research fellow at the Institute, Parthasarathi is researching the implications of emerging technologies such as blockchain, artificial intelligence, and virtual reality on business models. He is visiting the Institute from Tata Consultancy Services (TCS), where he worked in corporate research and development for seven years as an innovation evangelist.