Insurance is about to get very personal!

The way in which consumers consume insurance is changing. Insurance distribution (to use the traditional vernacular) is about to undergo a 180 degree about turn.

From a “sold, not bought” view of insurance, distribution has run its course for many lines of business. Customer expectations have changed and the inside-out approach to building silo-ed, exclusion-filled, fixed term products just doesn’t cut it anymore. Incumbents beware!

For this month’s InsurTech Insights for The Digital Insurer,  I looked at new means of distribution that will fundamentally change the insurance supply chain. Where insurance will be supplied through ecosystems and as part of a wider proposition and not a solo purchase bought in isolation. 

“Your fat margin is my opportunity”

This is the Jeff Bezos quote that defines the era of digital disruption. Where tech savvy entrepreneurs find new ways to “disrupt” established business models. Using digital and mobile to streamline out-of-date business models oozing with fat margin.

He wasn't, but he could have been talking exclusively about insurance!

The insurance supply chain is typically seen as a linear model. Insurance distribution starts with brokers, ARs and MGAs at the front end. Carriers underwrite risk and decide whether to pay a claim. And the buck stops with the reinsurers. Front to back, risk and premium moves from one intermediary to another, each one taking their share. It’s a model that hasn’t really changed over the last century.

The combination of many intermediaries in the supply chain, each one taking margin, together with inefficiency and friction that goes with it has fuelled the rise in InsurTech. When you add in the shift in agency to the consumer (because of the likes of Bezos and how he built Amazon by putting the customer absolutely and unequivocally at the centre), it is easy to see why insurance is a juicy target for digital disruptors.

Redefining the Insurance Supply Chain

As the insurance industry catches up and embraces the Fourth Industrial Revolution, we will see a redefining of the insurance supply chain. It has started already.

The insurance business model will evolve from the traditional linear model where risk and premium moves front to back in a bi-directional flow. In its place we see new supply chain models for insurance distribution at the front end with efficient management of risk capital at the back.

Of course, as a highly regulated industry, one of the biggest drags on change will be the legislature. But just as regulators and law-makers made adjustments to accommodate the Fintech models for alternative finance, they will surely follow suit in InsurTech.

Although seeing today's press that the law makers have ruled against Uber in London it goes to show that disruptive innovation is never plain sailing!

In this new model for insurance distribution, the supply-chain will co-exist with brands and within ecosystems (often) unconnected to insurance.

Customers will be rated as individuals and not members of a risk pool. A greater share of premiums collected will be set aside to pay claims. Instead of sales commissions, there will be platform fees. Time to Pay Claims will become the KPI of choice for customers to rate their insurance experience. And as convenience replaces price as the key buying criteria, the way that insurance is distributed will change.

As my good friend Spiros Margaris puts it in this excellent article called We Were Kings (or When Things Went to Zero);

The real and biggest threat to incumbents will likely originate from tech giants, such as Amazon, Apple and Facebook, and other big non-tech companies that have large customer and employee bases. These organizations will use their customers and employees to sell banking and insurance solutions, and the big financial institutions will become at best dumb pipes.

Automation is the key for insurance distribution

In the new insurance supply-chain, there will be fewer hand-offs, less friction, less premium erosion. Just like Amazon, the customer will be absolutely and unequivocally at the centre of the ecosystem.

Trusted brands will own the customer relationship. These brands know the meaning of loyalty and will value these relationships highly. They also understand how expensive it is to build them in the first place, and how easily that can be lost.

Amazon-like levels of service will become the norm for both insurance distribution and paying out claims. Automation is the key to making it very, very easy to do business.

Of course, someone will need to manage risk capital. This will be the domain of the reinsurers, with the role of the carrier becoming superfluous.

The reinsurers know better than anyone how to manage large pools of risk capital. They’ve been carrying the insurance industry for long enough. In the new insurance supply-chain, firms like Sherpa will own and manage the customer experience.

The Sherpa model is to charge a value based annual fee to a customer in return for meeting all their insurance needs. This removes sales commission from the equation.

The founder and CEO of Sherpa, Chris Kaye, explained to me, “Today, insurers pay sales commission for selling the insurance products that the insurers have created.

“We are turning that on its head and creating a membership organization that is unequivocally on the consumer’s side. No more commissions for products you don’t need, instead a flat fee to assure the risks that matter most are protected.”

How does this work in the Sherpa model?

On behalf of their customers, Sherpa go straight to Gen Re and buy insurance wholesale. It means that Sherpa can distribute personalised insurance products to customers whilst packaging up parcels of risk at the back end.

This innovative approach is one example of how customer brands will be able to fine tune, personalise and price based on a whole set of new and different risk criteria.

So what? Well today, insurers create the products that they want to sell. Brokers do their best to find the best match of their customer’s needs to the fixed insurance products on offer. But, what it means is that customers end up paying for cover they don’t need. And they don’t always get the specific cover that they do want.

This approach allows the brand, in this case Sherpa, to personalise the cover specific to the individual whilst packaging up modules of risk for the expert managers of risk capital.

Go west to see the future of insurance distribution

China’s ZhongAn epitomises everything that is InsurTech. They are a 100% digital tech business with around 1500 employees. Over half of them are developers and none are in sales. They also happen to provide insurance, and a lot of it!

In around 4 years of trading, ZhongAn have written over 8 billion policies to over 580 million customers. They sold 200m policies in one day alone last November during China’s annual online shopping fest!

The thing that makes ZhongAn the darling of InsurTech is that 99% of all operations are automated. Quote, policy, premium collection and claim settlement are all automated. Which is why they can process 18,000 policies a second.

But it’s ZhongAn’s approach to premium pricing and insurance distribution that really set them apart. First, their insurance business is built around retail ecosystems. Their products are embedded in the customer buying process through retail sites. They make it super easy to buy insurance, simply by checking a box.

Next, their insurance is micro-priced, based on a personalised premium, unique to the individual customer.

ZhongAn do not use the law of large numbers to price risk premium. Instead, ZhongAn use big data for dynamic and personalised pricing. There is no single price list for insurance products. Customers are risk assessed individually and priced accordingly.

For ZhongAn, it is more important to build customer loyalty (aka stickiness) through speed and convenience.

ZhongAn use ecosystems to distribute insurance

A question I get asked a lot is; “are these InsurTechs an insurance firm or a tech firm?” It’s a great question, just like asking if AirBnB is a hotel chain or if Uber is a taxi firm.

Of course, there are many old diehard’s of the insurance industry that rail against that question and revert back the old mantra of “an insurance company is an insurance company”.

But the reality is that, in this rapidly changing digital world, the fundamental nature of providing a financial safety net is changing too.

The old “insurance product”, designed by insurance companies to suit their own needs and aimed at customer segments that never claim, is on its way out.

In ZhongAn’s case, they are a tech company first. Which is why they are able to take a fresh approach to insurance, unhampered by old ways of thinking.

When it comes to insurance distribution, ZhongAn’s business model is based on supplying insurance cover through an ecosystem partnership model. They don’t pay broker fees or have to support a huge cost of sale. Instead, they have partnered with leading players who already have a customer base across many different market sectors.

This allows ZhongAn to directly embed insurance products into an online experience, making it really easy for the customer. Customers simply check a box to include the insurance cover. The premium is dynamically, real-time micro-priced, unique to the customer at that moment in time. This is all about improving customer experience.

Insurance distribution is going to change, it’s just a matter of time

For many, it is hard to imagine a world where insurance could be any different to how it has been for the past 100 years. To them I say, cast your mind back to 1995.

It was only 20 odd years ago that people were talking about this thing called the WorldWideWeb and everything could change. A lot of it sounded science fiction and the stuff of fantasists at the time. Even so, nobody could have possibly imagined the full extent to which the world would change. And, over such a short timespan. All because of this thing called the Internet.

Just as the supply-chains of many industries have changed in the Internet era, so will that of the insurance industry. It’s no long a question of “if”, but “when”.

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The author, Rick Huckstep, is Chairman of The Digital Insurer. He is a keynote speaker on InsurTech and an investor and advisor to technology start-ups and a global top 10 InsurTech influencer on social media. #InsurTech9