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The 4 Major Sources of Change for Insurance

The insurance industry faces disruption from a host of new technological and social phenomena. To plan for these, it is helpful to first examine how other industries have either successfully navigated large-scale changes and prospered, or have failed to do so and disappeared.

This article will examine past and future market disruptors. It provides case studies of businesses that have failed or succeeded to navigate large-scale changes. By reviewing these cases, business leaders in the insurance industry will get a sense of how to prepare for inevitable disruptions.

Four Major Sources of Change and How to Deal with Them

Many of the recent and impending market disruptions fall into the following categories:

Source#1: Disruptive Innovations

Some innovations completely displace old markets or create new ones. This can be devastating for businesses if they fail to adapt quickly.

The best example of this is the Kodak/Fuji Film rivalry that took place during the advent of digital media. Both companies were in the same dire straights: Inexpensive digital photos would soon replace the lucrative camera film, decreasing profits by more than a quarter.

However, when digital media eventually took over, Fuji Film was able to thrive, while Kodak nearly faded out.

As Fuji clearly demonstrated, the best way to handle disruptive innovation is through radical flexibility. In a 2012 article, The Economist summarized the rivalry outcome as follows: “Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one.”

While Kodak was complacent, Fuji developed new products, sold intellectual property such as chemical compounds and sought new markets for film. By the time Kodak had gone into bankruptcy proceedings, Fuji had diversified enough to remain competitive, at one point growing to some $12.6 billion in market value while Kodak’s shrank to less than $220m.

Source #2: Technological Upheaval

Some new technologies change the way businesses operate from within. The best example of this is analytics software. Analytics refers to the use of sophisticated mathematical techniques to produce new value from data.

The adoption of analytics will become virtually universal. According to technology-research firm IDC, big-data technology and services will grow at a 27% compounded annual rate through 2017 to more than $32 billion worldwide. A study conducted by MIT Sloan Management Review and IBM found that organizations that excel in analytics usually outperform new adopters of analytics by three to one.

To manage technological upheaval, businesses are thinking creatively about new possibilities presented by new technology. For example, Sky Italia, a satellite TV provider, uses analytics to predict what kind of content its customers want to see, based not only on their watching habits but on their social media activity. Casinos use analytics to gauge customer behavior based on such fine points as when patrons order drinks, where they play the most and even when they smile.

Source #3: Consumer-Culture Shifts

Digital technology has a widespread impact on culture that affects customer/vendor relationships. One prominent outcome of this is that buyers are moving much further down the sales funnel before interacting with salespeople.

For example, in 2012, Ernst & Young completed a global survey of 30,000 banking customers and found that those who were unhappy with their banks were twice as likely to switch to a competitor as they were in 2011. Because accounts can be transferred with just a few clicks of the mouse, banks now have to work harder to keep their customers from leaving. Further, banking clients are increasingly performing their own research without input from bankers.

The same is true for B2B customers, as one CEO of a B2B company described in an interview with Forbes:

“My sales team has called on every possible client, and they don’t know where to go next.”

According to member-based business advisory company CEB, buyers now go through about 57% of the purchasing process before ever talking to sales.

To react to changes in consumer culture, marketers must replace the old sales models with “facilitated buying” strategies. Vendors are increasingly interacting with prospects right where they are and provide more value on the front-end. By acting as buyers’ guides rather than salespeople, sales teams will grow relationships through trust. This is why content marketing strategies are displacing traditional advertising in many marketing budgets.

Source #4: Price-Determination Fluctuations

In the present consumer culture, price determination has become more elastic and complex. As such, many businesses are re-inventing their pricing structures.

The health insurance and health benefits industries are examples where large-scale pricing shifts are taking place. Because of the Affordable Care Act, health benefits brokers will now have to disclose their commissions, which will give clients more negotiating leverage. Those brokers who have the most technical skill and who can flexibly price products and services are having the most success.

Another contributing factor to pricing shifts is in the spending habits of “millennials.” These people, ages 13 to 30, are increasing in purchasing power by about 3% per year. Their spending is unpredictable, is mostly digital and will account for nearly one-third of total spending by 2020.

To meet consumer demands for pricing options, businesses are becoming more inventive. For example, the Silicon Valley start-up Uber offers a crowd-sourced taxi-like service that employs “surge pricing.” Under this model, Uber services cost more when demand is high and the supply of cars low.

“Sympathetic” pricing is another new pricing trend with humanistic intentions. According to business trend firm Trendwatching.com, waning consumer loyalty brought on by digital empowerment has made businesses eager to show consumers that they care. This has led to a series of warmer and fuzzier relationship-building strategies.

For instance, “painkiller” pricing is an emerging strategy meant to provide relief. An example of painkiller pricing is where bars give discounts to patrons who have been served a ticket that day. Another example is “compassionate” pricing, which typically involves sliding scales for lower-income customers. Finally, “purposeful” pricing is meant to effect social change – such as through offering free public transport to alleviate inner city traffic.

Conclusion

For most industries, disruption is inevitable. Oftentimes, those businesses that are most accustomed to success will have the most trouble adapting.

The first essential step in planning for disruptions is to gain a basic understanding of what the incoming challenges will look like. Once this is accomplished, insurance businesses can begin applying lateral and creative planning strategies to successfully navigate the change.

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