During the internet boom of the late 1990s, I heard a term that stuck with me: "the Las Vegas business model." The term was used by a Harvard Business School professor on a panel I moderated -- and he said the results aren't pretty for any competitor caught in the cross-hairs.
The Las Vegas business model involves someone giving away a product -- YOUR product, if you're unlucky -- to sell more of something else. The professor called this the Las Vegas model because he said it's tough to sell run-of-the-mill hotel rooms or meals in Las Vegas when casinos will give away rooms and food to people deemed likely to leave enough money behind at the gambling tables.
The same problem could hit at least some parts of insurance, especially as embedded insurance gains steam. Apple doesn't need to make money off warranties, for instance; it just needs to keep your devices running so you can keep buying things through the Apple Store -- and Apple can keep collecting its tens of billions of dollars of commission each year. Many car makers have started offering insurance, but they're mainly in the business of selling cars. What if they start bundling insurance at a steep discount to help dealers persuade prospective customers to buy their car and not a competitor's?
This could get ugly.
The Las Vegas business model springs to mind because of a smart piece Tom Bobrowski published with us last week: "Tech Giants Aim to Eliminate Insurance Costs." The summary warns: "Technology companies view insurance as a cost to eliminate, not a business opportunity to pursue."
He walks through some examples, including how Tesla is trying to minimize insurance costs as a way of bringing down the total cost of ownership so it can sell more vehicles. He also looks at cybersecurity, where huge software vendors such as Microsoft are doing their utmost to reduce vulnerability and reduce the need for insurance.
I'd add the liability insurance Amazon offers. Amazon has every incentive to make it as cheap and convenient as possible for sellers to operate on its site -- and keep paying those hefty commissions to Amazon. Amazon doesn't even have to earn a profit on that insurance, so good luck to any insurer trying to compete.
Tom says tech giants have four major advantages over insurance companies:
- Superior data, which comes from the ability to continuously monitor behavior, as Tesla can do with its cars and their drivers
- Direct customer relationships, which eliminate distribution costs that constitute 15-25% of premiums
- Technology infrastructure that can automate claims, detect fraud and model risks
- Brand trust: Customers already trust them with payments, personal data, and critical services
For me, the first two are much more formidable than the last two. Tech giants can have a major advantage on data. So can other manufacturers, such as the big car companies, given all the sensors now being built into products. And any company that can embed insurance into the process of selling something else takes a huge chunk out of customer acquisition costs.
As for the last two, I'd say insurers have extensive technology, too -- even if there are always complaints that it's dated. Insurers also have the sort of experience with processing claims, detecting fraud and modeling risks that requires all sorts of nuance and that tech companies would have to develop from scratch. Tech giants do seem to have brands deemed more trustworthy than those of insurers, in general, but that gap would surely narrow if the tech companies get into insurance in a big way, because that would put them into the business of denying lots of claims.
Despite the fears at the start of the insurtech wave a decade ago that insurance would be "Amazoned," as retail commerce had been, tech giants have mostly stayed away. Google tried car insurance but found it could sell leads for more than it would earn by selling insurance. Amazon is experimenting with telehealth and pharmacy services but has shied away from any major moves in healthcare.
In general, tech companies didn't want to commit the capital or have to deal with the extensive, state-by-state regulation that insurers face. Those reservations will continue, I believe. Besides, many giants from outside the industry are talking, at least for now, about insurance as a business opportunity, not as a cost to be eliminated. General Motors has said it hopes to generate $6 billion of insurance revenue by 2030, and Elon Musk has said insurance could account for 30-40% of Tesla's business.
But I think Tom is right when he says the Las Vegas business model represents a major trend, even if different parts of the insurance industry will be affected at different rates and even if it will take, in his estimation, five to 20-plus years to play out.
An ugly trend for insurers, but one we should all keep in mind.
Cheers,
Paul