Tag Archives: business model

How to Evolve the Business Model

A recent global research study found that 61% of insurance carriers and financial services firms are moving away from traditional, vertically integrated business models. Think about that for a second. More than half of the industry is fundamentally changing how they do business.

Why are carriers taking such drastic measures? The research found three primary market forces – increased competition, evolving customer expectations and new digital technologies.

More than 80% of executives expressed concern that technology giants, such as Amazon, Facebook and Apple, could become major competitors or channel disruptors, and insurtech was also identified both as a threat and opportunity based on recent disruption. For years, insurance leaders have felt comfortable in their position – entrenched in a regulated industry and offering a valued service to customers, but new entrants are offering unique value propositions that are available any time, anywhere.

Unsurprisingly, the study found evolving customer behaviors and demands that are another challenge shaping the industry. As we all have learned over the last decade, consumers are constantly on the go, and they want to interact with insurance carriers the same way they do business with retailers that provide fast and easy digital experiences.

See also: AI Still Needs Business Expertise  

In addition, 53% of survey-takers said they must better leverage new technology, such as AI, machine learning, blockchain and IoT, to compete effectively in the changing market and keep up with rising customer expectations. These are the very technologies allowing tech companies to affect customer expectations by using data-driven insights to hyper-segment customers and offer hyper-customized products and services. More simply, platform-based companies have agile business models that allow them to better leverage customer data and quickly customize new products at competitive prices.

Given these threats, nine in 10 respondents predictably indicated there is a need for transformational digital change.

Modernization and core systems have been a conversation for years, but insurers no longer have to face the costly and time-consuming option of replacing legacy technology – or continuing on the same limited path. With a digital business platform (DBP), they can adopt and integrate new technologies with their existing core systems, allowing them to work with a global ecosystem of partners to become more nimble and customer-focused.

Initial findings are encouraging, as 85% of respondents indicated that a DBP represents an opportunity to reposition their companies, and 83% agreed that integration of legacy core systems into a DBP is important for competitive positioning in the next three to five years. However, only 23% have a DBP that is working and providing benefits. Quite the dissonance…

On the bright side, 32% of insurance carriers reported having built a DBP, compared with just 23% of banks and 19% of brokerage, wealth management and capital market firms. It isn’t often we hear insurance is ahead of the technology game, but with the opportunities – and threats – at their doorstep, now is the time to act.

See also: Insurance 2030: Scenario Planning  

Those who attempt to maintain the vertically integrated business model supported by legacy technology will struggle to remain relevant. Meanwhile, digital-forward insurers that capitalize on the path to modernizing core systems with digital features will reap significant benefits. The current industry environment is best summed up with the phrase often attributed to Charles Darwin – “survival of the fittest.”

The Research

For the research, 471 senior executives in banking, insurance, brokerage, wealth management and cards and payments were surveyed across the U.S., U.K., Germany, Spain, Italy and Japan in early 2019. Nearly 50% of respondents were from institutions with more than $10 billion in annual revenue, and 55% of those who completed the survey were C-level executives.

Download a copy here.

Insurance’s Flawed Business Model

At its core, the industry is plagued by an inherent conflict of interest. Our customers don’t have an industry expert advocating solely on their behalf; the experts have financial incentives coming from the insurance industry.

As I say kiddingly, the first page of your insurance policy tells you, “We cover you for everything.” It’s the next 40 pages that take all that coverage away.

I firmly believe that there is strong opportunity to shift the traditional brokerage model away from one that is purely transactional and toward the strategic advisory role that companies around the world need, one that is built on trust.

But before we talk about the future, let’s explore the existing environment.

See also: Ready for Fourth Industrial Revolution?  

Insurance brokers’ incentive is purely about the sale of a policy. They receive a commission when the policy is bound, not for providing strategic advice before, during or after the sale.

Brokers wear three hats representing themselves, the insurance company and then the client.

How can the client obtain the most comprehensive coverage at the market’s most competitive pricing when the broker wears three hats?

How can someone negotiate solely on my behalf if he has financial incentives and contractual relationships that potentially conflict with my best interests?

  1. If you are making 10% commission on a policy, are you going to be more inclined to sell a policy with a premium of $80,000 or $100,000 (assuming no differences in coverage)?
  2. Consider a smaller, regional brokerage, which may have three or four carriers that it primarily writes business with on a direct basis. If Travelers is the primary carrier, I hate to say it, but that relationship means just as much, if not more, to the brokerage than many of the clients do. If the brokerage upsets Travelers, perhaps by moving risk to another carrier or pushing too hard against the company in a claims negotiation, the brokerage is in a bad way. Travelers needs to be kept happy if a brokerage wants to maintain leverage to effectively price and win new business and of course retain existing business… not to mention the contingency commissions received for writing a certain amount of business with a carrier.
  3. Many brokers/agents, particularly the smaller, regional practices, are generalists, yet, in this era of emerging technology and data proliferation, insurance products are continuously refined and are often difficult to interpret without a deep understanding of both the particular client industry and new, relevant insurance contract language. Consider cyber insurance. There is no standardization in the industry, and almost every carrier has its own underwriting application and insurance policy language and structure. This leads many retail brokers to use a wholesale broker (specialist) to place the risk, as they do not understand how to properly explain the risk or terms of coverage (I can’t say that I blame them).

The insurance broker needs to move toward being a true client adviser, going beyond just the placement of insurance and including continuous engagement throughout the year on items such as the insurance and indemnity language in your lease/supplier/vendor/etc. contracts, letters of credit and collateral agreements/negotiations, claims analysis and negotiations and so on.

See also: How Tech Created a New Industrial Model  

True risk management is an in-depth analysis of both risk mitigation and risk transfer. To transfer risk most effectively, an extensive understanding of your client’s entire operations and, at the minimum, its contractual obligations, is a must. Simply reviewing a contract to see if your client meets the insurance requirements that the landlord stipulates in a contract is not strategic advice. Reviewing the contract and advising your client that she should not be responsible for “any and all liability” but rather “damages, expenses, etc. resulting from or in connection with the execution of the work provided for in the contract” is what I would call strategic advice. That’s just the tip of the iceberg.

As we consider new models of distribution and leveraging the rise of technology as we shift toward the “Insurance-as-a-Service” model with a focus on the customer experience, I firmly believe we must create solutions that provide insurance brokers (i.e. the industry distribution force) with the tools that they need to shift toward the strategic advisory role. We can diminish the current industry inefficiencies and yield more effective results on a consistent basis and with absolute clarity.

The question now is, how do we effectively integrate “technology of tomorrow” with “business models of today” and interpret the “culture of yesterday”?

New Business Models Are Needed

The pressures the insurance industry is facing seem to keep coming like an unending stream of tsunamis, beginning with changing customer expectations with millennials and Gen Z and gathering momentum with blurring industry boundaries and the wave of insurtech startups. The ability of the industry to invest large sums of money into creating opposing forces to fight these tsunamis is withering due to a triple whammy … the triad:

  • Increased claims costs
  • Soft market
  • Operational costs that challenge the existing business models

2017 turned out to be a record-breaking year of major catastrophes, including wildfires, hailstorms, flooding, snowstorms and hurricanes, to name a few. It has been reported that, in the U.S. alone, there was $306 billion in total damage in 2017, with 16 events that caused more than $1 billion in damage each. Much of this would be reinsured by the London market or reinsurers. The financial impact is being felt in profitability and the potential for increased risk that needs to be addressed.

The soft market is continuing, with no change soon, given the excess capacity in the market. The excess capital is fueling many new startups in insurtech. In addition, the low-interest-rate environment continues to challenge returns and is intensifying insurers’ focus on underwriting and claims fundamentals. But the pressures to optimize the organization do not necessarily move the organization forward innovatively to compete effectively in a fast-changing market.

See also: Changing Business Models, ‘New’ ERM  

How are insurers responding? Our Strategic Priorities – Knowing vs. Doing research highlights a growing gap between insurers that know about the changes and insurers that are doing something about them. There is an awareness of the pace of change that is signaling unheralded challenges and opportunities. Unfortunately, turning awareness into doing, with actionable initiatives, is elusive, creating an ever-widening gap between leaders who are taking action and those who are not.

If you look at parallels with other industries, it is clear that inaction or traditional approaches will not be enough.

Consider the media, taxi or music industries. The traditional models were significantly disrupted by new entrants or existing companies entering their industry. Just putting the business online or making it accessible via an app is not necessarily enough. Why? Because the fundamental business model did not change to adapt to the broader market change. You just “paved the cow path.”

While incremental steps may optimize your existing business and buy time for the organization, they do not fundamentally change the business model to enable growth and to capture a new generation of buyers with different needs and expectations.

We are seeing new models underway with recent entrants like Lemonade, Tapoly and Meet Mia, embedded insurance by Tesla and the potential for Amazon and Apple to enter the insurance market. All of these new products will be constructed on unique customer experiences that are compelling, consistent, engaging and seamless. The new definition of insurance may mean that you reach far outside of tradition to launch supplemental services you may never have considered. But, no matter how you grow, you’ll need to first shift into Digital Insurance 2.0 — a step that will make flexibility and growth viable.

See also: 4 Tech Impacts on Business Models  

With today’s pace of change, the path of least risk will include taking some risks. The risk to invest in new business models, new products and new channels can, at minimum, keep insurers competitive. Even better, taking these risks could allow insurers to leapfrog the competition. Because the new competition does not play by the traditional rules, insurers need to be a part of rewriting the rules for the future. There is less risk in a game where you write the rules.

This article was written by Viyesh Khanolkar.

Why Insurance Is Ripe for Disruption

Today, most people are driving in semi-autonomous cars, or semi-self-driving vehicles, whether you realize it or not. So you may have nice specs, alloy rims and some cool new tricks: contactless keys, dynamic cruise control, parking assist, self-correcting lanes, a bunch of other mini-innovations that improve the driving experience for you personally and anyone driving with you or around you. These “minivations “ are just the start.

We know that roughly 93% of all vehicle accidents are caused by human error. Almost $1 trillion a year is spent on auto repair. Sit back and question that for a second, and that’s when you realize that all of this money – nearly $1 trillion! – is being dropped right into the pockets of the auto repair companies and the physical parts manufacturers.

Traditional original equipment manufacturers (OEMs) are showing a glaring absence of innovation when it comes to preventing deaths. There are roughly 30,000 deaths per year due to auto accidents in the U.S. alone. To repair the auto industry and its surrounding ecosystem, the loss of lives must be addressed.

How? Through autonomy.

If you can take the 93% of human error caused by accidents down to 20%, 10%, 5% and ultimately under 3% with a (level 2, 3, 4 and 5 autonomy) vehicle, what will happen? First, you save lives (and the costs of healthcare). Second, you collapse an entire business model. You effectively shine light on the inefficiencies and economic costs absorbed by individuals.

See also: Which to Choose: Innovation, Disruption?  

This is where our favorite subject enters: insurance. Traditional insurance. The intangibles and untouchables: The Benjamin Buttons of Innovation!

Enter simple math. Look at the premiums you as an individual pay relative to the cash outlay that the insurance companies must make due to accidents. Do you see it now? To say that the business models of the incumbents in auto insurance will shift dramatically is an understatement.

This concept – a company without a tangible product that makes money off the liabilities they have on their balance sheet by means of your deposits – is going to pay for stagnation by means of obsolescence.

Now a reversal occurs – individual empowerment amid institutional disempowerment. The next generation of insurance companies (insurance-as-a-service, insurtech, ethical autonomy, you name it) will naturally, inevitably and ultimately rise to the top of the pack and take share away.

It is only sensible, therefore, to presume that the future of auto insurance is fascinating in a world where the metadata becomes statistically significant as it intersects with the data of connected vehicles. Why? Because now I can just pay as I drive. A true service (finally!). A pay-as-you-go business model that is as exact as it is precise. So, I – as an individual, an owner, leaser or driver turned rider – am no longer an “average” anymore. This is the concept of hyper-personalization, hyper-humanization and hyper-empowerment. There is an excellent example of hyper-personalization where I know precisely how many miles I actually drive, and the only premium I pay for insurance is for those miles. Furthermore, what if I as the user can actually obtain insights into my driving behavior (i.e. hard brakes, speeding, etc…),further influencing coverage premium and empowering me to drive behavioral change (no pun intended) with analytical insights and recommendations.

In fact, the business model has already been created in form and substance. It exists today – there are insurance companies offering that solution as we speak, and I suspect it will increasingly become the standard. It will be interesting to see which insurance companies become print newspapers, which ones become blogs and which ones have left ancient history to trade perhaps one fiscal year for the opportunity to pioneer the next frontier.

But before we embark across the Rubicon, let’s take a brief step back. By 2020, we will live in a world with 50 billion connected products. The enormity is surpassed only perhaps by the complexity.

So if you are at a company right now that is just starting to feel pretty good about your position along the intelligence of things continuum, really good about your digital marketing team’s evolution, your grasp on social media/SEM/SEO, your grasp on building a multi-channel experience, your grasp of what your customer wants, enjoy the feeling –you’re about to be disrupted. Amazon ring any bells?

See also: How to Respond to Industry Disruption  

And you’re going to get disrupted in a way that’s staggering in its infinite nature, with infinitely more data points, infinitely greater opportunities and, as a result, infinitely more options amid a sea of competition, which makes you feel infinitesimally small. Suddenly. This competitive force has built such a commanding, unexpected lead. Yes, a good, old KO before you even heard the bell go off. You will likely default, and it will be too late to pivot.

For the lucky, the ability to slip into obsolescence and appreciate the nostalgia of the past will do. (Of course, not the positive vibe-nostalgia, the punch-drunk love of sentimental warmth. Nope, as you become a relic of history, the nostalgia will be more like the Greek word root for nostalgia, which translates to pain, or more specifically the debilitating and often fatal medical condition expressing extreme homesickness).

Why will you get disrupted? Because we’re going to fast forward parabolically toward predictability and optimization. And that is precisely when machine learning takes place — that is when the machines become smart. As machines become more intelligent, they start to recognize patterns. Then they start to actually give you advice, input. Next, they start to predict what the outcomes could be, output. I/O. That, well, leads to artificial intelligence.

To be continued….

4 Tech Impacts on Business Models

Just a decade ago, “insurance” and “innovation” seemed mutually exclusive. Insurance products and the business overall hadn’t changed much over the previous century and the likelihood of insurers – which, by their very nature, are risk-averse – changing anytime soon seemed unlikely to many both inside and outside the industry.

However, over the past decade, there have been dramatic changes in the world that insurers cover and in the data and technology available to them. The result is that insurance companies have opportunities to explore new revenue models and improve profitability in ways that did not exist even just a few years ago.

See also: Secret to Finding Top Technology Talent  

The most prominent changes and their effects on revenue models include:

1. Consumers, social media, and data – The ability to connect, communicate with and observe insureds and potential insureds in real time or near real time has opened up new possibilities for insurers to understand their customers’ needs, pain points and desires. Many carriers have started to rethink their customer experience so they can “listen” directly to their customers instead of being solely reliant on their distribution channels.

  • Revenue model implications –Insurers are using technology and data tools to explore opportunities to provide complementary products and services to insureds. These tools enhance carriers’ understanding of customer needs and enable them to address these needs seamlessly via direct and indirect channels.
  • Profitability implications – Insurers are rethinking their business processes and customer journeys to identify “leakage areas” and “moments of truth” when profits are hurt by 1) frustrated customers choosing to leave or 2) missed opportunities to expose customers to products and services that meet their needs.

2. Insurtech – While the fintech boom has subsided somewhat elsewhere in financial services, insurtech is still growing. Traditionally, one of the biggest hindrances to many insurers in getting new products or new product enhancements to market was their own technology and data environment, and the belief that they alone had to build any new technology from scratch. However, the rapid rate of technological change and insurtech capabilities has led many carriers to look externally to enhance their capabilities and test new products and delivery models for their products. This underlies the promise that insurtech offers for established players – in fact, we think the opportunities that insurtech presents outweigh the threats many incumbents perceive.

  • Revenue model implications – Insurers are increasing their investments in, partnerships with and acquisitions of insurtech companies to more quickly bring new products and services to market, especially ones that better match pricing to a more accurate understanding of the risk or actual use of the insurance (including on-demand and usage-based insurance models).
  • Profitability implications – As a result of technological disruption, insurers are rethinking their value-chains and leveraging insurtech and other technology systems to improve operational areas that have historically been inefficient in terms of cost, time and use of human capital.

3. Internet of Things (IoT) – Although IoT technically is part of nsurtech, the impact of device networking is creating unique risk management – even risk avoidance – opportunities for insurers. From commercial and personal line P&C to life/health and group, IoT opens up opportunities for carriers to move from simply computing the probability of risks and then reacting to them as they occur to being able to monitor potential risks and prevent their occurrence.

  • Revenue model implications – Insurers are exploring how IoT can open up product and service opportunities. In the P&C space, insurers have the option of partnering with IoT companies to provide IoT solutions as part of their product offering in both B-to-B and B-to C. In life/health and group, we expect insurers to continue to test how devices can reinforce healthy lifestyles and open up opportunities for insurers to make life and health truly about “life and health” and not just death and sickness.
  • Profitability implications – Insurers are leveraging IoT to reduce claims frequency and severity. We expect new insurance models will test and explore ways to share these benefits with the customers – for example, by using behavioral economics techniques to provide incentives and reinforce positive decision-making and lifestyle choices.

4. Bionic Advice – There is currently a lot of talk about robots and machines replacing humans. However, at least for now, the real opportunities are not in finding the “perfect algorithms” that completely automate advice. Rather, they’re in machines enhancing the effectiveness of advisers and other distribution channels. And, the insurance industry appears to be prepared; in our recent annual CEO Survey, 61% of insurance CEOs said their companies are exploring the benefits of humans and machines working together.

See also: How Technology Breaks Down Silos

Numerous studies have confirmed that customers prefer the flexibility of interacting with insurance companies via the channels of their choosing – and this still often includes human ones. The real benefit of robo-advisers and AI is that they can automate basic advice but provide immediate, detailed information specific to a given customer that an adviser then can use to inform her product and planning suggestions. In addition, robotics and AI increasingly provide insurers the opportunity to capture information and refine their understanding of and recommendations for their customers throughout the sales and customer lifecycle processes.

  • Revenue model implications –Insurers are exploring bionic advice models to increase revenue by better matching products and customer needs and by creating new product bundles based on an enhanced understanding of customer segments.
  • Profitability implications – Insurers have lost out on many sales opportunities over the years – not because they had disinterested customers but because they or the channel partner never really understood customer needs. Many carriers realize this and are exploring how to deploy bionic advice models to automate customer follow-up, either in real time (e.g., while talking to an adviser) or at specific intervals (e.g., annual review, life event, etc.). The goal is to help carriers be more relevant to customers and, by offering appropriate products and service bundles, increase the products per household and boost “stickiness.”


In the case of the scenarios we describe here and others that could emerge, we see some consistent patterns:

  • New revenue models will result from the opportunity to leverage data, technology, social medial platforms and mobile devices that lead to the creation of new products, services and pricing strategies.
  • Insurtech is not just about new products and services. Insurance companies will continue to take advantage of emerging technologies and data to enhance their internal operating models. This, in turn, will enable them to market new products and services faster and to sell and service them more efficiently.
  • Insurance companies will continue to explore how to leverage peer-to-peer models and behavioral economics to drive new pricing strategies, growth and profitability.