The business of insurance is being disrupted, rapidly and from all sides. The competitiveness of traditional carriers is under severe threat. The companies that will survive and thrive will be those that can adapt to meet the challenges – and turn them to their advantage. We spoke to Ravi Malhotra, managing director in Accenture Strategy, about the steps carriers should take to remain relevant and successful.
Q: What is the nature of the disruption that’s threatening insurers?
First of all, it’s important to understand that while disruption is affecting all insurers, it’s only threatening some of them – those that are unable or unwilling to adapt. For the others – and we call them the Digital Transformers – it represents a great opportunity to reinvent their business and operating models, find new sources of value for their customers, and in the process lay a new foundation for their long-term competitiveness and growth.
The disruption is coming mainly in the form of changing customer expectations and behavior, technological innovation, and the advent of new competitors, many of them from outside the industry. The first of these is obviously about the things consumers want from their insurance companies. But it goes further than that. It’s also about the things consumers want in their lives, and whether insurers can change their traditional role to meet these new requirements.
Technology has always been a great disruptor; the difference now is that it’s coming at us faster than ever. What’s more, it’s the enabler that is allowing many non-insurance companies to muscle their way into the industry, by means of powerful platforms, or sophisticated customer analytics, or novel sets of offerings or channel capabilities, to name just a few.
Q: How is this disruption affecting the traditional insurance business model?
In the first place, it’s causing traditional profit pools to shrink. The demand for some forms of insurance is diminishing, and we expect this to continue. Full-service auto insurance is a prime example. As innovations like ride-sharing and driverless cars become commonplace, car ownership will diminish – and along with it, the number of insurance customers. We can also anticipate that there will be fewer, less severe accidents, which will cause premiums to decline. Telematics will reduce the premiums for the growing number of car owners who opt for this service. And then finally, direct online selling and aggregators are shifting the market towards a cheaper, more commoditized, no-frills product.
We project that insurers stand to lose between 15 and 30 percent of their revenue and between 25 and 50 percent of their profits, due to the erosion of their traditional markets combined with changing risk curves. But while this might make many insurers uncomfortable, it’s not necessarily bad news – if it forces them to explore the flip side of the coin: the opportunities that are emerging to improve the combined ratio, to pursue new premium growth, to develop new (perhaps hybrid) products that address new risks, and to exploit entirely new sources of revenue such as providing data utility services.
Q: What do insurers need to do to counter the threats and exploit the opportunities of disruption?
You’ve got the question dead right, because they do need both a defensive and an offensive strategy. So the first priority is to protect their territory, their customer base, against competitors who are sneaking in from the sidelines. This might be traditional insurers with appealing new offerings, or newcomers such as telcos, retailers, online giants with massive brands, or small start-ups with devastating new business and operating models. To keep them at bay, insurers need to use technology to improve their customer experience and at the same time lower their costs.
Then the second step is to enhance the product offering to give customers something different and better. Insurers need to find new ways of providing value to customers. In the past they would examine their existing products and services in the hope of coming up with improvements. This won’t cut it anymore. True customer-centricity demands that they step outside of their product portfolio, outside of their organization, and look at the world through the customer’s eyes. By freeing themselves of the constraints of their legacy, in all its manifestations, insurers stand the best chance of learning what their most valued – and potentially lucrative – products can be.
Finally, when they have learned what consumers value, insurers need to decide what role they will play in providing it. Because there’s a good chance they won’t be able to do it on their own. For many, the answer lies in creating, or joining, an ecosystem of related providers. This will present the traditional insurer with tough decisions: Should they control the ecosystem or play a supporting role? How should revenue be shared and disbursed? Should their products be branded or white-labelled? It’s a long list. But there’s little doubt that a network of supportive partners stands a better chance of meeting consumers’ needs and creating new revenue streams than an isolated carrier locked in a legacy mindset.
Q: So where should insurers start?
The first step is to ensure you have a good understanding of where your business is positioned: what are the forces that are transforming your particular marketplace, how vulnerable are you – and your competitors – to the disruption that’s taking place, and what opportunities are emerging that suit your business mix? Then when you know exactly what’s confronting you, you can develop an effective strategy that combines defense, to protect your existing business, and offense, to explore and test new propositions and business models for your future growth.
It’s critical that this new strategy is customer-focused – that you develop it with the customer’s perspective of what represents true value, even if that means looking beyond traditional products and services and your current operating and business models. And it’s inevitable that your strategy will be digital, that it will extend across the enterprise value chain, and will address your short, medium and long-term needs. It will identify gaps in capability, and will evaluate different approaches for plugging them – which may involve partnering, or buying exciting new start-ups, or piloting new ventures.
Key to all of this will be the recognition that the playing field has changed, and that it’s necessary to play the game in a different way. For many, this may be the hardest part.