The world we live in and the assets we own are becoming more digitized. As a result, customers demand greater control of the services they choose. This means that every business needs to re-evaluate its approach to embrace genuine customer-centric business models. InsurTech, as a niche subset of FinTech, has already delivered some unique value to the insurance sector learning from its FinTech big brother.
As insurers continuously seek new ways to grow and scale profitably and differentiate, they also can learn from these ventures. And indeed, within a market climate that requires accelerated execution, insurance businesses failing to align to the new normal and adapt their business model to fast-moving customer expectations may be blindsided by emerging technological advancements and miss some unique opportunities.
Today’s insurance customer wants unique experiences.
Previously, insurance customers were a “passive” group. They would pick from an existing set of insurance products with a limited and difficult-to-understand scope of options. The customer as an individual buyer didn’t matter truly due to existing distribution limitations or product-led approaches. The constrictions of insurance company functionality, combined with an understanding of the customer’s expectation, shaped a distinct model for the insurance industry, which is evident today.
However, the insurance customer has undergone a complete metamorphosis with the current digital revolution and other well-known societal changes. They have become more present, demanding, and sometimes resistant to proposed offers, and as a result, the insurance business models require some level of transformation and reinvention to recognize this.
To understand this shift, we need to look at two defined subsets of the population who will be, dominating markets for the years to come: the elderly and millennials.
The Government Office for Science/Foresight Report Future of an Ageing Population lays out the startling reality of the U.K.’s aging population. They predict that, by 2040, 1 in 7 people will be over the age of 75. An aging population dramatically changes the nation’s health with increased ill-health, chronic conditions, cognitive impairments, and disability. The mushrooming of new demands from the elderly requires a radically different insurance model, more caring and more digitized.
In the U.S., rising costs in long-term care threaten to drive retirees into financial ruin, shares David Kwon in an article discussing ways to digitize experiences for the Elderly to mitigate emerging risks.
Alongside this sits millennials, who are the long-term insurance consumers of today and tomorrow. Combined with Gen Z, Millennials will yield around $350 billion (£264 billion) of spending power in the U.S. alone – about $150 billion (£113 billion) by Gen Z and around $200 billion (£151 billion) by millennials – based on research by McKinsey & Co. And by 2020, Gen Z will account for 40% of global consumers. The other 28% will be the millennials.
Yet, the millennial generation of 23-39-year-olds isn’t at all homogenous in the way we have characterized previous generations before them. As the Global WebIndex Audience Report 2019 states, “millennials are not a uniform consumer segment.” They are extraordinarily diverse.
Where the commonalities of millennials come together is that they are mobile-first multi-device individuals. They want simple, convenient, and consistent experiences. They are selective, personalized spenders while operating within a socially networked and socially conscious arena. They expect digitized and friction-free services to be mirrored across every part of their lives, including insurance.
Popular expressions state that millennials have “killed” many things, including life insurance, shares Matt A.V. Chaban in an article written for IBM. This is because of the complexity, confusion, and inconvenience surrounding life policies, even though millennials are financially worse off than previous generations. The latter means that premiums and deposits for life insurance products have declined over a six-year period.
When we align both the elderly and millennials (including Gen Z), we can see a landscape that forces a change within the business and operational designs and why friction-free and digitized customer experiences are at the core of those new designs. Delivering those emerging experiences requires personalized, agile, and disruptive capabilities often provided by partners who master a clear understanding of visible vs. embedded services that all digitally driven individuals want.
Adaptive business models meet new insurance customer’s needs
The main issue is that the current insurance model, broadly speaking, doesn’t reflect the required model needed to fulfill a new state of play, which may be why some market valuations are affected as investors challenge existing directions from pricing, product design, and distribution to the allocation of resources favoring nimbler NewTech players.
This applies to insurance too.
Panzarino and Hatami starkly point out that there will only be two types of survivors: “new entrants that have made it and the incumbents that have adapted.” Staying stagnant isn’t an option.
A customer-centric business model which does things differently is what’s needed. Such a model must allow and enable hyper-personalized and dynamic experiences. It needs to deploy solutions fast and in a way that can scale. Central to this include technologies ranging from open hybrid cloud architectures combined with augmented AI-led process automation to evaluate risks speedily and accelerate the access to the data required to build differentiated capabilities.
Shaping the future insurance growth model learning from leading FinTechs
In Reinventing Banking and Finance, Panzarino and Hatami have defined a terminology called ‘FinTech Tribes.’ The terminology refers to market leaders who have developed digital business models to defeat some of the most complex businesses to support targeted customer segments. The digital platforms on which these tribes operate mean reinventing old fashion approaches to disrupt the existing nature of “how things are done: this to create new models that will work more effectively for the customer of the future.”
InsurTech, as a smaller subset of FinTech, is already learning immense lessons from these FinTech tribes. Indeed, we too have tribes; similar to those identified within broader FinTech examples. And insurers could take heed from this insight. Studying FinTech & InsurTech tribes can expose guidelines that are most relevant to the disruptive customer-centric insurer.
Lens on FinTech versus InsurTech tribes
Understanding different tribes involve understanding their core goal and objectives. These groups of disruptors have emerged and grown because they want to solve a well-defined and curated challenge that they often have felt and experienced. Understanding their purpose and drivers enables us to know why they are shaped the way they are.
Tribe 1: FinTech bank challengers vs. InsurTech insurance challengers
Perhaps the easiest to evaluate are those challengers who have emerged precisely because they are frustrated by the lack of financial innovation. In short, they want to deliver unique customer experiences and do this better than traditional players.
Typically, this tribe is headed up by individuals who aren’t new to the sector. They are born from frustrations within the industry they serve. They use their core understanding and knowledge and combine it with digital capabilities to do things seamlessly and differently. Examples include Monzo, N26, and Starling Bank.
In InsurTech, we call these innovative companies either insurance challengers or pure digital players. Their business models are disruptive but fundamentally challenging the premise of the old-school approach. Excellent examples include Hippo, Lemonade, Root Insurance, WeFox, and ZhongAn.
InsurTech challenger, Lemonade demonstrates its digital and experience-centric inclinations clearly via its slogan, “Instant everything. Great prices. Big heart.” Highly focused on a well-defined segment called the “HENRY” or high earner not rich yet, Lemonade’s customer base accounts for at least ¼ of NYC’s rental millennials and is expanding in Germany, Netherlands, and France. Unlike traditional insurance models, it utilizes highly sophisticated behavioral economics and AI algorithms to evaluate seamlessly particular customer needs to premium price effectively and uses geo-location information in a way that wouldn’t be possible without an entirely digitized approach.
Tribe 2: Fintech payments innovators vs. InsurTech value chain innovators
Obviously, within finance, payments are a vital concern for business success. Payment solutions lagged when it came to the dot-com revolution. Unsurprisingly, the likes of PayPal and Stripe combined tech, finance, and value-added services to create innovative answers to online transactions and several tech giants, such as Apple Pay, to ease mobile usage and reduce friction at the payment stage.
In InsurTech, this tribe served the entire insurance value chain and underwriting, servicing, and claims management. We saw new approaches to algorithmic underwriting within the underwriting space, using A.I. to augment the precision and accuracy of a range of choices made. Good examples include Akur8, Concirrus, Cytora, and Praedicat. Toss, for instance, combines both an app for consumer payments and insurance management services, while Snapsheet and CLARA Analytics focus on minimizing claims and litigation costs. And Bdeo is extending its virtual intelligence offer to the realm from motor insurance to property insurance claims intelligence.
Leading European, Generali, has been advancing its A.I. practices by combining internal competencies and external technology capability supplied by leading tech providers and the InsurTech ecosystem. A growth venture with which I talked in recent months, Akur8, has created a highly effective insurance pricing process, which is “fast, accurate and safe.” Akur8’s model utilizes A.I. to automate pricing, making it ten times faster, and more accurately predictive. Akur8 argues that 80% of the rate-making process can be automated through white-box modeling while retaining control and transparency and satisfying global regulators’ needs. In March 2021, Generali France adopted Akur8’s capabilities to enhance its pricing processes by automating risk and demand modeling using its transparent A.I. proprietary technology.
Tribe 3: FinTech champions of the unbanked vs. InsurTech champions of the underserved
As highlighted above, mobile-first customers and digital natives are not confined only to developed nations. As both finance and insurance look to the customer of the future, companies are highly aware of the emergence of such profiles across geographies. Incumbents have largely failed to reach these customers. But here comes the champions.
The mission of champions is to bring the benefits of digital transformation in banking and insurance to those unable to access them. Within FinTech companies, we see this with Vodafone’s m-Pesa, Nubank, and Paytm using mobile reach to extend banking in developing nations.
Within InsurTech companies, the angle may look slightly different as we combine our learnings to serve underserved market segments within developed and developing markets. Within geographies, the SME and gig economy workers benefited from focused digital platforms from Next Insurance, Nimbla, Slice Labs, Tapoly, and Zeguro. Others are looking at digitizing a series of more complex activities to build friction-free engagements to serve unique audiences, such as the underwriters seeking precision in their work with solutions such as Concirrus or Praedicat.
A great example of a business dedicated to the challenged generations is Canopy Rent, a venture focused on providing the rental millennial with the ability to plan both their rental health and financial health transparently. The company’s vision is to put more money in the renter’s pocket and accelerate their journey to homeownership by giving them the tool they need to make better choices. By building an ecosystem of trusted partners, the Canopy team supports its customers as effectively as possible while bringing together the best of the EnergyTech, FinTech, InsurTech, and PropTech worlds.
Tribe 4: FinTech social banks vs. community-driven InsurTechs
With the rise of social media’s power, particularly within millennials’ hands, a distinct tribe of social players has emerged within finance and insurance. Social media creates awareness by entering several social networks across the geo-political landscape.
Within FinTech, this means marrying financial services with social networks and infrastructure. One example is WeChat, the Chinese social media platform, and its introduction of WeChat Pay. Within WeChat, almost everything can happen in one place, including making payments and responding to government requests. Another example is Ant Group, born from Alibaba, PingAn, and Tencent, which started rooted in payments but now extends to loans, investments, and insurance to serve a particular underserved segment, the Chinese small business owner.
In InsurTech, the social or community angle lends itself towards a purpose and a social cause, leveraging tech and social platforms crucial to attract millennials and Gen Zs. Let’s highlight that ZhongAn and Lemonade take their social responsibility seriously to engage with underserved market segments and use social media effectively as part of their strategies.
As a well-known InsurTech within this Tribe, Laka has grown a robust platform for avid cyclists. In 5 years, the team has developed a proposition supported by its collective riders and communities to flip insurance upside down. Instead of charging a fixed premium, Laka calculates a rider’s monthly contributions – up to a max capped amount – based on the collective’s claims. Technology is a core part of the proposition, as well as value-added services relevant to the community.
I can see that a fundamental focus of this tribe is its consideration for sustainable development goals through sustainability-led strategies that embed circular economic thinking and other emotional triggers to shape disruptors that respond to societal concerns.
Tribe 5: FinTech infrastructure builders vs. InsurTech infrastructure builders
The last FinTech tribe converges well with current InsurTech developments in Panzarino and Hatami’s evaluation. This tribe drives outside-in change by integrating a variety of emerging technologies and tools as seamless platforms. This tribe is about re-engineering the way things are done. It is characterized by digital innovation, combining artificial intelligence, robots, and APIs to automate complex tasks. They approach legacy infrastructures strategically, reworking or wrapping around to fulfill the end customer’s needs.
Within FinTech companies, these tribes have launched a range of banking and P2P platforms (e.g., SoFi and Lufax), including crowdfunders and global currencies such as Bitcoin and Libra distributed ledger champions.
In InsurTech, this tribe is behind the concept of InsurTech as a Service. OneConnect insurance solutions use insurance technology as a service platform for fast settlement, loss adjustment, and authentication. It creates intelligent services within typically unresponsive industries, giving smaller companies access to the advanced technologies they need. They have done so in finance, insurance, and wealth management.
Another example is Kasko. Kasko uses technological solutions to enable insurers to create and launch their tech-rooted services cost-effectively and quickly. The latter allows insurance companies to develop digital insurance products by accessing the very best of technology. The latter would include IoT, artificial intelligence, the Cloud, and other critical capabilities required to shape unique insurance models.
These tribes aren’t exclusive. There are more. And many are moving to hybrid models. As we write this article, it’s probably fair to say that new tribes are emerging right now to target unique sizable and underserved needs. Building resilient and replicable frameworks to evaluate and assess these new entrants is undoubtedly part of the equation.
Are those great innovators friends or foes? Well, I would think of a balance between the two. Particularly for those that doubt the advantages and the opportunity offered through collaboration and ecosystem development.
Roadmap to Success: guidelines to build the insurance business models of the future
Five fundamental guidelines emerge from our understanding of FinTech & InsurTech business models. We must consider those to evaluate, evolve and transform the basic premises behind the traditional insurance models:
1. Future insurance business models should be highly customer-driven first
As highlighted by many of the examples shared, whether FinTech or InsurTech, each grouping focuses on a niche segment. This means that embracing a customer-centric mindset is paramount. The customer must sit at the center of an insurer’s business model, predominantly with a clear understanding of their most personal and emotional needs, among others, whether elderly and millennial. As expectations are sharply evolving, users demand seamless interactions across various event stages. For instance, digital usage must deliver fast and friction-free responses. Additionally, hyper-personalized digital approaches allow for the refinement of unique processes and value-added services.
2. Future insurance business models should be framed with emerging tech capabilities in mind
Even with the concept of change linking inside-out to outside-in thinking, the tribes’ explanation highlights how developed business models utilize digital capability and functionality to enable transparency, speed, and effectiveness, even with the concept of change linking inside-out to outside-in thinking. In InsurTech, we highlighted the concept of InsurTech as a Service. Several insurers are building targeted capabilities to enhance customer experience at every step of the process. IFFCO Tokio General Insurance Company Limited achieved customer satisfaction and efficiencies by using machine learning algorithms to shape new customer-centric services in unique ways. Machine learning A.I. allows businesses to truly harness the power of big data with cloud technology to enable big and small players to benefit from cutting-edge technologies. This ensures that customer-centric processes come to life through the use of consistently applied iterative design thinking techniques.
3. Future insurance business models must be adaptable, flexible, and agile
We can say one thing with certainty: market demands will continue to be uncertain and evolve faster than we predicted in the past. Insurers must choose their optimum digitization path to become more flexible and nimbler to adapt quickly and effectively to the external drivers and their internal priorities. Insurance players that can adopt new methodologies, thinking, and capabilities gain room for growth and the ability to scale with ease as opportunities arise. I address this point when talking with Holly Cummins from the IBM Garage.
4. Future insurance business models must draw on emerging innovation practices
The insurance field is known for tight regulation and highly structured approaches. Covid19 has made many leaders refocus their attention on day-to-day activities rather than long-term growth activities. The new insurance business model must reflect the insurance character’s regulatory and structural inherent elements while considering the value-created by emerging practices, particularly in the venturing space. For instance, within the sphere of risk mitigation, the best methods today involve design sprinting, advanced modeling techniques, and visual intelligence within the legal and claims areas. All these methods are entering many departments to accelerate the efficiency and the accuracy of resolutions, utilizing advanced algorithms to provide insight and address issues in near-real-time.
5. Future insurance business models must embed a new execution culture and an entrepreneurial mindset
The insurance industry’s entire culture and mindset need to be altered to one rooted in trust, transparency, fairness, and social good. This means moving away from only looking at gross written premiums and product-centric approaches to consider venture capital-led evaluation metrics and customer-centric design. Many of the successful new entrants that have appeared in recent years have rooted an entrepreneurial/ owner-driven mindset within their strategy and execution frameworks, enabling them, in some cases, to take a seat alongside financial institutions and tech giants. This concept’s tendrils reach right into practical execution, with a need for the right talent in the right place, with an eye on future developments, ethics, and social responsibility.
Building the insurance business models of the future
We have to be honest with ourselves. We must consciously want to support the design of the future’s emerging and evolving business models to handle and control current seismic shifts. We need to accept that the financial services industry innovators and disruptors are here to stay and challenge conventional thinking. As we evaluate or talk to growth ventures to help them partner or find investment opportunities, we also evaluate ways to facilitate the deployment of NewTech-led capabilities with insurers. Curiosity and humility enable us to welcome and absorb the NewTechs that are teaching us lots with everything we do and share the wisdom with those prepared to engage in what I recently called “an execution jump.”
Solutions like IBM’s Hybrid Cloud and A.I. capability have already enabled the evolution of established business models into more relevant ones while considering ways to deliver ethical, secure, compliant, and scalable business activities. Companies such as Allianz, Aviva, Ergo, Generali, KBC Group, and Thelem deploy such capabilities to shape assets that help scale at speed.
As we stressed, the overall process is not about technology alone; it is about the business model and the customer it seeks to serve. As stated within the Harvard Business Review article “The Transformative Business Model”:
The very business models of insurance certainly need to evolve, transform and scale in such ways. Few are taking steps to make this happen. Still, we all look forward to seeing the impact of such activity.
This article was first published on LinkedIn. You can find it here.
The future of insurance is now > http://ibm.co/3u8oQky
Thanking the great team at IBM for the opportunity to write this article utilizing some of their insurance case studies.