It is said that extinction is the rule and survival is the exception!
But when it comes to the dinosaurs of the insurance industry, you can’t help but wonder about what it is that makes them so resistant to extinction, even though nothing about them has changed for about a century. Have they adapted so exceptionally well or did modern day economics fail to penetrate them through technology, process, or people? This also deepens the curiosity when you notice that the average age of top 45 insurance companies on the Fortune 500 list is more than 95 years! This fact is not only baffling, but absolutely contradicts the statement made by Dominic Barton of McKinsey & Co, who mentioned that the average age of the S&P 500 reduced to 18 years from 90 years in 1935.
To understand this exception, we need to examine the insurance industry from a Product, Underwriting and Distribution perspective.
- From a Product perspective, ‘insurance’ or an ‘insurance policy’ is a contract between the insurer and the insured, where the insurer promises to cover the losses if the insured pays the required premium and meets certain other basic provisions. Sounds like a simple logic. But when you ask an insurance customer about the kind of product they are buying, you will be surprised to learn the wide spectrum of understanding including the services and facilities, and in case of a more sophisticated customer, this understanding also involves asset erosion and risk management. This shows that product awareness is the current trend that insurance customers are increasingly adapting to.
- Insurers often do a good job calculating the value of the ‘contract’ or the ‘promise’ so that they never have to pay more than the cumulative assumed risk for a particular risk portfolio. This method of risk calculation (actuarial) has been their success strategy for over a century. Insurance industry has been well disciplined about Underwriting the assumed risk, which is the core of its business and a great reason for the extraordinary persistence. But with increasingly catastrophic natural calamities and other disasters of significant magnitude, this method employed by the insurance industry is being tested.
- Another equally important segment of the value chain is Distribution. It is generally agreed that no business can survive merely by creating a value, unless it delivers on services. For insurance sector, delivery and service involves distribution and claims. So far, the insurance industry has been well insulated from the impact to its organic and inorganic growth models and market penetrations. But as the saying goes, what takes you here will not take you there. There has been a major technological shift that has challenged one of the core competencies of these large carriers – the distribution channel With digital delivery and high adoption from consumers, the future doesn’t look promising for the insurers unless they react to digitization needs. They need to learn to self-destruct their ancient approaches and recreate a model that will cater to the mood and expectation of the increasingly engaged and empowered customer, that not only demands value, but also the delivery and servicing of that value.
Digitization-The impending solution
Digitization is like God where everyone has their own interpretation of either the existence or nonexistence. There is no issue with individual interpretation and building strategy around it, what matters is how that strategy is executed to deliver results. Digital distribution has multiple components but the focus needs to be on the customer and the value added services delivered to the customer. Shashank Singh articulated this very well in his article ‘Digital Distribution = Insurance Big Bet’, where he stresses the need for building integrated digital distribution platforms from personalized profiles, products, communication, sales and support to cater to customers. There is a common need for both consumers and carriers to come together to this digital ecosystem, as Damon Levine mentions in his article Insurance Management (Why you are missing its essential Benefits.)
Future and beyond
With seamless integration of all these components, customer expectations would match what is being delivered by the big gigs like Amazon, Google or Apple. One of the fundamental change this will bring to consumer behavior is the understanding that insurance is no longer a financial instrument that is sold but a commodity that can be purchased. The customer also feels empowered with this change as delivery becomes a choice and switching becomes easier. This also makes the customer feel in control and in the driving seat, eliminating the need to interact or negotiate with an insurance agent. Several Insurtechs are developing innovative solutions for customer engagement, support, service and delivery. There is an exhaustive list of such industry pioneers curated by several organizations including – Coverager and Insurance Thought leadership.