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Examining the growth of ecosystems and the trend’s implications for insurers.

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Insurance companies have the opportunity to create new sources of revenue by rethinking their traditional roles and adopting an ecosystem mind-set.

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 multiple participants (producers and consumers) to connect to it, interact with one another, and create and exchange value. The most successful companies in the digital era, including Alibaba, Amazon, and Facebook, were all designed on platform business models.

An ecosystem, meanwhile, is an interconnected set of services that allows users to fulfill a variety of needs in one integrated experience. Consumer ecosystems currently emerging around the world tend to concentrate on needs such as travel, healthcare, or housing.

Business-to-business (B2B) ecosystems generally revolve around a certain decision maker—for example, marketing and sales, operations, procurement, or finance professionals.

To succeed in ecosystems, insurers will have to take a hard look at their traditional roles and business models and evaluate opportunities to partner with players in other industries. They must also understand how ecosystems will shift value pools and change the nature of risk.

Adopting an ecosystem mind-set will be an arduous journey for many insurers, but those that understand this evolving landscape can take the first steps to creating new revenue sources.

Ecosystems typically provide three types of value:

  1. They act as gateways, reducing friction as customers switch across related services.
  2. They harness network effects.
  3. They integrate data across a series of services.

Insurers in digital ecosystems

For insurers, shifting from an industry to an ecosystem perspective requires a significant change in how they define their role in the economy. Currently, insurers act primarily as risk aggregators.

They have a passive and limited relationship with customers, which increases their exposure to disintermediation, disaggregation, commoditization, and invisibility. If insurers were to lose their distribution and customer relationships, they would be left with few options to reinvent their business models.

Adopting an ecosystem perspective—reevaluating the traditional business model and considering partnerships with players both within and outside the industry—could reinvigorate insurers’ digital strategies.

Role of the new insurer

Insurers can play multiple roles in an ecosystem. For example, the personal-mobility ecosystem offers a range of opportunities to expand into areas such as vehicle purchase and maintenance management, ride-sharing, carpooling, traffic management, vehicle connectivity, and parking. As a result, insurers have a range of opportunities to expand their roles.

Partnerships will be critical

As ecosystems enable and necessitate a focus on risk prevention, forging partnerships will be a critical priority. For reference, executives need look no further than their recent efforts to partner with Internet of Things (IoT) providers, which they pursued in an effort to offset their disadvantage from a lack of customer touchpoints and engagement. Insurers should embrace a similar mind-set to assemble fruitful alliances.

The industry has already seen a number of high-profile partnerships between established insurers and tech and analytics start-ups.

Insurers have been targeted in all parts of the value chain by insurtech companies as much as by other industry players. Although these newcomers are populating every part of the value chain (Exhibit 2), their focus to date has been on the more easily accessible slivers of the industry—mainly distribution, particularly in property and casualty insurance.

Since innovation from insurtechs actually aims to contribute to the insurance value chain (except distribution for large players), insurance executives should view potential partnerships with insurtechs as positive.

The rise of ecosystems involves multiple firms coming together in symbiotic relationships to achieve greater value for themselves than they could capture alone.

Shifting value pools

Although digital leaders have made incursions into different industries based on their ability to own the technology pathway, other focused efforts could offer openings for insurers as they evaluate ecosystems.

Ownership of the customer relationship

Distribution has been the target of disruption primarily because digital natives have successfully demonstrated that ownership of the customer relationship is a stepping-stone to an ecosystem play. The core of the insurance industry is highly regulated, which gives insurers a competitive advantage due to their regulatory skills and huge capital requirements.

Risk engine and analytics

Insurers have strong analytics capabilities compared with their peers in other industries; analytics has been a core component of the traditional insurance business model. Digital ecosystems offer traditional insurers valuable opportunities to use analytics to evolve and expand their business models.

They could facilitate the evolution of existing insurance businesses by advancing risk assessments, for instance, by considering safety measures such as connected-home solutions. Insurers can also use analytics to enhance pricing and risk-accumulation control.

As different businesses generate growing volumes of data, risk management will continue to demand increasing amounts of data modeling and advanced analytics. Because of their established analytics capabilities, insurers in new digital ecosystems can provide analytics-as-a-service to other industry players.

This offering could include predictive-modeling and optimization services that enable faster and smarter business decisions across all industries within the entire analytics value chain.

Changing nature of risks and new markets

The risks that need to be insured are changing significantly for two primary reasons. First, uncertainty will be reduced as tracking and predictive technology improves.

For example, connected cars have fewer accidents and breakdowns, predictive maintenance reduces business interruptions, and wearables help ensure a healthier lifestyle. Second, substantial changes in risk distribution and actuarial models (for example, due to an increasing number of long-tail risks) are further aggravating this trend.

A resulting demutualization could shift the focus to predicting and managing the risks of individuals rather than communities. As a consequence, premiums can be expected to come under pressure, reducing what have traditionally been rather stable revenue streams.

Although the inclusion of new addressable markets could offset lost revenues, insurers must take a more holistic view of the developments and opportunities available.

Ecosystem players have the capability to scale at a far faster rate than companies could in the past. Ecosystem strategy can facilitate the expansion of insurers into adjacent and completely new areas of business by using complementary services.

Options include offering innovative hybrid solutions in insurance and services offerings with partners from other industries (for example, predictive maintenance, smart parking, and preventive care). Insurers could also enhance their risk engineering by harnessing insights based on sensor data from other industries.

Last, insurers could draw on their analytics expertise to offer proprietary data and analytics solutions to third parties—for instance, through data marketplaces.

Devising and implementing an ecosystem strategy will require sustained dedication and commitment. Executives aiming to kick-start an ecosystem strategy should focus on a couple of areas. First, not all of the total value at stake is going to be up for grabs for all players in the distribution economy.

Therefore, all players must identify and prioritize the ecosystems in which they can play and win. Second, an ecosystem strategy requires strong performance across multiple dimensions, including culture, technology, and customer engagement.

Insurers should determine the critical capabilities that will act as differentiating factors in an ecosystem and assess whether their organization has sufficient horsepower in these areas.

A huge opportunity for insurers who can react fast

The rise of ecosystems is simultaneously one of the greatest opportunities, biggest threats, and most daunting challenges of digitization. Not all industries and players are equally well suited to pursue this opportunity, and companies that dive in might not be able to capture all of the value at stake.

Large, at-scale insurers are somewhat better suited to evolve into orchestrators. However, this wave of ecosystems does provide a chance for some players to realign priorities and initiatives and leapfrog the competition in the process.

Becoming an ecosystem player requires far more than technology investments alone. Instead, insurers must take a 360-degree view of the organization across multiple dimensions to ensure that their investments align with the requirements. Answering several key questions can help shape the discussion:

Strategy: Where does ecosystem strategy rank in the organization’s priorities?

Customers: How does the organization’s customer ownership, access, and engagement look?

Partnerships: Does the organization have a strong network of partners that will allow it to extend beyond traditional industry boundaries?

Technology: Is technology seen as the fuel for the organization’s strategy?

Talent: Is the organization positioned to attract and retain the most innovative and entrepreneurial talent?

Culture: Are customers at the center of everything that the organization does?

The rise of ecosystems is the natural result of digitization. Organizations with adaptability at the core of their design and strategy will be poised to use it to their advantage. Evolution has taught us that it is not the strongest species that survive, but the ones most responsive to change.

 

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Insurance

How Much Life Insurance Should an Individual Carry?

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Very few people enjoy thinking about the inevitability of death. Fewer yet take pleasure in the possibility of an accidental or early death. If there are people who depend on you and your income, however, it is one of those unpleasant things you have to consider. In this narrative, I’ll approach the topic of life insurance in two ways: First I’ll point out some of the misconceptions, then I’ll look at how to evaluate how much and what type of life insurance one needs.

 

Does Everyone Need Life Insurance?

Buying life insurance doesn’t make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer’s fees, etc.), then it is an unnecessary cost for you. If you do have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), you still do not need life insurance.

However, if you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, you likely will need insurance to ensure your dependents are looked after if something happens to you.

 

Insurance and Age

One of the biggest myths aggressive life insurance agents perpetuate is “insurance is harder to qualify for as you age, so you better get it while you are young.” To put it bluntly, insurance companies make money by betting on how long you will live. When you are young, your premiums will be relatively cheap. If you die suddenly and the company has to pay out, you were a bad bet. Fortunately, many young people survive to old age, paying higher and higher premiums as they age (the increased risk of them dying makes the odds less attractive).

Insurance is cheaper when you are young, but it is no easier to qualify for. The simple fact is insurance companies will want higher premiums to cover the odds on older people, but it is a very rare that an insurance company will refuse coverage to someone who is willing to pay the premiums for their risk category. That said, get insurance if you need it and when you need it. Do not get insurance because you are scared of not qualifying later in life.

 

Is Life Insurance an Investment?

Many people see life insurance as an investment, but when compared to other investment vehicles, referring to insurance as an investment simply doesn’t make sense. Certain types of life insurance are touted as vehicles for saving or investing money for retirement, commonly called cash-value policies. These are insurance policies in which you build up a pool of capital that gains interest. This interest accrues because the insurance company is investing that money for their benefit, much like banks, and are paying you a percentage for the use of your money.

However, if you were to take the money from the forced savings program and invest it in an index fund, you would likely see much better returns. For people who lack the discipline to invest regularly, a cash-value insurance policy may be beneficial. A disciplined investor, on the other hand, has no need for scraps from an insurance company’s table.

 

Cash Value vs. Term

Insurance companies love cash-value policies and promote them heavily by giving commissions to agents who sell these policies. If you try to surrender the policy (demand your savings portion back and cancel the insurance), an insurance company will often suggest that you take a loan from your own savings to continue paying the premiums. Although this may seem like a simple solution, keep in mind that if the loan is not paid off by the time of your death, it will be subtracted from the death benefit.

Term insurance is insurance pure and simple. You buy a policy that pays out a set amount if you die during the period to which the policy applies. If you don’t die, you get nothing (don’t be disappointed, you are alive after all). The purpose of this insurance is to hold you over until you can become self-insured by your assets. Unfortunately, not all term insurance is equally desirable. Regardless of the specifics of a person’s situation (lifestyle, income, debts), most people are best served by renewable and convertible term insurance policies. They offer just as much coverage, are cheaper than cash-value policies, and, with the advent of internet comparisons driving down premiums for comparable policies, you can purchase them at competitive rates.

The renewable clause in a term life insurance policy allows you to renew your policy at a set rate without undergoing a medical exam. This means if an insured person is diagnosed with a fatal disease just as the term runs out, he or she will be able to renew the policy at a competitive rate despite the fact the insurance company is certain to have to pay a death benefit at some point.

The convertible insurance policy provides the option to change the face value of the policy into a cash-value policy offered by the insurer in case you reach 65 years of age and are not financially secured enough to go without insurance. Even if you are planning on having enough retirement income, it is better to be safe, and the premium is usually quite inexpensive.

 

Evaluating Your Insurance Needs

A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:

  • How much debt you have. All of your debts must be paid off in full, including car loans, mortgages, credit cards, loans, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).
  • Income replacement. One of the biggest factors for life insurance is for income replacement. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% (if you do not trust your dependents to invest, you can appoint a trustee or select a financial planner and calculate his or her cost as part of the payout). Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Once you determine the required face value of your insurance policy, you can start shopping around. There are many online insurance estimators that can help you determine how much insurance you will need.
  • Insuring others. Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. The death of a child, while emotionally devastating, does not constitute a financial loss because children cost money to raise. The death of an income-earning spouse, however, does create a situation with both emotional and financial losses. In that case, follow the income replacement calculation we went through earlier with his or her income. This also goes for any business partners with which you have a financial relationship (for example, shared responsibility for mortgage payments on a co-owned property).

 

Other Ways to Calculate Your Needs

Most insurance companies say a reasonable amount for life insurance is six to 10 times the amount of annual salary. Another way of calculating the amount of life insurance needed is to multiply your annual salary by the number of years left until retirement. For example, if a 40-year-old man currently makes $20,000 a year, under this approach, the man will need $400,000 (20 years x $20,000) in life insurance.

The standard of living method is based on the amount of money the survivors would need to maintain their standard of living if the insured died. You take that amount and multiply it by 20. The thought process here is the survivors can take a 5% withdrawal from the death benefit each year (which is equivalent to the standard of living amount) while investing the death benefit principal and earning 5% or better.

 

Alternatives to Life Insurance

If you are getting life insurance purely to cover debts and have no dependents, there is another way to go about it. Lending institutions have seen the profits of insurance companies and are getting in on the act. Credit card companies and banks offer insurance deductibles on your outstanding balances. Often this amounts to a few dollars a month and in the case of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, make sure to subtract that debt from any calculations you are making for life insurance—being doubly insured is a needless cost.

 

 

 

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