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Jul 2020

Life Insurance Disruption - Sources of disruption

Source: Asia Insurance Review | Jun 2016

CEOs should be worried about disruptors from all directions. In this article, Ms Jenny Sutton of Galileo Platforms introduces a new series on Disruption in Life Insurance and discusses the perception and reality of the disruption threat and opportunities.
Ask any life insurance CEO what keeps them awake at night, and they will say something about disruption. 
   Many fear that the megatech companies like Google, Amazon, Facebook or Alibaba, will add insurance to their existing portfolio of services offerings. And with their intimate knowledge of the customer, they would be able to offer potential customers very personalised solutions. 
   Others fear startups – and that they will be “Ubered” or disintermediated. Less of a concern, but still invading their sleepless thoughts are traditional competitors – will one of them reinvent themselves and redefine the industry?
Assumptions resulting in constraints 
These CEOs and their boards should be worried. Insurance still operates one of the oldest business models in the world – personal sales approach, processes heavily laden with paper and data accumulated from hundreds of years locked in archaic legacy systems. 
   From a sales perspective, catalogues, department stores, shopping malls, and more recently, online stores, have replaced door to door salespeople for almost all categories of purchases. Yet life insurers continue to justify deploying a personal, and expensive sales process, because, they tell themselves “insurance is sold and not bought”. 
   The assumptions that insurers are in the business of selling something that the buyer does not want and that the only way to sell is in person, are limiting constraints that insurers have imposed on themselves.
Barriers to change not insurmountable
Despite the acknowledged need for a change in the model, to date, the number of insurance disruptors is surprisingly very low, particularly when compared to the very large number of startups disrupting parts of the banking model.
   For now, CEOs may take comfort from the fact that disrupting the insurance industry is perhaps not as easy as disrupting the taxi or hotel industry. Key barriers generally cited are the capital requirements and the regulatory compliance burden. While these are indeed very real considerations, these barriers are not insurmountable.
CEOs breathed a collective sigh of relief, when, as of 23 March 2016, Google discontinued their GoogleCompare aggregator/lead generator service. Failure to engage the larger insurers, and the state-by-state licensing requirements were cited as reasons. 
   A key challenge that Google faced was that once they passed the lead on to the insurer, the sales process typically followed the traditional pen and paper approach. This was not the customer experience that Google wanted to be associated with. Because of this poor experience, and the resulting low conversion rate, incremental revenue to Google was low and probably did not offset the potential loss of insurance advertising revenue from Google’s core pay-per-click advertising offering. 
   But it is too soon to write off this threat – rather, expect that when the megatechs enter the insurance space, they will insist on taking control of a much bigger portion of the sales journey, positioning themselves as an alternative end-to-end solution provider, not just a lead generator.
While anyone who uses a taxi, can probably imagine how the taxi business works, and on the back of the envelope could do some quick calculations of the economics of the industry, it is much harder for the layman, even if they are themselves a buyer of insurance, to understand enough about the insurance economic model to be able to identify where opportunities lie. 
   Everyone knows that there is a huge opportunity to improve the customer experience, and many a dinner party discussion has been devoted to how customer unfriendly insurance companies are. 
   But it is difficult to simply layer a new customer experience on existing business, and few outsiders know enough to tackle building a new life insurance company from the ground up. 
   Still, in Q1 2016, the record was set for early stage deal activity in the insurance sector, with 135 startups at various stages of funding and launch preparation, and aggregate funding exceeding US$3.5 billion to date.
   Startups however cannot all be considered competitors – in fact many startups are looking for insurance companies to partner and collaborate with, in order to access underserved or unserved markets, and to leverage existing capital, skills and infrastructure. 
   So defensive walls should not automatically be built against startups – each should be carefully evaluated for its potential to deliver new and different opportunities to the insurer.
Industry insiders should be in a better position to understand the assumptions embedded in the existing models, and leave their companies to build a better insurance business. But few have. 
   The founders of Lemonade, and a few other startups, do boast insurance industry veterans on their management teams. But these are the exception, not the rule. This may be due to the conservative nature of the industry, and the people in it, who are unwilling to take on the uncertainty of a startup.
   Or it may be because many insurers have provided an outlet for innovation by starting their own incubators or innovation centres. 
   AIA’s EDGE LAB in Singapore aims to find innovative ways to address evolving healthcare challenges; Aviva’s Digital Garage’s mandate is to launch digital products and services; Manulife’s LOFT houses resources for coming up with new ideas and building creative solutions and MetLife’s Lumen Lab is focused on data analytics to improve claims experience. 
   At the same time, some have also created private equity funds to invest in or partner with startups, such as AIA who has partnered with NEST to fund accelerator programmes for startups and AXA Digital Ventures which seeds investments, sometimes with exclusivity rights, to Fintech companies.
   But according to KPMG, insurers’ innovation efforts may be “overly-focused on incremental, operational innovation rather than more strategic, market-shaping innovation”, with just 6% of respondents to their 2015 survey saying that “their growth strategy over the next two years focused on offering ‘wholly new’ products and services to existing or new customer segments.” 
   Innovation still seems to be an inside-out process and is too focused on gaining internal efficiencies and incremental changes to existing products and services. Few companies are taking an industry level view and asking themselves how the life insurance industry could be structured differently than it is today.
   The competitors to watch are those that are able to successfully collaborate with creative startups, or organisations that bring new capabilities, particularly in customer experience design, technology and social media. 
   This requires an approach to organisation design, investments, risks and partnerships that most insurers simply do not have today. In these companies, “Alternative Distribution” will no longer be an afterthought, but will have prominence at all levels as “Strategic Distribution”.
Watch out for the thieves in the night
CEOs should be worried about disruptors from all directions. 
   As the WEF Forum’s 2015 report on The Future of Financial Services notes, new forms of competition should be expected across an increasingly disaggregated value chain. 
   It is unlikely that a single threat can be identified and defended against. Instead expect that specialised players will each focus on discrete markets or aspects of the value chain, to which insurers will have to respond concurrently. This requires complex scenario planning and formidable agility that few insurers are capable of today. 
   CEOs and their boards will need to decide their strategy for leading disruption and/or responding to potential disruptors. While there are many possible strategic approaches, insurers must be clear on their disruptor strategy and optimise their limited resources if they want to defend their market positions.
Ms Jenny Sutton is Co-Founder of Galileo Platforms. She has worked with and for insurance companies in the areas of strategy, technology, operations and distribution on four continents over her 30-year career.
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