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Insurance Ecosystems: Opportunity Knocks

Ecosystems have been growing in scale and importance in recent years, but the pandemic has greatly accelerated their evolution. Customers rapidly turned to remote engagement, bolstering their expectations of 24/7 service and easy interactions. Insurers’ legacy limitations now look increasingly out of step with contemporary buying behavior and distribution.

Rather than taking several years to fulfill digitization road maps, insurers will find that participating in a connected supply and demand service model offers something better, faster and cheaper.

Enabling technology is affordable and effective. Cloud-based technology and machine learning have helped insurtech firms grow quickly without the burden of legacy systems and are now helping carriers fill gaps, particularly as many insurers modernize their core systems to make external integration more practical. The same technologies support innovation from competitive sources that offer services or components that are “good enough” at relatively low cost.

Strategic considerations

Now that the building blocks are in place, industry leaders are increasingly engaging in ecosystems that serve broad consumer needs, often where insurance is only one offering among many. Strategic options are multiplying.

Similar organizations might make very different choices on roles, investments and partnerships, depending on their risk appetite, organizational culture, technical capabilities and ability to invest.

Here are four things to consider as you determine how to compete in insurance ecosystems:

1. Choose your ecosystem role(s) strategically

You can become involved in an ecosystem in many ways, with different levels of commitment and investment. Your role(s) reflect how you’ll relate to other participants and the degree of your commitment. This may be complicated.

  • As an owner, you’ll build and control the ecosystem, but at significant cost and the risk that nimbler players could overtake you.
  • An orchestrator creates a foundation, including technical platforms, and captures customer data but may not be able to curate the entire customer experience.
  • Adaptive participants plug into one or several ecosystems. This is a lower-risk strategy, but it’s more behind-the-scenes and could cause you to lose contact with end customers.
  • Abstainers are entirely responsible for their own offering. This could put them at a significant disadvantage if buyers find an ecosystem’s holistic approach more appealing. Abstainers also may miss the opportunity to provide their capabilities as inputs into other participants’ offerings.

Some insurers may take different roles in several systems at once, depending on resources and focus, but we expect ecosystems to evolve within a particular sector, with both industry and non-industry partners joining forces to develop markets that work for all.

2. Find the right match – and quickly

Companies comfortable with ecosystems have learned to make quick buy-build-borrow decisions. When you’re facing potential tie-ups, you’ll need to decide fast, because the most appealing opportunities won’t last.

Ecosystems benefit from having a variety of partners. Whether you’re the organizer or are providing products as an adaptive participant, look for tie-ups that add complementary and scalable products or services to drive more traffic into the ecosystem. Ideally, partners leverage each others’ capabilities and knowledge to help the ecosystem grow. Whether you’re considering a potential partner or an acquisition target, your due diligence process should include intangibles. Your stakeholders should know what your brand promises: value, service, innovation, trust, stability, etc. If a potential partner or acquisition doesn’t bolster that image or its culture doesn’t fit the ecosystem, then you probably should move on.

See also: The Intersection of IoT and Ecosystems

Complacency is a big risk; you likely can’t wait indefinitely to determine the best corporate development strategy. When certain ecosystem positions are taken, or when the insuriech player that can fill a key need has been bought by a competitor, you’ll be out of luck.

3. Adjust your approach to match an ecosystem’s maturity

Ecosystems vary considerably by maturity and focus. You may see partners offering components but, for now, a fragmented user experience. That doesn’t mean you should wait for clarity; rather, you may have an opportunity to significantly shape the outcome. You’ll want to be patient, recognizing that whatever you build may be an interim solution. In other instances, some ecosystems will be further along, which means you’ll need to quickly decide how to integrate, and on what terms, as you catch up.

Ecosystems don’t necessarily come with clear labels or governance. Some may start with a bilateral partnership model, offering additional value for customers by bringing together two non-competitive providers. This may become more like a product marketplace, or vertically integrated, even if some capabilities are white-labeled. Regardless, relationships are developing faster than before, and today’s opportunities are unlikely to exist six months from now.

4. Make deliberate choices with your ecosystem investments

Ecosystems typically require fresh thinking about product design, data and technology. You’ll likely need to expand these capabilities to:

  • Provide individualized recommendations that drive engagement and adoption. Few insurers have invested much effort in improving the (internal and external) user experience (UX). Like social media sites, ecosystems depend on keeping users “plugged in” with communication that’s relevant and personal.
  • Open systems securely to your employees, employers and partners so you can be more flexible about the products, services and experiences you offer. This means building a well-functioning API framework and enablement process, as well as expanding integration capabilities to support secure connections to external parties. This may require changes to the back end to your data management programs, data storage and exchange platforms, as well as developing analytical capabilities that enable data-driven decision-making and discovery.
  • Use data, analytics and business intelligence assets to “sense” market insights and package them to add value to ecosystem offerings.
  • Design, develop, source and manage products and services to meet customer needs, while offering value to other ecosystem members and reducing the capital intensity of your own business. This requires prioritization. You can’t do it all, and ecosystems provide a way to meet those needs without “owning” a product. By involving ecosystem participants, you can quickly satisfy customer needs, widen your offerings and improve the customer experience. 

Conclusion: Don’t miss out on the best opportunities

Ecosystems’ appeal is undeniable. They offer carriers a chance to reach beyond conventional insurance products and strengthen their relationships with customers, and are a logical response to a changing, highly networked business environment. Although they require insurers to apply unfamiliar skills – flexibility, customer intelligence, speed and coordination – they can provide the benefits of scale without the asset intensity and command-and-control leadership that historically have characterized the industry.

Many prominent insurers have been watching developing networks with curiosity and interest but often without urgency. This approach typically worked in the past, when the industry changed slowly and competitors were known quantities. Carriers now need to understand where they fit before the appealing opportunities are taken. There is tremendous upside, but not for those who sit on the sidelines.

The Intersection of IoT and Ecosystems

Traditional, end-to-end business models are breaking down in every industry, including insurance. In the digital era, it is increasingly difficult for any single firm to deliver the seamless experience that customers expect. More insurers are leveraging digital ecosystems to reinvent their products and services, providing better risk management, reduced claim cost and new sources of revenue.

However, rooted in legacy systems and siloed business structures, most insurers even lack the foundations to successfully execute insurance ecosystems. Insurance organizations will likely struggle in moving from traditional insurance offerings to tailored, ecosystem-driven customer experiences.

Nonetheless, insurers should have a plan for incorporating ecosystems into their business models. It’s time for all insurers to become insurtechs.

As opposed to the traditional business model, where insurers create and distribute end-to-end products and services, an ecosystem model is characterized by unified/digital platforms that incorporate third-party products and services and collaborate with segment-focused distribution partners. Carriers must either bundle value from others with their products (e.g., providing IoT-based real-time risk mitigation services) or provide value to a bundle that someone else is creating (e.g., insuring the performance delivered by an IoT service provider).

Based on research from the IoT Insurance Observatory — a think tank focused on North America and Europe with almost 60 members, including many of the largest insurance and reinsurance groups and prestigious tech players like ValueMomentum — the adoption of IoT requires a robust set of capabilities, as represented in the following figure. 

Source: IoT Insurance Observatory

See also: The New IoT Wave: Small Commercial

Any insurance IoT program is a multi-year journey that requires overcoming functional silos, coordinating the different stakeholders and developing a collective intelligence. Insurers can achieve four kinds of goals:

  1. Improving core insurance activities (assessing, managing and transferring risks) by using IoT products and services for continuous underwriting, claims management and risk reduction. This goal was investigated in depth in our previous article, “Chloe and Insurance: A Love Affair.” 
  2. Providing positive externalities to society, a topic more and more relevant due to the current focus on ESG investments (environment, social and governance);
  3. Generating knowledge about policyholders and their risks. This knowledge has allowed carriers to insure current risks in a different way, enable up- and cross-selling actions and insure new risks;
  4. Improving customer experience by interacting with them more intimately and frequently, moving beyond the traditional risk transfer. Many players are selling additional services for a monthly fee; others have found new ways to sell insurance coverages thanks to IoT.

Partnerships are a key differentiator. Some insurers have recently announced bold initiatives to use an ecosystem to expand their reach. One such insurer is Nationwide, which recently disclosed its partnership portal, where it exposes its services and protection products – including auto usage-based insurance (UBI) and connected homeowner insurance – to partners. 

With more than half of insurers delivering on their core systems modernization projects in recent years, it’s time insurers leverage data coming from their core systems to grow their business. By integrating IoT devices data to the core system data and leveraging this data fusion, insurers will have the opportunity to build a more holistic view and understanding of their customers and their risks. Insurers will be able to build a sort of digital twin of the customer, then tailor their services and offerings and improve the customer experience. Insurers will also overcome business lines silos, enabling upselling and cross-selling. 

Many senior insurance executives acknowledge that the world will be more and more connected, but, even with ecosystems as a topic on the agenda, IoT has not been exploited in business processes in a meaningful way. To lead an IoT-based business transformation, a clear vision and a structured and well-communicated plan are necessary. 

Technology is one of the key enablers of this transformation. However, insurers will have to carefully investigate, determine, prioritize and experiment with a range of IoT business use cases to develop an IoT-based business model. Many insurers are exploring a range of scenarios beyond connected cars, including connected homes, health and lives, infrastructure, factories and transportation. A comprehensive approach to help insurers build out the required capabilities for IoT is below. This insurtech approach takes insurers from business model definition to vendor partner strategy, to platform implementation and finally to IoT insights across the insurance value chain.

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A main challenge for insurers is building the technology architecture to aggregate, normalize and analyze data to make it available for the IoT platform. A big question for many is: How do I get started? An effective way to develop your architecture is by leveraging frameworks.

The framework below breaks down the broad portfolio of technology components, services and capabilities. The components are arranged in three layers – Edge, Fog and Cloud computing – addressing where data should be stored and processed for speed, cost and effectiveness, depending on the type of data and purpose of the data. 

The collection of managed and platform services shown in the framework, across Edge and Cloud computing layers, connects, monitors and controls IoT assets and the processes that generate data for insights and analytics. These services work together across multiple layers that include the IoT ecosystem — such as sensors, devices and industrial sensors — and connect to the computing infrastructure at Edge, Fog or Cloud, persistently or intermittently. 

Data collected by the IoT ecosystem is then processed and analyzed at the Cloud layer, along with enterprise data sets such as on customers, policies, claims and billing. All of this data forms the inputs to the digital twin, which can then be turned into actionable outcomes using the latest computing techniques. 

For insurers that are currently investing in IoT, and for many more that are considering doing so, this framework can help guide your approach and provide a strong architectural foundation.

See also: Global Trend Map No. 7: Internet of Things

As new waves of technology or sudden social shifts bring disruptions or opportunities to the industry — similar to telematics or digitalization — insurers must capture opportunities rapidly. Insurers that can reinvent themselves by leveraging data, including from the IoT, and form ecosystems will win.  

After all, the digital economy is a “made for me” economy, and the digital twins allow insurers to tailor insurance experiences. Customers will reward organizations that understand their needs and provide them personalized value. 

There are already examples of successful insurers – in different business lines and different geographies – that have effectively integrated IoT. Their stories mastering usage of IoT is an achievable target without investing hundreds of millions of dollars, but instead by leveraging the right partnerships.

Big Opportunities in Insurance Ecosystems

You may have noticed that the word “ecosystem” has crept into the insurance industry vernacular. Consequently, we risk turning an important concept into a cliché, one so overused outside of its original context that its impact and meaning become fuzzy and  eventually lost.

To be clear, I am not suggesting that “ecosystem” does not apply or is not fundamental to the transformation of the insurance industry – quite the opposite, actually. But we should understand its origin, respect its meaning and use it appropriately.

The word “ecosystem” derives from the Greek words oikos, meaning “home,” and systema, or “system.” It was first used in 1935 in a publication by British ecologist Arthur Tansley to draw attention to the importance of transfers of materials between organisms and their environment. In the early 1990s, James F. Moore originated the strategic planning concept of a business ecosystem, now widely adopted in the high-tech community. The basic definition comes from Moore’s book, “The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems.”

Using biological ecology as a metaphor, Moore reveals how today’s business environment parallels the natural world and how, just like organisms in nature, companies must coexist and coevolve within their own business ecosystems. He identified radically new cooperative and competitive relationships and provided a comprehensive framework that businesses can use to enhance their own collaborations with their customers, suppliers, investors and communities.

Insurance Platforms and Ecosystems

Powerful and exciting insurance industry ecosystems have emerged – and continue to evolve like living organisms – as connected sets of services in a single integrated experience. Platforms enable and support ecosystems in that they connect offerings from cross-industry and inter-industry players in P&C, life, health and accident.

Platforms and the ecosystems they support will increasingly enable insurers to turn strategic visions into realities. Today, insurers succeed by offering products. In the future, insurers will win by providing access to risk prevention and assistance services — and by offering the right product to the right customer at the right time.

McKinsey research found that ecosystems will generate $60 trillion in revenue by 2025 — which will constitute 30% of global sales in that year. Consequently, many insurance executives are looking beyond industry borders to understand the growing opportunities and threats that come from new partners and competitors in the ecosystems relevant to them, from mobility to healthcare and beyond.

Platform businesses are the most efficient value creators, compared with other types of businesses, because they harness the power of distributed supply and network effects. The network effect is a phenomenon whereby increased numbers of people or participants rapidly improve the value of a product or service.

See also: Ecosystem-Based Business Models

Purpose-Built Insurance Ecosystems

The P&C insurance industry has already developed ecosystems to support specific business functions and continues to do so. Some examples date back to 1980 when information providers built platforms linking auto insurers to collision repair facilities to streamline the repair process. These ecosystems quickly expanded to include independent appraisers and adjusters, auto glass and car rental vendors, salvage pool and towing operators, parts providers and others. Today the ecosystems are beginning to include telematics service providers and auto manufacturers and dealers.

New property claims ecosystems are emerging to include a full suite of contractors, inspection technology, digital payments and other service providers, enabling insurers to resolve claims in hours instead of days or weeks. According to Paul Carroll, editor in chief of Insurance Thought Leadership, “Innovation will focus less on bells and whistles and more on improvements across entire processes and organizations. But incumbents must start preparing.”

Future Insurance Ecosystems

Look no further for a brilliant and powerful new ecosystem extension than the recent announcement that Credit Karma, a unit of Intuit, has partnered with Progressive Insurance to offer usage-based auto insurance to Credit Karma’s millions of financial service smartphone app members, using its integration with DMVs to obtain instant driver and vehicle information.

And as if on cue, in her “11 insurtech predictions for 2021,” Martha Notaras, managing partner, Brewer Lane Ventures, predicts that “insurance will be embedded in every financial and retail transaction.” 

“It is not a matter of if, but when, the insurance industry will have to adopt an ecosystem approach. The industry is not immune to the changing demands of the market,” says Dr. Geoffrey Parker, professor of engineering at Dartmouth College and a visiting scholar and fellow at the MIT Initiative on the Digital Economy.

Ecosystem-Based Business Models

Across the insurance industry, boards and senior executives are coming to terms with the need to become more digital, efficient and agile. The current environment is prompting insurers to find new revenue streams, boost customer engagement, achieve sustainable profitability and generate higher returns on equity. 

In reimagining their customer engagement models, many forward-thinking insurance executives view ecosystems as essential. Early adopters have already leveraged ecosystems and collaborations with insurtechs to get closer to customers. One carrier created on-demand access to insurance for ride-sharing drivers. Another offered free home monitoring services to its policyholders. A third developed a digital health platform to help customers achieve personal health and wellness goals. 

These programs and business models are helping drive growth mainly because they are centered on leveraging partnerships and shifting non-core capabilities outside of the enterprise. No wonder more insurers now see ecosystems as an effective, flexible and capital-efficient way to grow the business and promote customer-centricity. 

What ecosystems are and why they matter

Ecosystems are networks of companies that choose to collaborate and may produce a higher level of business value than any individual business can produce on its own. 

Typically, ecosystem-based models feature leadership or orchestration by a single company, which provides a platform of core capabilities and participants that offer complementary services and add-on features and functionalities. Consumers engage with this ecosystem, paying for various products and services and benefitting from the value created by the leaders and participants.

Within insurance specifically, ecosystem-based models typically enable interactions across the value chain by leveraging a differentiated infrastructure to allow for better service offerings, richer customer interactions and higher rates of automation. 

See also: New Actuarial Model for Unclosed Business

The journey to ecosystem success

While the benefits are often compelling, insurers may need to have a road map in place to create the most effective ecosystem strategies and business models. The following three core actions can help map out a fruitful journey.

1. Engage insurtechs for stronger customer engagement and increased agility

Insurtechs are integral to the development of successful ecosystems and can foster meaningful innovation across the industry. Insurers have a multitude of opportunities to invest in or collaborate with insurtechs – be it to launch products faster, engage customers in new ways or enhance back-office processes. Consider how Nationwide, a leading U.S. insurer, used an ecosystem model and extensive insurtech collaboration to launch an entirely new digital business focused on millennials within only seven months. 

Insurtechs can help insurers in multiple ways, starting with access to customer-centric technology and analytics and the ability to deliver rich and tailored customer experiences. Typically, companies can derive value from these collaborations by clearly defining strategic imperatives and adopting a test-and-learn mindset.  

Many insurers also benefit culturally from insurtechs’ relentless focus on innovation, agile working style and next-generation thinking. The most fertile opportunities for collaboration and new capabilities often involve the most advanced technologies, including the Internet of Things, artificial intelligence (AI), machine learning and robotics, with potential applications across the value chain. 

2. Scale faster by digitizing existing business models and embracing advanced technology

For years, many insurers have been constrained by inflexible legacy technology. Today’s advanced technology offers meaningful upside for insurers that modernize their core systems. Early adopters are using software-as-a-service (SaaS), AI, machine learning and robotics to enable straight-through processing, self-service and smarter cross-selling. Within the claims function, AI and robotics can deliver faster and more accurate payments, starting with frictionless first notification of loss, which may lead to higher customer satisfaction. 

Similarly, predictive analytics, another game changer for insurance, can allow insurers to make better use of internal and external data for pricing risk. 

By moving more processes and data to the cloud, insurers may effectively engage with ecosystem partners and streamline digitization of key processes. 

3. Enhance the operating platform to increase effectiveness and agility with innovative workforce and sourcing strategies

Strategically, ecosystems allow different participants to play to their strengths. In that sense, insurers can look to enhance their operating model, focusing on core, differentiated capabilities and adopting the right sourcing strategy for everything else. 

One large U.S. insurer determined that a new spin-off company would be able to compete more effectively in the personal life and annuities markets. The new company was designed to be lean, cloud-based and asset-light. Freed from the constraints and complexity of legacy technology architecture and able to engage with a range of partners for non-core capabilities, the company became poised for long-term growth.

Offshoring and outsourcing can drive efficiencies and cost savings across routine processes, freeing human and financial resources to focus on the highest-value activities. Policy administration and call center support are typically the first to be migrated to nearshore or offshore captives. Third-party administrators (TPAs) are often a viable option, while other insurers have turned to SaaS models as an alternative to expensive and risky system upgrades or replacements. 

Ushering in the new age of ecosystems

Given how ecosystems can be an effective go-to-market strategy across industries, thanks largely to success in driving growth and innovation and the creation of relevant products and personalized experiences, the collective and widespread adoption of these models within insurance may be imminent.

In fact, to some extent, ecosystems are already driving innovation at an outpaced scale and speed within the insurance industry. Additionally, such models are helping carriers overcome long-standing challenges related to outdated technology and weak customer engagement. 

See also: The Pandemic and a New Ecosystem

However, the first step for insurers to effectively integrate these models into their businesses may require a shift in management thinking – one that is willing to understand why the whole is bigger than the sum of the parts. With a clear vision for profitable growth, strategic foresight and operational and technology investments and an appetite for significant cultural change, insurers may be able to successfully embark on the ecosystem journey.

A Maritime Metaphor for Change in P&C

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” – William Arthur Ward, Writer

New digital technologies, increased competition and changing customer demands are forcing 61% of insurance carriers and financial services firms to move away from traditional business models, according to a recent global study of C-suite insurance and financial services executives. While we don’t need a study to tell us that digital disruption is real, what’s mind-boggling is what the other 39% of organizations are (or aren’t) doing about it.

To use a maritime analogy, there are essentially three types of organizations out there. The pessimist says, “Humpf, this storm will surely wreck our ship, so we’re staying in port.” The optimist says, “We’ll stay the course and hope the storm passes.” The realist says nothing—and plots a new course.

Where does your organization fall? One thing is clear: The seas are changing, and the time has come to make some pivotal choices about where and how you’re going to steer your ship.

Ecosystems and interoperability are the waves of the future

All the waste and operational inefficiency that exists in the current P&C environment is simply not sustainable. By getting on board with a more open ecosystem, organizations can accelerate innovation and move our entire industry forward faster.

See also: Road to Success for P&C Insurers  

The bigger the ship, the harder it is to stop or turn on a dime. You understand the need for change, but inertia is keeping you from dealing with a host of challenges—from complex, inflexible legacy systems to regulatory considerations, sunk development costs and just plain skepticism about whether new solutions can deliver on their promises.

I understand and can empathize with all of these hurdles, having spanned the spectrum of the insurance value chain in my career, from broker to modeler and now solution provider. Change is fraught with risk. But staying the course is its own risk.

“Well, in insurance, we move slowly,” isn’t an argument you’ll hear from those in the 61%. Not when there are a host of practical technologies and platforms, such as innovations in data and analytics, that have been built to complement existing systems—and can be implemented right now, not years from now.

Pragmatic innovations, ecosystems and interoperability accelerate change

Scott McConnell, divisional president for NTT Data Services, who published the global C-suite study previously mentioned, wrote in an Insurance Thought Leadership article:

“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.”

No matter the size of your ship or the complexity of your systems, reaping the benefits of more pragmatic technologies means tapping into an ecosystem of partners that can accelerate change without disruption to your legacy and core systems.

But, while having a host of practical point solutions to assist in core workflows is necessary, it’s not entirely enough. The ability to advance innovation and market efficiency hinges on improved connections between systems, or interoperability. To effectively leverage practical solutions, investment and attention must be paid by insurers, reinsurers, brokers and solution providers to advance interoperability among systems. This includes the formation of open data standards for the transfer of data in the marketplace, open modeling and data platforms to allow the market to leverage a best-of-breed view of risk across a multitude of expert providers. Likewise, open APIs are needed to facilitate seamless workflow integrations between in-house systems, technology providers and modelers/data providers.

Keep it smart and simple

It’s clear we’ve reached uncharted waters in our industry. Will you stay the course or brave new seas? Sure, there are regulatory and change management considerations along with competing priorities—all of this is true. The first step starts by acknowledging all of it and recognizing you can’t just wait. There are practical innovations right in front of you that you can do and that can create momentum without heavy investment in time and resources, and without totally redoing your legacy systems.

See also: Provocative View on Future of P&C Claims

I challenge you to think about how you can bring simplicity to some very complex problems. Look to your partners. Look to your customers. Look to pragmatic technologies. And then plot a course for change.