Tag Archives: amazon

Moving Beyond ‘Greed Is Good’

Last month marked the 50th anniversary of Milton Friedman’s defining essay on the role of the corporation, which concluded that “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”

That conclusion has been taken to such extremes — think, “Greed is good,” the signature line from the movie “Wall Street” — that a backlash has been developing. I think the insurance industry can support what might be thought of as a “beyond greed” movement, and even ride it. Doing so would help our public image, while benefiting the customer and — dare I say it? — perhaps even increasing industry profits.

Now, there’s lots of power to Friedman’s argument. Otherwise, it wouldn’t have guided business for so long. Businesses need to generate profits to keep investing and improving in ways that benefit us, the customers — think of all the things that Amazon has been able to deliver cheaply and quickly to you since the start of the pandemic because of Jeff Bezos’ ferocious investments in his business. (Who knew I even needed eight sets of chopsticks, an air fryer and 63 plants?) Profits also provide feedback that help businesses get better at serving us. If a company is generating lots of earnings, the market is telling the company that it’s doing well. If not, the company needs to try something different.

My old friend Andy Kessler notes in a column in the Wall Street Journal this week that Friedman specified that a company focusing solely on profits must “stay within the rules of the game, which is to say, engage in open and free competition without deception fraud.” Andy says that, within the right structure, Friedman’s focus on profits produces huge benefits for society.

But cracks have been appearing in that structure. For instance, tobacco companies lied for decades about the dangers of smoking, and oil and gas companies likewise hid what they knew about greenhouse gases and climate change. Profits thrived. But did the companies show social responsibility? Not so much.

More recently, social tensions have heightened about income inequality, which can be traced in part to the laser focus on profits. That focus has certainly pushed the upper end of corporate pay far higher by creating a vicious circle (a virtuous circle if you’re one of the senior executives benefiting). The circle looks something like this:

To encourage the CEO to drive profits and nothing but profits, his or her pay is tied to the stock price — boost earnings, giving the stock price a kick, and you win big. CEOs are then evaluated against a peer group and are slotted into a quartile. They are paid like others in that grouping. Sounds fair enough, right? But who wants to tell the CEO that he or she is below average? In fact, in the chumminess of the board room, CEOs are almost all stars. That means they are paid above average — which raises the average, again and again and again, for each annual review cycle. Add in the potential for big gains on stock options, and the system looks increasingly unfair to anyone not fortunate enough to be at the high (and always getting higher) end of the scale.

Meanwhile, wages have been stagnant in the lower ranks of businesses. In the past, gains from productivity tended to be shared with workers, in the form of higher wages. In recent decades, almost all the gains have been captured by companies feeling pressure to produce maximum profits.

With the sense building that the pursuit of profits and nothing but profits has taken us too far to the greed end of the scale, the Business Roundtable released a statement in August 2019 signed by 181 CEOs “who commit to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”

Such an approach, known as “stakeholder capitalism,” turns out to be easier to articulate than to execute. For instance, Marc Benioff, CEO of Salesforce, who was one of the champions of the Business Roundtable statement, declared a “victory for stakeholder capitalism” in late August when he reported quarterly sales exceeding $5 billion — then announced the next day that he was cutting 1,000 jobs. He argued that the cuts weren’t inconsistent with a pledge to benefit all stakeholders, but the 1,000 people losing their jobs surely felt differently.

A study looking at all the companies whose CEOs signed the “stakeholder capitalism” statement found, a year later, that they hadn’t followed through. I’m not especially surprised. You may value your employees greatly, but, if you’re Walmart, you’re not going to suddenly start paying clerks $15 or $20 an hour unless you know that your competitors will, too. Otherwise, you’d cede an advantage to them. So, I don’t think much will change until there is some kind of public pledge by all companies to do a series of very specific things for employees, communities, etc. or until government mandates something such as an increase in the minimum wage.

But the sentiment is there. There is a movement afoot to get businesses to look beyond profits and focus on broader issues, and it sounds to me a lot like what insurance is all about: We’re here to help clients reduce their risks and to recover quickly when the inevitable losses occur. We don’t sell widgets; we help people in their time of need. Who better to lead a “beyond greed” approach to business?

Back in the early days of the personal computer, when I was covering technology for the Wall Street Journal, the CEO of a successful software company told me his strategy consisted of trying to spot a parade. He didn’t have to organize the parade. He just had to put on a drum major costume, jump in front of it and lead it somewhere.

The more-than-profits movement seems like a parade that could — or even should — be led by insurers.

My suggestion would be less “stakeholder capitalism” as the starting point and more Peter Drucker. Drucker, the management guru whom I had the privilege of interviewing twice, began with the customer. Rather than the diffuse focus of “stakeholder capitalism” or the harsh emphasis on profits that Friedman advocated, Drucker argued that “the purpose of business is to create and keep a customer.”

That focus on the customer not only fits the historic ethos of the industry but seems to be where we’re heading. I’ve never seen an industry talk so much about the customer experience or the customer journey. And I’ve started to see the industry’s focus shift to what customers really want: to avoid losses, rather than to be reimbursed after they occur. Just in the past couple of weeks, Travelers announced that it was using artificial intelligence to help clients survey their workplaces and spot ergonomic issues that could cause injuries, and CSAA announced a pilot program to provide fire retardant that Californians can spray on brush surrounding their homes as a wildfire approaches. The list could go on.

Focusing on the customer could lead as far as insurers wanted to go into the “stakeholder capitalism” movement, with its emphasis on communities, employees and suppliers, as well as customers and shareholders. After all, clients live in communities that would welcome fewer car accidents, a reduction in home invasions and theft and other benefits that insurers could facilitate. Insurers will invest in employees and relations with suppliers as part of caring for customers. And if Drucker was right — he almost always was — focusing on creating and keeping a customer will make the profits flow, keeping those shareholders happy.

In fact, I’d argue that the industry is at a point where attaching to the hip of the customer could lead in all sorts of interesting directions and new revenue streams. Why just focus on serving a client after a car accident? Why not begin the relationship way upstream, installing a camera that watches both the road and the driver and uses AI to make sure the driver is paying attention as he heads into a known danger spot like a blind intersection? Why not continue the relationship way downstream, helping a client run errands via Uber or Lyft while waiting for a car to be repaired?

When I hear complaints about capitalism, I think of the line concerning democracy that is generally attributed to Winston Churchill, that “democracy is the worst system of government — except for all the others.” I’d agree that capitalism is the worst economic system — except for all the others. Capitalism, while messy, drives an extraordinary amount of innovation and has been the engine driving the progress of civilization for centuries now.

But maybe it can be a little better. And maybe the insurance industry can help lead the way.

Stay safe.

Paul

P.S. Here are the six articles I’d like to highlight from the past week:

A New Boom for Life Insurance?

Life insurance can move past the 250-year-old, risk-focused transaction and become a core component within a life, wealth and health ecosystem.

Keys to Limiting Litigation Liability

Risks associated with GL and AU claims can be managed, even with “social inflation,” “nuclear verdicts” and tough jurisdictions.

How Analytics Can Tame ‘Social Inflation’

Claims data within insurance companies is being increasingly seen as a key asset, not a byproduct of the claims process.

P&C Insurers Shift Course in Pandemic

In 2021, there looks to be a major increase in overall tech spending and a rapid acceleration of digital transformation plans.

Insurtechs’ Role in Transformation

Insurtechs are important for the development of the industry — but as tools. Incumbents must still get the real transformation done.

State of Diversity, Inclusion in Insurance

Organizations that adhere to a rigid hierarchy throw up roadblocks to diversity & inclusion due to preconceived notions.

Should Insurers Use Amazon Model?

I’ve seen many insurance trade press articles or social media posts asking why insurers aren’t using either an Amazon or Netflix business model. The articles or posts mention that Amazon and Netflix are massively successful, are driven by a strong customer focus, have operations throughout the globe and, equally importantly, conduct commerce using web-based mobile apps.

So, should insurers use an Amazon or Netflix business model?

No.

I’ll explain why, and also cover the functional areas within the insurance value web that can be strengthened using aspects of or principles driving the Amazon and Netflix business models, but let’s start at a very high level. Let’s look at: business models, the Amazon business model, the Netflix business model and the insurance industry business model. 

I always keep in mind that the insurance industry is not homogeneous. However, for the purpose of this post, I will illustrate an insurance business model that has applicability – at a high level – to all of the non-health-insurance lines of business. Please excuse my broad brushstrokes of the insurance business model that I visualize.

Business Models

The following is from a post I wrote titled: Business Models, Moats, & Start-ups: An Insurance Analyst Perspective.

There are many descriptions of business models available from a multitude of sources. I’ve created an illustration from an interview that Harvard Business Publishing had in late 2008 with Professor Clayton Christensen discussing “reinventing your business model.”

To paraphrase Professor Christensen’s description:

First, a firm creates a value proposition. The value proposition is defined in a manner to help someone accomplish a “job” (i.e., fulfill a need) affordably, conveniently and effectively. Next, the firm establishes a formula to deliver the value proposition in a profitable manner. Then, the firm identifies the resources it needs (i.e., buildings, equipment, people, products and technology) to support the value proposition (and deliver it profitably). Finally, processes coalesce that are required to support the firm’s value proposition and resources simply and affordably.

Expanded Business Model

For me, this is a reasonable, logical description of a business model before factoring in the forces within a specific industry that will alter the components to align with them.

However, I want to expand on Professor Christensen’s business model components. My expansion (see visual below) encompasses three other major components: activities, technology applications and technologies. 

These three additional components resemble Russian nesting dolls in that processes are composed of several activities. Each activity can be – and usually is – supported by several technology applications, and, in turn, each technology application can be – and usually is – supported by several technologies.

I think of my three additions to Professor Christensen’s description of a business model as an “expanded business model.” 

Firms regardless of industry, whether startups or incumbents, need to consider how the set of additional components enable the company to profitably deliver the value proposition (i.e., help a customer fulfill a need) affordably and simply to the company’s target markets — again, “with regard to the realities of the industry in question.”

For this post, I will not use all of the aspects of the expanded business model to discuss the Amazon, Netflix and insurance industry business models. However, to maintain your sanity and mine, I will discuss the same three elements of the expanded business model (value proposition, profit formula and technology applications) throughout this post.

(I believe that a more extensive discussion encompassing all the components of the expanded model would make sense to write at some point. I’m not sure when I would get to do that.)

Amazon: Industry, Markets and Business Model

In the 2017 letter to shareholders, Jeff Bezos wrote: “One thing I love about customers is that they are divinely discontent. Their expectations are never static: They go up. We didn’t ascend from our hunter-gatherer days by being satisfied. People have a voracious appetite for a better way. And yesterday’s ‘wow’ quickly becomes today’s ‘ordinary.’”

I submit that his company strives to continually provide contentment for his clients in both the consumer and corporate markets that Amazon targets. Whether he succeeds with every initiative, Bezos – based on recorded interviews with him, his letters to shareholders and the stream of new capabilities offered to clients – is driven to continually satisfy people’s voracious appetite by finding a better way for clients to conduct commerce with Amazon. 

Amazon Industry and Markets

Industry Description – NAICS

The U.S. government has categorized Amazon as belonging to:

  • NAICS code 518210: data processing, hosting and related services
  • NAICS code 454110: electronic shopping and mail-order houses. 

Note that on a NAICS two-digit level, code 51 encompasses “information” industries, and code 45 encompasses “retail trade” industries.

During my desk research for this post, at first glance it seems that Amazon employs its products, solutions and services from both industries. However, it is more applicable to state that Amazon learns from and leverages its capabilities in each of its NAICS-coded set of industries to satisfy its clients’ “voracious appetites” in both of its target markets.

Target Markets

The company began its operations in the consumer markets (selling hard-copy books) in 1994, and in 2004 the firm decided to offer AWS’ Simple Queue Service (and in-depth knowledge of maintaining, enhancing and managing that infrastructure) to clients in corporate markets. A Wikipedia entry about AWS states that: “Amazon Web Services was officially re-launched on March 14, 2006, combining the three initial service offerings of Amazon S3 cloud storage, SQS and EC2.” 

Again from Wikipedia: “In 2020, AWS comprised more than 212 services spanning a wide range including computing, storage, networking, database, analytics, application services, deployment, management, mobile, developer tools and tools for the Internet of Things.” 

Four principles guide consumer and corporate markets

Bezos stated in the firm’s 10-K for the fiscal year ended Dec. 31, 2019, that the company seeks “to be Earth’s most customer-centric company.” He wrote that the firm is guided by four principles:

  • customer obsession rather than competitor focus
  • passion for invention
  • commitment to operational excellence
  • long-term thinking.

At the 2012 re:invent Day 2 conference, Bezos said that the firm’s obsession with retail customers was the same as with corporate AWS customers. He said it was necessary to continually:

  • improve the reliability of AWS
  • lower prices for AWS clients
  • innovate faster APIs for AWS clients. 

Constantly lowering costs for customers is part and parcel of the firm’s customer obsession. One major theme that weaves through interviews with Bezos and articles about Amazon is the firm’s drive to answer the question: “How can we generate more revenue from our own infrastructure to lower costs for our (consumer and corporate) customers?”

Summing up Amazon’s consumer market

I think of Amazon as a firm that offers a fusion of physical and digital artifacts, specifically:

  1. purchased physical and digital artifacts, supported by 
  2. a supply chain (encompassing digital and physical artifacts supported by servers, distribution centers and delivery vehicles), which are in turn supported by
  3. Amazon’s technology solutions (including AI applications used to quicken and improve customers’ navigation, search and selection of known and predicted consumer product goods (CPG) and media and entertainment products that they might want to consider for future purchase.

I assume that a description of Amazon’s corporate markets, beyond stating that AWS offers scale-as-a-service, could be crafted in a manner that is similar (and more than likely much tighter) to my summary about Amazon’s consumer markets.

However, whether thinking of Amazon’s offerings to its consumer markets or corporate markets, I consider Amazon.com to be an optimization engine that is continually refined to provide retail and corporate customers with an excellent experience conducting commerce with the firm.

Now, let’s discuss the three selected components of the expanded business model (value proposition, profit formula and technology applications).

Value Proposition

I believe that Amazon has two value propositions: one for consumer markets and one for corporate markets. Both are based on the same foundation of customer obsessiveness.

Value proposition for consumer markets: Provide consumers a panoply of digital and physical distribution channels to purchase products from a growing selection of retail and information goods and services at low prices and deliver quickly.

Value proposition for corporate markets: Provide corporations a secure, scalable cloud services platform offering storage, compute, analytics and other capabilities-as-a-service at low prices.

See also: 7 Business Models of the Future for Insurers  

Profit Formula

Amazon generates revenue from a wide and expanding selection of sources, including:

  • retail (CPG)
  • media and entertainment (including Amazon Prime, a subscription service for consumers)
  • corporate markets (AWS)
  • digital advertising services.

Some of the relatively newer sources of revenue include Amazon’s entry into prescription drugs and groceries (Whole Foods).

Amazon continually strives to find ways to make it easy for its retail consumers to conduct commerce with the firm, not only using mobile apps and the firm’s web site, but also using its voice-responsive Alexa devices and, more lately, shopping at the Amazon Go stores. Amazon is offering its Amazon Go store functionality to other retailers.  

Amazon’s net income in 2019 was $11.59 billion, which was up from $10.07 billion in 2018.

Amazon Flywheels: Consumer and Corporate Markets

The firm accomplishes its mission through its stellar implementation of the flywheel, which Jim Collins described in his 2001 book, “Good to Great.” The flywheel strengthens the retail and corporate client experience while simultaneously lowering the firm’s expenses.

One of the best discussions of the Amazon flywheel is given by Simon Torrance (dated April 9, 2018, on YouTube and titled: “New Growth Playbook – Amazon’s Growth Flywheel”). I am using his visual below (with his permission) with some minor alterations. 

Amazon continually expands the selection of goods and services for customers to choose (which is why it is number 1 in the visual: It drives the flywheel). Doing that increases traffic to Amazon.com. That traffic both drives expanding selection of goods and services and lowers Amazon’s cost structure, which leads to lower prices. And around the flywheel goes. 

But wait a second: Amazon allowed third parties to use Amazon’s infrastructure to offer their own goods and services. Doing this accelerates the speed of the flywheel: increased selection leading to even stronger customer experience and …

Amazon’s implementation of the flywheel also illustrates the firm’s realization that it could leverage knowledge of its own infrastructure by offering that infrastructure (i.e., AWS) to corporations for their use to serve their own clients. Moreover, the visual captures how Amazon bridged the consumer and corporate markets to help their corporate clients, their consumer customers, their Amazon Marketplace participants, IoT developers (in this instance) and, of course, Amazon itself. By introducing its own branded connected IoT physical devices (Alexa, Fire TV Stick), Amazon introduced and accelerated purchases (and the corporate flywheel) that corporations could create and deliver to Amazon’s customers, which strengthens, yet again, Amazon’s experience for consumers.

Technology Applications

(I distinguish between technology and technology applications. For me, AI is a collection of technologies and is not itself a technology application. In this section, I discuss a small selection of technology applications that Amazon uses to strengthen customer experience.)

Amazon constantly strives: to make it easier for consumers to conduct commerce with the firm, to drive down the firm’s costs and to expand the number of retail (CPG) and media and entertainment goods and services that customers might want to purchase. Add all of that to one of the firm’s four principles – its passion for invention – and it is no surprise that Amazon is essentially a CX-driven laboratory that continues to create applications from current and emerging technologies to support the firm’s objectives.

Amazon’s technology applications include:

  • Recommendation engines to suggest products that consumers might want to consider purchasing. The recommendation engines are a quick solution to a customer’s need to navigate Amazon’s vast selection and choose a purchase.
  • Warehouse robots working with humans to quicken the responsibilities of pickers, packagers and stowers.
  • Alexa, the cloud-based, voice-controlled virtual assistant that provides information and, of course, an easy way to purchase goods and services.
  • Amazon mobile apps available on iOS, Android and Windows devices.
  • eReader (e.g., Kindle – offered as a physical device and as an app available on mobile devices) that enables customers to read purchased books (and magazines) and to purchase more books.
  • Amazon Prime Video – a streaming app for movies (licensed and original Amazon content) and television shows available on mobile devices.

Amazon continually leverages what the firm learns using its own capabilities and then refines its operations involving either consumer markets or corporate markets.

AWS and Fulfillment by Amazon (FBA) are two examples of Amazon’s expanding its capabilities and profit footprint. A third example is Amazon’s Ground Station-as-a-Service. This is an offering to satellite/Earth observation/NewSpace operators firms that don’t want to build their own ground stations, want to expand the number and location of ground stations they already have built or want to expand the number and location of ground stations they are getting from their current partners.

Netflix: Industry, Markets and Business Model

Industry Description – NAICS

The U.S. government has categorized Netflix as belonging to NAICS code 515210: cable and other subscription programming and NAICS code 532230: video tape and disc rental: 

  • NAICS 515210 includes: establishments primarily engaged in operating studios and facilities for the broadcasting of programs on a subscription or fee basis.
  • NAICS 532230 includes: establishments primarily engaged in renting prerecorded video tapes and discs for home electronic equipment.

When Netflix began operations in 1997 by offering DVD rental by mail, the appropriate NAICS code would have been 532230. Netflix’ shift from renting DVDs by mail to becoming a subscription-based media firm obscures the reality of constant reinvention that is the firm’s hallmark to support its vision of offering a high-quality customer entertainment experience.

Target Markets

Netflix targets the global consumer market with its offerings of on-demand, subscription-based streaming content.

Netflix has become (according to the firm’s 10-K for 2019) “the world’s leading subscription streaming entertainment service with over 167 million paid streaming memberships in over 190 countries enjoying TV series, documentaries and feature films across a wide variety of genres and languages.” Netflix also has approximately two million customers who still rent and return DVDs by mail.

Netflix creates content in different countries around the world and distributes that content worldwide. Below, the chart shows the average paying memberships growing in the four major regions Netflix operates: U.S. and Canada, EMEA, LATAM and APAC. (Note: APAC excludes China and North Korea.)

Creating compelling content

Founder Reed Hastings says, “Our North Star is how do we do the absolute best content we can to please our customers.” Netflix is all about offering compelling stories to become a destination site for customers’ viewing.

Compelling story-telling is an integral component of who we are as humans (see visual). Our distant ancestors drew pictures on walls letting others know where food was located. At almost the end of the 19th century, Thomas Edison built the first movie studio called The Black Maria. Silent movies ruled the era, including Charlie Chaplin’s “Modern Times.” Much more recently, Netflix created the first Netflix Original web television series, which won seven Primetime Emmy awards, two Golden Globe awards, two Screen Actors Guild award and one Satellite award. Through six seasons, House of Cards won 27 awards. 

Selected Key Dates in Netflix’ History

Obviously, the dates of incorporation and IPO are very important for Netflix (see visual). However, if I had to pick some other major dates on the Netflix timeline, my choices would be the dates:

  • Netflix began streaming (because this initiative redefined the consumer entertainment marketplace to an on-demand (or binging) marketplace)
  • of all the acquisitions and partnerships, of which I show only two in the visual. The acquisitions and partnerships provide Netflix with intellectual property (IP) that the firm can use to create series and movies.

Value Proposition

To attract customers from other activities that take place in what Hastings called the consumer’s “moments of truth,” Netflix created a value proposition to provide on-demand, personalized, streaming entertainment available for viewing on any internet-connected screen for an affordable, no-commitment monthly fee. Did you catch the “no-commitment monthly fee?” Customers can cancel at any time (and come back when they want).

One of Hastings’ guiding principles that drives his company to strengthen and reinvent Netflix is that “time is the real competition.” Not Disney+, not Amazon Prime Video, not Apple TV Plus, not Hulu and not other visual entertainment content but time itself. Time that customers could enjoy by reading a book, taking a walk, going to Starbucks or doing anything in their free time other than watching entertainment on Netflix.

Netflix bolsters the value proposition by allowing members to watch as much as they want, any time, anywhere, on any internet-connected screen. Members can play, pause and resume watching, all without commercials.

Moreover, Netflix puts the member (or customer) center stage by creating metrics based primarily on each customer rather than on the content. From the Product Habits blog: “Cable TV channels typically calculate their audiences based on viewership or how many viewers a TV show has. Netflix comes at this from the opposite direction by focusing on how many movies (or shows) a viewer has watched. Rather than optimizing individual shows to maximize the number of viewers, Netflix instead leverages its vast media catalog to optimize for movies watched per individual user.“

Strength of vision

Netflix intends to stay true to its value proposition by stating (and often restating in articles and interviews) that it has no intention of introducing advertisements into content, adding sports or going into gaming. 

Story-telling – whether series, films or unscripted content – makes up the entertainment that Netflix currently offers and plans to offer.

See also: Building a Virtual Insurer Post-COVID  

Constant reinvention of Netflix

But that laser focus on story-telling – and not on other content – does not mean that Netflix has not reinvented and will not reinvent itself. Far from it. Reinvention has been the foundation of Netflix’ success for more than two decades. 

The firm has moved from DVD rentals by mail to streaming licensed content (and by introducing streaming – or bingeing – the firm redefined what it meant to watch content on the web) to creating and streaming original content.

Refining the amount of content available on Netflix

The phrase used to be, “What’s on [television] tonight?” Since Netflix and other multichannel video programming distributors (MVPD) redefined the “what” (and the “where” and “when”) of content to view, people want to know the availability of streaming content.

From an article on Vox dated Jan. 27, 2020, titled “How Netflix is winning more with less content” written by Rani Molla (@ranimolla): “Ten years ago, Netflix had a total of 7,285 TV and movie titles in the U.S., according to streaming service search engine Reelgood. Now it has 5,838. That’s down nearly 50 percent from a peak of about 11,000 titles in 2012, according to Reelgood’s database, but up from 2018, when it had a low of 5,158. 

The decline is part of a long-anticipated move by Netflix away from relying on other studios’ content and toward making its own. Netflix is making that transition as other content makers — namely Apple, Disney, NBC and WarnerMedia — launch and grow their own streaming services. This influx of new services also coincides with Netflix paying higher and higher prices to license content, especially if the content belongs to one of its new streaming competitors. Netflix could also be intentionally winnowing its selection as its vast troves of viewer data show it what people actually watch and what it can afford not to license. 

Still, Netflix now spends more than half its cash on originals, Chief Financial Officer Spencer Adam Neumann said on the latest earnings call. That’s up from nothing, less than a decade ago. “The future of our business is mostly originals,” Neumann said. 

Implications of Netflix creating original content 

Netflix is not only talking the talk but walking the talk” about original content. An article dated Jan. 16, 2020, titled, “Netflix Projected to Spend More Than $17 Billion on Content in 2020,” by Todd Spangler, discusses a BMO Capital Markets forecast: “The streamer will invest around $17.3 billion this year in content on a cash basis … up from around $15.3 billion in 2019. Netflix is not expected to ease up any time soon: Its content spending will top $26 billion by 2028, per BMO’s report.”

The spending on original content will have implications on Netflix’ financials. Moreover, creating and distributing original content has many other implications, including: 

  • decreased licensing cost of other studios’ content
  • increased costs (for original content)
  • increased need, and cost, for people skilled in creating high-quality, desirable content
  • tactical hope that original content keeps existing customers and attracts new customers
  • significantly more control of how long the (original) content can remain on the Netflix media system for viewing by customers.

Profit Formula

Netflix’ operating income and net income have been steadily increasing from 2015 through 2019. However, Netflix’ free cash flow has steadily declined from -$921 million in 2015 to -$3.3 million in 2019.

Netflix has also seen a steady increase in long-term debt from $2.4 million in 2015 to $14.8 million in 2019.

I think these financials point to the sustainability of the firm: using long-term debt to create a repository of more original content. How many years can Netflix operate in this manner? Keep in mind that I realize that I may very well be wrong on this matter, as I am not a financial analyst — please let me know.

Technology Applications

Netflix strives to keep its members entertained by offering personalized content. Netflix may no longer have the 11,000 titles for viewing it had some years ago, but 5,800-plus titles remains a large content repository. Moreover, the repository is not static: Netflix continues to license content and will continue to create Netflix Originals.

The volume of current and future planned content creates a challenge for Netflix: determining how to steer the appropriate content to each member. Put another way, the continual challenge for Netflix is how to identify and tell each member about the specific content the member would enjoy that is residing in a particular place (at any point in time).

The answer rests with Netflix’ applications of machine learning to improve each member’s experience. Netflix uses machine learning (which is a technology and not a technology application) to optimize the Netflix service end-to-end, including to (this is directly from the Netflix Research web site):

  • create and improve the firm’s recommendation engine
  • optimize the production of original movies and TV shows
  • optimize video and audio encoding
  • optimize the in-house Content Delivery Network
  • power the firm’s advertising spending
  • power the firm’s channel mix
  • power the firm’s advertising.

Insurance: Industry, Markets and Business Model

Industry Description – NAICS

The insurance industry has many sub-industries, including the following (using information from the U.S. Census Bureau about the 2017 NAICS codes):

  • NAICS code 524113 – Direct life insurance carriers: includes establishments primarily engaged in initially underwriting (i.e., assuming the risk and assigning premiums) annuities and life insurance policies, disability income policies and accidental death and dismemberment insurance policies.
  • NAICS code 524126 – Direct property and casualty insurance carriers: includes establishments primarily engaged in initially underwriting insurance policies that protect policyholders against losses that may occur as a result of property damage or liability. Illustrative examples include automobile insurance carriers, direct; malpractice insurance carriers, direct; fidelity insurance carriers, direct; mortgage guaranty insurance carriers, direct; homeowners’ insurance carriers, direct; surety insurance carriers, direct; liability insurance carriers, direct.
  • NAICS code 524130 – Reinsurance carriers: includes establishments primarily engaged in assuming all or part of the risk associated with existing insurance policies originally underwritten by other insurance carriers.
  • NAICS code 524210 – Agencies and brokerages: includes establishments primarily engaged in acting as agents (i.e., brokers) in selling annuities and insurance policies.
  • NAICS code 524291 – Claims adjusting: includes establishments primarily engaged in investigating, appraising and settling insurance claims.
  • NAICS code 524292 – Third party administration of insurance and pension funds: includes establishments primarily engaged in proving third party administration services of insurance and pension funds, such as claims processing and other administrative services to insurance claims, employee benefit plans and self-insurance funds.
  • NAICS code 524298 – All other insurance-related activities: includes establishments primarily engaged in providing insurance services on a contract or fee basis (except insurance agencies and brokerages, claims adjusting and third party administration). Insurance advisory services, insurance actuarial services and insurance rate-making services are included in this industry.
  • NAICS code 525110 – Pension funds: includes legal entities (i.e., funds, plans and programs) organized to provide retirement income benefits exclusively for the sponsor’s employees or members.
  • NAICS code 525190 – Other insurance funds: includes legal entities (i.e., funds (except pension, and health – and welfare-related employee benefit funds)) organized to provide insurance exclusively for the sponsor, firm or its employees or members. Self-insurance funds (except employee benefit funds) and workers’ compensation insurance funds are included in this industry.

Keep in mind that not every sub-industry participates in getting and keeping each insurance customer. The role of each sub-industry participant heavily depends on which insurance lines of business the potential client wants (needs?) to purchase, the financial and staff resources of the insurance carriers underwriting the risks and the sub-industry participants involved with customer and claim services.

Two iron-clad rules of insurance commerce

There are two facts that absolutely rule insurance commerce:

  1. Insurance can only be underwritten in any one or more jurisdictions by an entity regulated and licensed to conduct insurance commerce there.
  2. Insurance can only be sold by a regulated salesperson who is trained, certified and licensed to sell specific insurance line(s) of business in specific jurisdictions.

Insurers that use algorithms to sell the insurance policy within seconds (or nanoseconds) must ensure that the algorithms comply with the regulatory requirements of carriers and agents to underwrite and sell the policy in the jurisdiction of the sale.

The importance of insurance regulation

Regulation is critically important to underwriting, sale and service. Why the emphasis? Because insurance mitigates or manages the risks to:

  • people’s lives, property, income/assets, health, actions and behaviors
  • companies’ (or non-profits’) financial well-being, behaviors, actions, property, products and services. 

Target Markets

The insurance industry targets consumers, corporations, non-profit organizations and, in actuality, any entity that could be hurt financially by any type of risk, whether the risk is caused by natural events or human actions or behaviors. 

The insurance industry offers its products and services to every person and every company in every industry subject to the risk appetite of each carrier. The insurance firm’s risk appetite is subject to a variety of attributes of the firm and the potential client, including the various exposures the potential client faces.

Exposures – of individual people, groups of people or companies – to a variety of risks (and in turn exposure to financial losses) where various insurance lines of business provide risk mitigation/management include:

  • living too long
  • dying too soon
  • planning for college education of children
  • retirement planning
  • having a swimming pool in a homeowner’s property
  • getting into an automobile accident
  • manufacturing products
  • managing a restaurant
  • holding sporting events
  • holding company picnics/outings
  • using entertainment venues
  • managing nursing/assisted living homes
  • launching satellites. 

In summary, insurance offers products and services to exposures of life, living, health, working, entertaining and conducting commerce (in any industry).

Skeleton Framework of the Insurance Industry

The insurance industry offers products (i.e., insurance policies) for the exposures articulated above and more within a specific industry structure: life and annuity (L&A), property and casualty (P&C), health (which I do not cover) and reinsurance (which I rarely if ever cover). [I realize this is a simplistic structure that omits other lines of insurance.]

I’ve included the visual below only to give a taste of the industry structure.

Value Proposition

The value proposition of the insurance industry, regardless of major line of business, is to mitigate or manage risks.

Let’s consider two value chains encompassing the flow of risk of the consumer purchase of insurance and of the corporate purchase of commercial P&C insurance.

My intention below is to show not just a flow of the acceptance of risk by some of the key participants in the insurance transaction but also to reinforce the complexity of the insurance transaction. I agree that consumers (i.e., individuals) don’t need to know the machinations behind their transactions but that ignorance doesn’t negate the complexities. 

Illustrative Risk Flow for the Consumer Purchase of Insurance

Illustrative Risk Flow for the Corporate Purchase of Commercial P&C Insurance

See also: The Messaging Battle on COVID-19: Are Insurers Losing?  

Profit Formula

Insurers generate their income from two main sources: premiums and investment income. To generate profitable premiums, insurers must strive for quality underwriting (i.e., to truly know the current and future exposures the prospective client faces through the intended length of the insurance policy). 

To generate targeted investment income, insurers must strive for excellence in investing within the boundaries required by insurance regulators and must understand the current and future economy, political situation and insurance regulatory philosophies regarding all aspects of getting and keeping customers, whether retail or corporate.

Investment income

The acceptable investment areas are conservative in nature. For the U.S. life and accident and health insurance industry, for instance, the investment portfolio includes: bonds, preferred stock, common stock, mortgages, real estate, BA assets and cash. BA assets refers to the long-term invested assets as would be required to be reflected on Schedule BA of the NAIC Annual Statement Blank or the successor. For 2Q19, bonds represented 78% of the asset concentration.

Premiums

Premiums are the second major component of insurance company profitability. But insurers must strive for quality underwriting, and scale may not be an insurance company’s friend,.

Let’s discuss the concept of scale.

Scale

The mobile app that underwrites and binds an insurance policy within seconds (or nano-seconds) is the equivalent of a modern-day Frankenstein monster that runs amok through an insurance company’s financials, delivering rivers of blood red ink.

Why?

When a L&A or P&C insurance company underwrites and sells an insurance policy, it is simultaneously purchasing a future claim. 

To ask two questions that every insurance (underwriting, actuarial, claims, marketing, sales and distribution) executive should consider with the sale of every insurance policy: What is the loss cost associated with the insured (i.e., policyholder), and when will that loss cost emerge for the insurer to adjudicate (and at what costs to adjudicate the claim, including any required investigations into possible fraud)?

The more insurers focus on scale, the more likely that they will incur underwriting losses.

L&A Insurers

The negative impact of scale is minimal for life insurance policies and annuities because L&A insurance companies have the Law of Large Numbers to use in addition to each L&A insurers’ own mortality and morbidity statistics and trends. L&A insurers, using these capabilities, can create models that have a high level of confidence predicting how many people (and more specifically their clients) will live during the year and also predict when death claims will occur. Still, L&A insurers need to to take care of the situations that are not candidates for simplified/accelerated underwriting (i.e., for those prospective insureds who don’t need a medical exam because of age, face amount of policy or other factors).

The negative impact of scale is more apparent for life insurers selling short-term disability (STD), long-term disability (LTD) and long-term care (LTC) insurance policies: These need to develop strong models to create predictions regarding occurrence – and cost – of claims. Mortality and morbidity statistics and trends obviously are in play in these markets. But so are a panoply of costs associated with delivering healthcare and physical rehabilitation. Scale is definitely not a desired attribute of STD, LTD or LTC sales.

P&C Insurers

The P&C market, whether personal or commercial, is where the Frankenstein monster of scale can truly run amok. I believe this holds true in the:

  • personal lines P&C insurance market
  • small commercial P&C insurance market
  • mid-size commercial P&C insurance market of corporate clients that do not have risk managers or only have CFOs who are not experienced in purchasing commercial P&C insurance. 

In these three markets, insurers must manage the attraction of scale by continually honing their risk appetites. This means that P&C insurers must focus their underwriting skills on prospective clients by creating policy conditions (encompassing terms, conditions and restrictions) that stipulate what exposures are covered (and not covered) and selling the policies at actuarially sound rates (that comply with insurance regulations, of course).

Technology Applications

The insurance industry is essentially an industry composed of a portfolio of processes to get and keep customers. There never was a time when the industry didn’t use technology applications to support each firm’s processes.

There are a myriad of ways to discuss the technology applications used by insurance firms. One path is to discuss the technology applications used to support not only the processes that insurance firms use to operate but also the technology applications that support the activities within each process. Another path encompasses selecting important business objectives of each insurance functional area/department and discussing the technology applications used to support those objectives.

I will use a systems perspective and discuss a few of the applications of technology in each of the systems:

  • Systems of Record: The technology applications include those supporting the business objectives of quoting/rating, underwriting status/final decision, policy administration, billing and claims management. 
  • Systems of Customer Engagement: The technology applications include those supporting the business objectives of customer service, customer communication (using both analog and digital pathways), marketing campaigns, cross-sell/up-sell initiatives and customer satisfaction programs.
  • Systems of Broker Management: The technology applications include those supporting broker calendaring/client appointments, broker training, broker pipeline management, broker/client communication, broker/insurer management (including campaign management), insurer downloading/certification requests, and broker productivity/profitability management.
  • Systems of Decision-Making: The technology applications include those that support determining the effectiveness of marketing campaigns, measure agent/broker productivity or profitability, predict customer lifetime value, predict probable maximum loss (by customer, by market segment, by …) and model the potential premium flows from entering new markets or creating new products for existing markets. 

Insurers should not use either Amazon’s or Netflix’s business model …

Finally, I can repeat my answer of “No, insurers should not use either Amazon’s or Netflix’s business model” and offer my reasoning. Without the discussion above, albeit a very lengthy discussion, I didn’t feel right about offering my reasoning to my response.

My reasoning is:

  • Amazon’s and Netflix’s business models are built to quicken the sale of commodities.
    • Insurance is not a commodity. This holds true for every line of insurance.
    • Insurance, in several instances, is a legally required product (personal P&C insurance) or an expected product (commercial P&C insurance) or is just good sense to purchase (individual L&A; group life) to manage/mitigate the continually changing risk landscape to support people’s or companies’ financial expectations or well-being.
  • Amazon’s and Netflix’s business ,odels are built to enable and amplify scale.
    • Scale is an enemy of insurance companies. In almost every insurable situation, insurers must apply stringent and high-quality underwriting skills to ensure profitable premium. 
    • While algorithms and models can be, and should be, used to assist insurance product development, sales, customer service, and claim adjudication processes, those algorithms and models must take into account that “one size does not fit all” and need to be tuned to meet the profit requirements of each insurer and to meet the changing regulatory requirements in each jurisdiction where the insurer and each of its distribution channels conduct insurance commerce.
  • Amazon’s and Netflix’s business models are built to accommodate speed, particularly the speed of customers using mobile devices.
    • Speed, like scale, can be an enemy of the insurance industry. Settling (either personal or commercial lines) P&C insurance claims quickly (within seconds or nano-seconds) can be a wonderful recipe for fraud.
    • Speed of bringing new insurance customers onboard can also be a serious problem. Insurers must strive for quality underwriting (to generate profitable premium). Can that be done with algorithms? Yes. But the algorithm (besides needing to be approved by insurance regulators in every jurisdiction where the insurer wants to operate) should be personalized to each prospective customer and continually changed for new products, enhancements to existing products and for changing regulatory requirements.
  • Amazon’s and Netflix’s business models’ support of new products and services is hampered by funding needs. Netflix, specifically, is funding Netflix Originals with long-term debt.
    • New insurance products and services have several hurdles to get to market, other than having the requisite funding, including at a minimum: ideation process involving participants from multiple departments, actuaries creating the actuarially sound rates (and reserves and surpluses), getting legal approval, training agents/brokers, training customer service representatives, creating claim adjudication practices, creating the requisite IT support, determining the amounts of ceded or assumed reinsurance if applicable and getting insurance regulatory approval.
    • I am definitely not a financial analyst, but I’m not sure how well the philosophy of loading up on long-term debt to bring new products to market would appeal to insurance company executives.
    • Moreover, there is the reality that insurance is not a book or a movie or a household appliance. It is a necessity (legally required in some instances) to mitigate or manage the risks to people’s lives, property, future financial requirements, actions and behaviors. (Put another way, no one is holding a gun to any person’s head and mandating that they use Amazon or Netflix.)
  • Both Amazon’s and Netflix’s business models include recommendation engines enabled by machine learning.
    • The insurance agent/broker serves as a “recommendation engine.” Slower than an algorithm obviously, but a repository (we hope) of the products and services that the various insurers s/he does business with that would be appropriate for the client. It would be helpful if insurers could create and provide machine-learning recommendation engines for their agents/brokers to use before or during an agent or broker’s sales meeting with prospective clients. 
    • One issue for insurers is to decide where to put the legally required skills and knowledge to conduct insurance commerce. Of course, insurers and the distribution channels know they have to have continual training and certification for each insurance line of business they want to sell in each jurisdiction. If the human is entirely replaced with an algorithm, that algorithm has to be continually retuned to meet insurance regulatory requirements.

Time to Retire the Term ‘Insurtech’?

When I founded and edited what became known as a “new economy” magazine in 1997, to explore all the strategic possibilities created by the internet, a friend told me a curious thing.

“You know,” he said, “there were magazines with names like Popular Electricity back in the early 1900s, when it was this great new thing. Then electricity just became part of daily life, and the magazines went away.”

Sure enough, after half a dozen fine years, my magazine, Context, faded away, as did all the similar publications, including Business 2.0 and the Industry Standard, which once were so thick with ads that they looked like phone books.

It may now be time to start retiring the term “insurtech,” too.

It’s not that technology is no longer a key driver for the insurance industry. Far from it. In fact, the pace of innovation has been picking up for years as companies have become more knowledgeable about the possibilities of various technologies, about how to incorporate them and about how to innovate, in general. Now, COVID-19 is making the industry step on the accelerator because so many interactions must happen virtually.

The issue is that technology is now so ubiquitous that it’s time to stop treating it as this new, alien thing. Yes, the many technologies now at the industry’s disposal — blockchain, the various flavors of artificial intelligence, etc. — are wildly complex. But so is the laptop or phone you’re using to read this right now, yet you treat your device as a tool, a simple extension of your hand or your brain. It’s time to start thinking of insurance technology — not insurtech — the same way.

We’re solving business problems, not technology problems, as we innovate within our organizations. We want to have the most efficient operations, the smartest underwriting, the fastest and smoothest claims processes for clients. Technology will play a role almost everywhere, often a key role, but the goal isn’t simply to have the best AI or the coolest blockchain application.

The industry has been migrating toward a more balanced view of technology and innovation. You see that, for instance, as companies try to rethink the customer journey, where the focus is squarely on the customer and where technology facilitates much of what happens, but in the background.

Some technologies will still require great attention, in and of themselves. Something like blockchain, for instance, could provide a competitive advantage if you figure it out before your competitors, or it could be an expensive bust for you, so you need to develop a deep understanding of the technology. But even with something like blockchain, you’re starting with that business problem you’re trying to solve.

I suspect the term “insurtech” will play out rather as “digital strategy” did at the consulting firm that published my magazine.

When the late, great Mel Bergstein founded Diamond Management & Technology Consultants in 1994, he had the then-radical idea that digital technology could drive corporate strategy, rather than just be an afterthought. The firm did a lot to popularize that concept, especially when one of our partners, Chunka Mui, co-wrote a best-seller in 1998, “Unleashing the Killer App,” whose subtitle was “Digital Strategies for Market Dominance.”

The notion of digital strategy stayed popular through 2010 or so, I’d say, and plenty of consulting firms will still sell you one, but every strategy has a digital piece to it these days. Try to imagine a strategy that isn’t digital. So, “digital strategy” has gradually become “strategy.”

Likewise, while a few people still talk about “e-commerce,” it mostly has a simpler name: “commerce.” Amazon was treated as a technology company for the longest time even though it sold books. Now, it’s treated as what it is: a retailer (that’s extraordinarily sophisticated in its use of technology) and a provider of technology services through its AWS cloud business.

“Insurtech” hasn’t been around nearly as long as “digital strategy” or “e-commerce,” and the combination of insurance and technology in innovative ways will only pick up speed from here. But the innovation needs to happen as part of, well, the normal innovation process and not as a sort of excursion into foreign territory. So, I think “insurtech” will soon enough be referred to by a different name: “insurance.”

Fintech Lessons Applied to Insurtech

Having worked in fintech since 2005, I witnessed the fintech wave forming, cresting and eventually crashing into the financial ecosystem. If there is a fraternal twin to banking, it’s the insurance industry. Both industries are built on managing risk, capital, compliance and distribution. Not everything in fintech will apply to insurtech, but there’s a lot we can learn by assessing the impact of fintech on the banking system.

The insurtech revolution will likely be more of an evolution–a more gradual shift and less of a big bang. The proof is the banking system. While it has clearly been affected by fintech, the tsunami of change has been less violent than what some predicted at the height of the craze.

Technology Is an Arms Race

Technology can be transformative, like the computer, the internet, the iPhone and many other examples. But, oftentimes, technology is iterative: One widget is replaced by a more efficient or lower-cost widget.

Advantages are often short-lived. Look at small dollar lending within fintech. Putting the entire application process into a digital format and with instant funding was incredible, but this has become the industry standard. Billions of dollars have been pumped into that space. In just a few short years, the software was commoditized.

Short of a truly defensible business model with unique intellectual property or network effects, most companies will find themselves in an arms race. No single technology will be the holy grail. Instead, a company’s ability to continually innovate rapidly will become the goal.

A lot of variables dictate how well an institution innovates, but here are some common mistakes that I have seen in fintech and now within insurtech as a potential technology partner:

  1. Carriers cannot always articulate what problems they are trying to solve and what success looks like
  2. Decision makers aren’t involved enough or don’t provide enough support in the innovation process
  3. Failing fast or testing concepts is cumbersome

Over the course of a year, innovation teams probably meet hundreds of startups. At Verikai, we have had the most success with innovation teams that are well-versed in the problems of the business. The challenge for startups is that we don’t know what we don’t know about your business. It’s difficult enough to sell a young technology but almost impossible to sell something to a client that can’t articulate its own problems well. It feels like some innovation teams are browsing instead of shopping; at Verikai, we believe that’s because there isn’t always alignment or support from the decision makers. By contrast, an innovation leader started off our meeting the other day by articulating all the problems he was responsible for solving and how solutions would help the business. He had me at hello.

See also: FinTech: Epicenter of Disruption (Part 1)  

Even if you create alignment, it’s incredibly difficult to push an insurance carrier into simple tests. There are a ton of valid reasons for why on-boarding is slow, but you have to find a way to cut through these barriers. Even the banks eventually found ways to re-engineer their internal processes to accommodate startups. Whether for contracts, audits, compliance, certifications or whatever, I would encourage carriers to find a way to “yes” rather than “no”.

Half the battle is accelerating your discovery process. Obsession over the latest technology craze is understandable, but what teams should really focus on is creating structure, culture and process that allow a company to adopt all of the relevant technologies in the coming years.

Sandboxes: Not Just for Kids

More data has been created this past year than all the previous years combined. There’s no way that any regulator can keep up with the proliferation of data and technology. While fair lending may not exist within insurance, the concept of disparate impact is shared with the industry, as is the concern for safety and soundness. In banking, regulators began creating sandboxes and town halls to encourage dialogue and learning. In addition, the fintechs began pushing regulators and Congress to change regulations to accommodate new business models. As the insurtech movement matures, I’d expect to see a lot more interaction with regulators.

It’s important that each carrier understands the shifting sands. Startups are more likely to lead with regulators, but it’s important that they not be the only voice at the table. Working with regulators is an incredibly important aspect of long-term planning for insurers.

Direct-to-Consumer Is Difficult

There are only so many people looking for financial products at any given time, and they’re not always in the digital channel. Fintech lenders, over time, became incredibly adept at customer acquisition through digital marketing. But even the digital market had an upper limit. The obvious place to then hunt for customers was through the banks themselves.

At first, fintech was the sworn enemy of banks, but now they are often partners. Insurtech, like fintech, will find a pain point that big insurance companies cannot address efficiently. Insurtechs will exploit it for what it’s worth, but will need to broaden their distribution over time through partnership. Certainly, there are MGAs that already write on behalf of their carrier partners, but I suspect an even deeper partnership is possible in many cases. While digital channels are incredibly appealing, brokers/agents are still relevant to many people. The point is that the digital market is a growing pool, but that there’s still a much larger body of water to fish from. Don’t be surprised if competition moves to cooperation over time.

Unbundle to Bundle

Fintechs were incredibly strong at finding niche markets that could be easily exploited under the noses of the banks. The same will hold true within insurance, but the demands of investors and capital will drive insurtechs to go after an even greater share of the consumer wallet.

All companies fear the Amazons and Apples entering the financial services market. However, it’s fintechs like SOFI, Marcus, Chime, Varo, Robinhood and countless others that are beginning to bundle multiple products to create modern, digital banks. The most expensive thing in fintech has been acquiring customers in high volumes. Naturally, companies can justify higher costs if they can increase customer lifetime values through cross-selling. And, there is a potential network effect for the winners. Whether insurtechs do the same thing or possibly some giant fintech player enters insurance, I suspect it’s a matter of time before someone will try to create the Amazon of the insurance space.

See also: What Gig Economy Means for FinTech  

The Early Days

It’s certainly going to take a while for all of these predictions to play out, but it’s important to have a long view. So far, I’m not sensing any panic in the industry. But, at the height of the mortgage crisis in 2008, no one paid too much attention to the peer-to-peer lenders lurking in the background. Somewhere around 2015, the banks went into high alert.

Depending on who you are and how you are positioned in insurance, the hindsight of fintech may be prescient for your company.

What Amazon, Netflix Can Teach Insurers

What insurers face now, digital giants like Amazon and Netflix faced when they moved to operate exclusively in the digital marketplace: transactions increasingly shifting to digital, and operations affected by an unprecedented wave of automation. Let’s explore the lessons these companies learned as they confronted the challenges that insurers face as they adapt to the digital marketplace.

One critical change for Amazon and Netflix was making a fundamental shift in the way their core systems and architecture were developed: they evolved – out of necessity – to migrate to a more flexible and responsive architecture by incorporating microservices. The factors that led to this shift sound strikingly similar to those affecting the insurance world. Here are five key factors for insurance companies to consider when planning their future technology directions, with examples of how Amazon and Netflix addressed similar issues.

  • Availability is a fundamental need when designing a digital user experience. Streamlining customer journeys depends on having technology and data at the point of the transaction. Netflix’s big availability issue was with its video library – which is a key selling point of the service. From a customer perspective, being able to watch thousands of movies and other content is less attractive if the customer can’t access the catalog any time. Netflix brought microservices to bear on this challenge, isolating the library functionality and running it independently from the rest of the user experience. This provided the capability to continually and frequently upgrade the catalog. For insurers, intermittent outages – especially on nights and weekends, when consumers and small business owners shop for insurance and digital agents are still working – are equally unacceptable.
  • Scalability and availability go hand in hand. When the volume of transactions goes up, processing power must be able to scale up, too. Monolithic tech stacks struggle here, especially because the points of failure can be so small – as insurers well know! Amazon’s shopping cart functionality had plenty of capacity for regular traffic but was challenged when required to scale up for the incredible volume of purchases on Black Friday and Cyber Monday. Inventory control is critical because you have to understand what products are in shoppers’ carts, what inventory can still be offered and when to cut off the sale of a specific item. Amazon decoupled the cart functionality from its monolithic tech stack and deployed a microservice that ran alongside the rest of their tech environment. The shopping cart microservice had the much simpler task of checking the inventory and maintaining customers’ carts. It could access additional processing power as the volume went up without relying on the same servers running the rest of the Amazon architectural stack. And because the shopping cart service was decoupled from the main system software, it could be continually updated and enhanced.
  • Speed is critical for scalability, and microservices have a lot to offer here. Both Netflix’s library and Amazon’s shopping cart experience are changing rapidly, with requests coming from thousands of users at a time from different front ends. Digital giants are known for providing a responsive user experience that is highly scalable without the need for serial data processing. Using microservices to support multi-threaded requests have given both companies an edge. For insurers, the support of an increasingly complex maze of distribution outlets requires rating capabilities that can consistently deliver sub-second responses. The ability to decouple this from core processes while dynamically scaling based on the needs of the front end is critical, regardless of line of business.
  • Maintainability and upgradability are significant areas of consideration for all insurers, based on the current state of their technology environments. As we look to the policy, billing and claims systems or the front-end user experiences, etc., insurers need the ability to increase the speed of software upgrades to be a more continuous, less disruptive and therefore higher-value undertaking. As we look at the dynamically changing user experiences needed in today’s digital world, the ability to upgrade these components and reuse discrete services at a greater frequency than back-end functionality is becoming a critical capability.

This is where microservices really shine. Each isolated process supports a small, discrete function. Therefore, it is easier to focus on a very specific capability with an update. There is flexibility gained in adapting to new integration points and integrating new services. The magnitude of the testing effort decreases significantly.

See also: What if Amazon Entered Insurance?

These are game changers for insurers that have been struggling with a monolithic architecture where everything affects everything else. And microservices give insurers the ability to ease pain points in their current technology environments and add capabilities without going through a full rip and replace.

We have much to learn from other industries’ successes and failures within the digital marketplace. But, let’s not reinvent the wheel. Let’s look at the lessons learned by the leaders in other markets and apply the knowledge they have gained.