January 29, 2016
Meeting a Litmus Test for Disruption
by Denise Garth
Disruption in insurance is a question of when, not if. But it's also still a question of how -- how will the industry pass the litmus test?
The insurance industry has been talking a lot about disruption over the past couple of years. But, as with many things, insurance is a late arriver to the disruption party. Clayton Christensen helped kick off an earnest discussion of the topic back in 1997 with his first book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. In his 2003 book, The Innovator’s Solution: Creating and Sustaining Successful Growth, he proposed this question as part of a litmus test for the disruptive potential of ideas:
“Is there a large population of people who historically have not had the money, equipment or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them?”
While Christensen has recently gotten some flak for being too dogmatic in his criteria for what constitutes a truly “disruptive innovation” (perhaps succumbing to his own definition of disruption?), the question actually describes very well how insurance has historically operated. It is a complex, mysterious product that has forced consumers to rely on the expertise of an agent or company rep to buy, understand and use it.
The increasing transparency and empowerment afforded by data, the Internet and digital technologies have helped level the playing field. Yet the majority of insurance buyers still rely on a live person, usually an agent, to make sure they’ve made the right decisions and to close the sale.
The ever-growing field of companies and investors eyeing the insurance industry sees this issue as one of the greatest opportunities for disrupting the industry’s incumbents. Some companies still take comfort in the fact that the insurance industry has difficult and unique barriers to entry, chiefly its complex regulatory environment and huge capital requirements to cover losses. But the size of the opportunity — $1.1 trillion in net written premiums in the U.S. in 2014, according to SNL Financial – is an incentive that is spurring a lot of creativity, innovation and investment that will help overcome these barriers. It’s a question of when, not if.
But it’s also still a question of how. How will the insurance business model change to at least meet the litmus test described by Christensen? It’s clear that changes are unfolding because of ambitious outsiders as well as creative and forward-thinking industry insiders.
So what should insurers do? How should they respond? Majesco’s newly released research report (based on a survey conducted in late 2015 with its customers), 2016 Strategic Priorities: Impactful Pace of Change, reveals that many insurers are monitoring potentially disruptive technology and business trends, but, unfortunately, few are actively preparing for the changes coming. Four overall themes emerged from the survey responses:
- First, there is a clear recognition of the shift to the customer being in control and the importance of being customer-driven.
- Second, there are significant barriers and limitations on current business capabilities that must be overcome to survive — let alone to grow and compete — starting with transformation of legacy systems that were built around products rather than customers.
- Third, there are potential blind spots around customer expectations, technology and competition that are lurking around the corner of the not-too-distant future, creating forceful disruption.
- Fourth, the pace and impact of change have intensified the need for agility, innovation and speed.
While business transformation progress is being made, significant work is necessary to compete in a customer-driven age. At the same time, the world is changing rapidly, and new expectations, risks, technologies, competitors and innovations threaten to significantly disrupt the insurance business landscape. For those unprepared, the change could be devastating.
The insurance industry is recognizing more and more that it is a target for potential disruption, because consumers are demanding – and getting – more transparency and responsiveness from company after company. Changes are being driven from both inside and outside the insurance industry along several different dimensions like technology, products, new players and partnerships. There are formidable hurdles for new entrants, but the incentive is huge for those who can remove the complexity of insurance and increase the value proposition for customers.
Insurance companies need to move beyond monitoring these developments to actively determining how the future will look. To prepare and respond, insurance companies must adroitly do two things simultaneously: modernize and optimize the current business while reinventing it for the future. It’s like changing the tire on a car while you’re driving at full speed down the freeway. Those companies that can do this will transcend merely surviving in an increasingly competitive industry and become the new leaders of a re-imagined insurance business.
Read more about how companies view these and other strategic priorities in Majesco’s research report, 2016 Strategic Priorities: Impactful Pace of Change.