Building Resilient Insuretech Business
Insurance is one of the oldest intermediate industries in the world and has been remarkably resilient to technological disruptions of all sorts over the years.
However, traditional insurers are seeing growing competition from digital players. The pandemic and customer-behavior-changes are pushing the industry to become digital much more quickly, and one of the big levers is building their own businesses.
Recently, more incumbent insurers are considering building digital businesses. As such, how to approach building digital insurance businesses has become relevant and what insurers can learn from their counterparts, both within and outside the insurance industry.
The world’s now changing pretty fast for the sector, driven largely by new technology and data. This makes it possible to transform not just the core underwriting part of the industry but also how policies are distributed, how claims are managed, and how you serve clients and customers in new ways that could lower risk, increase engagement, and lower your cost to serve.
For now, it is clear that insurers need to rethink and build new businesses to take advantage of the current digitization era. However, it is equally important to first and foremost know why and when a traditional insurer, both life and P&C [property and casualty], should build a new business.
James Bilefield, an expert in digital strategy and transformations, said the investor community is getting pretty excited about insurtech, a little bit of a variation on fintech.
I saw some numbers from Willis Towers Watson that said in 2020 annual insurtech funding reached an all-time high of just over $7 billion in US across 377 deals. So that’s the highest dollar amount, I think, in any year ever. And I think incumbents, which are facing into these headwinds, the key question for them is how quickly they adapt to what seems to be inexorable market changes, and really to decide what size of share their organizations will have in the next generation of the insurance industry.
Moreover, Pia Schlüter, a digital and analytics transformations expert as well as a partner in McKinsey’s Düsseldorf office, underscored that market changes, that’s, changing customer behavior, increasing availability of data and technology are the reasons why insurers are increasingly building new businesses.
It’s a way for them to protect themselves from disruption to their core business. It’s a way to meet these shifts in customer behavior and expectations. Most importantly, it’s also a way for them to open up completely new revenue streams.
We’ve done a bit of research and found that opening up new revenue streams was actually a key reason in over 60 percent of all business builds. Insurance also knows that if they don’t start building these new digital businesses themselves, there will be one highly funded insurtech somewhere that will do it, and that will eventually take away their customers and eat up their profit pools.
Moreover, James Bilefield argued that competition is coming from many sides to incumbent insurance players, and the digital attackers tend to get the headlines and maybe a lot of the investment dollars.
But don’t underestimate the power of big tech. The existing big tech platforms within this competitive space have very deep, data-rich customer relationships, and a number of them have already moved into financial services and are either looking to— or are already starting to—expand that footprint into the world of insurance.
Besides, James Bilefield indicated that even amongst the digital attackers themselves, differences exist. He explained that some are simply focused on established market segments, basically using new technology to innovate just a part of that value proposition. Additionally, some are betting on segments that are entirely new— for example, gig workers.
Also, some digital attackers innovate mostly on the distribution side rather than the product side whilst others build components to help incumbent insurance with their own tech stack around data collection, claims, handling fraud detection, et cetera, which can be a big unlock of optimized performance for a large existing organization.
So there are many different flavors among the digital attackers, and I think it’s important to differentiate between them as you start to think about the right strategy for your organization.
Challenges to building new businesses
Ideally, the reason for building these new businesses is to serve a strategy. Currently, there is a strategic shift in the industry in the last decade as businesses are getting a lot smarter and providing a more holistic set of experiences for the customer beyond just paying a claim. It’s becoming more and more clear that the industry is using digital business building to help fulfill, thus, that goal.
Nevertheless, it’s really hard to build these things. McKinsey’s research has shown just about 8 to 10 percent success rate for new businesses to scale with a satisfied management team. The majority of these don’t get there.
For digital attackers or digital businesses, making the right decision on where to build something and where to buy or partner on something is really crucial. This is because these decisions do not only allow them to speed up and lower their investments, but they also allow them to improve their value proposition. This is especially relevant in the types of ecosystems or platform plays that are springing up lately.
Moreover, to overcome these challenges to building new businesses, James Bilefield highlighted the power of partnerships for incumbents, which allow them to integrate great new technologies, which they’ve struggled to build themselves. Those technologies can also help add functionality quickly to serving customers and potentially broaden a range of products, sometimes geographies as well.
Also, James Bilefield stated that new businesses can also leverage the kind of incumbent advantages around data and analytics as well as leverage their access to capital and customers, often under a really trusted brand. Frankly, those are often assets that digital attackers don’t bring usually to the table, James Bilefield said.
We’ve seen some really good examples of smart partnerships between digital attackers and incumbent financial-services businesses elsewhere in the kind of wider financial-services sector. And we’ve even seen some of the digital attackers use partnership effectively to broaden their range of products at speed. They’re partnering with other digital attackers to grow faster. And so it’s not just the incumbents who are partnering with these folks; they partner with each other to gain scale and escape velocity, which they need to succeed.
From Pia Schlüter’s perspective, leveraging the best technology, using agile ways of working, and laying emphasis on customer acquisition could also help address these challenges.
I would see three critical success factors for incumbents trying to build digital businesses. And that, for me, would be number one: talent and resources; number two: data and analytics; And number three: thinking about how to transfer some of the learnings, or assets they are building in the digital business, to their core business.
Lessons from other industries
There are probably some other industries that have vaulted ahead faster than the insurance industry has and probably, most sectors could be dealing with a similar set of challenges. Are there lessons players in the insurance sector can pick from those sectors?
James Bilefield agreed that there are absolutely lessons to learn from industries which are a little bit further along the disruption curve than perhaps insurance has been. Some of the traditional news-broadcast groups have built pretty significant and profitable digital businesses, which are now often larger than their traditional analog businesses.
According to James Bilefield, some large retail brands and luxury-market players have also done a good job because they’ve been able to compete effectively against digital attackers using that incumbent or set of incumbent advantages they naturally have.
Moreover, James Bilefield noted something that is not unique to successful digital businesses, but has certainly been accentuated by digital businesses, is obsessive focus on the end user, and involving the end user as early as you possibly dare with your plans.
What are some practical ideas companies can do to get started?
It’s nice to talk about the theory of big digital ideas and new businesses, but very practically, as a company, whether an insurance company or a company outside the industry that’s looking to enter with a new business build, you will need certain things to help you start.
James Bilefield believes it’s helpful to focus the minds of the organization, rolling forward three or five years and imagining that one of the deep-pocketed big tech companies had moved into your market, you will need to ask yourself several questions.
How are you digitizing those? What across your organization are you able to automate today, tomorrow, or never? Where do you best deploy the amazing human capital you have in the organization? How are you using data in your organization? How are you using it to make better decisions and to innovate? And to what extent are you shifting your use of data from kind of looking in the rearview mirror to starting to understand and to use live data, and then using that live data to make some smarter decisions?
Then, put that against the fact that the world of technology will not stand still in the next three years. So, then, are those plans still fit for purpose with accelerating trends of technology disruption that we see around the world and the billions of dollars being invested in insurtech that was referenced earlier? And if not, what as an organization do you need to build, and how fast?
Sustainability in building new businesses
Sustainability is a big theme nowadays, and it’s quite important for corporations to have impact broadly, not just shareholder impact. It’s very important to explore what insurance industry executives and teams can do to ensure sustainability when building new businesses.
James Bilefield, thus, stated that sustainability is shifting to a posture where it’s actually about potential competitive advantage in the future alongside doing the right thing and bringing the organization and other stakeholders with you as you lead. This is more so, because the pandemic has highlighted the powerful role of business in solving some of the wider environmental, social, and corporate governance issues.