The insurance industry is on a collision course. As in the 1933 science fiction novel “When Worlds Collide,” a small number of individuals with insight have recognized this fact and are preparing for a new and different future, while many others are blissfully unaware of the impending danger.
Okay, maybe that is a bit dramatic, but the traditional world of insurance is threatened by the rapidly encroaching digital world and insurtech.
At SMA, we foresee a convergence of the traditional and the new that will create an updated generation of the industry rather than the disruption (and perhaps destruction) of the industry that some predict.
Very few of the new entrants want to go it completely alone when it comes to meeting regulatory and capital requirements, underwriting the risk and managing the end-to-end insurance value chain. Instead, they tend to create value in specific areas that might mesh nicely into areas in need of enhancement at existing insurers. Thus, the emergence of convergence — or the bringing together of the new, innovative companies and capabilities with the traditional elements of established businesses.
What is this convergence likely to look like? And, more importantly, what should insurers do to position themselves for success? If there is a single word that describes how convergence is playing out in the industry, that word is “partnering.” One way to look at the partnering opportunities is to combine the best of the old with the best of the new in five key areas.
Distribution: About 30% of all insurtech startups are, in some way, connected with the distribution space. These companies are born digital; often create an innovative customer experience; and leverage mobile, artificial intelligence, gamification and other technologies. Distribution is a prime area for partnering, and all of these new distribution firms are looking for insurer partners.
Risk: The rapidly expanding availability of data on perils (especially real-time data) offers new possibilities for improved risk selection and pricing. New predictive models and scores; more location-based data with greater levels of precision; and new real-time behavioral data all create differentiating opportunities for insurers. Much of this new capability is available through firms that could be great partners.
Product: Innovation is the name of the game with products. There are many insurtech firms that are creating ideas for micro-insurance, usage-based insurance, behavior-based insurance and parametric insurance. Many innovators are seeking insurers with underwriting capacity and a solid distribution network.
Customer service: New options are emerging for areas such as billing, claims and other areas related to customer service. New and emerging technologies are especially relevant here, with drones, blockchain, mobile payments, AI, wearables and other tech creating new options. Many of the insurtech firms have innovative offerings in very specific areas and look for proof-of-concept and piloting opportunities with insurers.
Operations: Many tech companies — both incumbent and new firms — offer solutions to take operational efficiency to the next level. Robotic process automation and other AI techs lead the way, but other technologies offer improvements, as well. Video streaming and smart glasses for claims can improve claim operations. Again, the companies that are creating these new solutions are eager to partner with insurers.
The future doesn’t have to be a disaster scenario for the insurance industry. In fact, the potential is here for the industry to reach new levels of profitability and societal impact. Partnering to leverage emerging technologies, new business models, innovative products and new ways to reach customers can result in the best of both worlds for everyone, delivering new value to customers and growth for the industry.
At American Family Ventures, we believe changes to insurance will happen in three ways: incrementally, discontinuously over the near term and discontinuously over the long term. We refer to each of these changes in the context of a “version’ of insurance,” respectively, “Insurance 1.1,” “Insurance 2.0” and “Insurance 3.0.”
The incremental changes of “Insurance 1.1” will improve the effectiveness or efficiency of existing workflows or will create workflows that are substantially similar to existing ones. In contrast, the long-term discontinuous changes of “Insurance 3.0” will happen in response to changes one sees coming when peering far into the future, i.e. risk management in the age of commercial space travel, human genetic modification and general artificial intelligence (AI). Between those two is “Insurance 2.0,” which represents near-term, step-function advances and significant departures from existing insurance processes and workflows. These changes are a re-imagination or reinvention of some aspect of insurance as we know it.
We believe there are three broad categories of innovation driving the movement toward “Insurance 2.0”: distribution, structure and product. While each category leverages unique tactics to deliver value to the insurance customer, they are best understood in a Venn diagram, because many tactics within the categories overlap or are used in coordination.
In this post, we’ll look into at the first of these categories—distribution—in more detail.
A.M. Best, the insurance rating agency, organizes insurance into two main distribution channels: agency writers and direct writers. Put simply, agency writers distribute products through third parties, and direct writers distribute through their own sales capabilities. For agency writers, these third-party channels include independent agencies/brokerages (terms we will use interchangeably for the purposes of this article) and a variety of hybrid structures. In contrast, direct writer sales capabilities include company websites, in-house sales teams and exclusive agents. This distinction is based on corporate strategy rather than customer preference.
We believe a segment of customers will continue to prefer traditional channels, such as local agents valued for their accessibility, personal attention and expertise. However, we also believe there is an opportunity to redefine distribution strategies to better align with the needs of two developing states of the insurance customer:those who are intent-driven and those who are opportunity-driven. Intent-driven customers seek insurance because they know or have become aware they need it or want it. In contrast, opportunity-driven customers consider purchasing insurance because, in the course of other activities, they have completed some action or provided some information that allows a timely and unique offer of insurance to be presented to them.
There are two specific distribution trends we predict will have a large impact over the coming years, one for each state of the customer described above. These are: 1) the continuing development of online agencies, including “mobile-first” channels and 2) incidental sales platforms.
Online Agencies and Mobile-First Products
Intent-driven customers will continue to be served by a number of response-focused channels, including online/digital agencies. Online insurance agencies operate much like traditional agencies, except they primarily leverage the Internet (instead of brick-and-mortar locations) for operations and customer engagement. Some, like our portfolio company CoverHound, integrate directly with carrier partners to acquire customers and bind policies entirely online.
In addition to moving more of the purchasing process online, we’ve observed a push toward “mobile-first” agencies. By using a mobile device/OS as the primary mode of engagement, the distributor and carrier are able to meet potential customers where they are increasingly likely to be found. Further, mobile-first agencies leverage the smartphone as a platform to enable novel and valuable user experiences. These experiences could be in the application process, notice of loss, servicing of claims, payment and renewal or a variety of other interactions. There are a number of start-up companies, some of which we are partnered with, working on this mobile-first approach to agency.
To illustrate the power of a mobile-first platform, imagine a personal auto insurance mobile app that uses the smartphone camera for policy issuance; authorizes payments via a payment API; processes driving behavior via the phone’s GPS, accelerometer and a connection to the insured vehicle to influence or create an incentive for safe driving behavior; notifies the carrier of a driving signature indicative of an accident; and integrates third-party software into their own app that allows for emergency response and rapid payment of claims.
In the latter of the two customer states, we believe “incidental channels” will increasingly serve opportunity-driven customers. In this approach, the customer acquisition engine (often a brokerage or agency) creates a product or service that delivers value independently of insurance/risk management but that uses the resulting relationship with the customer and data about the customer’s needs to make a timely and relevant offer of insurance.
We spend quite a bit of our time thinking about incidental sales channels and find three things about them particularly interesting:
Reduced transactional friction—In many cases, customers using these third-party products/services are providing (or granting API access to) much of the information required to digitally quote or bind insurance. Even if these services were to monetize via lead generation referral fees rather than directly brokering policies, they could still remove purchase friction by plugging directly into other aggregators or online agencies.
Dramatically lower customer acquisition costs—Insurance customers are expensive to acquire. Average per-customer acquisition costs for the industry are estimated to be between $500 and $800, and insurance keywords are among the top keywords by paid search ad spend, often priced between $30 and $50 per click. Customer acquisition costs for carriers or brokers using an incidental model can be much lower, given naturally lower costs to acquire a customer with free/low cost SaaS and consumer apps. Network effects and virality, both difficult to create in the direct insurance business but often present in “consumerized” apps, enhance this delta in acquisition costs. Moreover, a commercial SaaS-focused incidental channel can acquire many insurance customers through one sale to an organization.
Improved customer engagement—Insurance can be a low-touch and poorly rated business. However, because most customers choose to use third-party products and services of their own volition (given the independent value they provide), incidental channels create opportunities to support risk management without making the customer actively think about insurance—for example, an eye care checkup that happens while shopping for a new pair of glasses. In addition, the use of third-party apps creates more frequent opportunities to engage with customers, which improves customer retention.
Additional Considerations and Questions
The digital-customer-acquisition diagram below shows how customers move through intent-driven and opportunity-driven states. Notice that the boundary between customer states is permeable. Opportunity-driven customers often turn into intent-driven customers once they are exposed to an offer to purchase. However, as these channels continue developing, strategists must recognize where the customer begins the purchase process—with intent or opportunistically. Recognizing this starting point creates clarity around the whole product and for the user experience required for success on each path.
Despite our confidence in the growth of mobile-first and incidental strategies, we are curious to see how numerous uncertainties around these approaches evolve. For example, how does a mobile-first brokerage create defensibility? How will carriers and their systems/APIs need to grow to work with mobile-first customers? With regard to incidental channels, which factors most influence success—the frequency of user engagement with the third-party app, the ability of data collected through the service to influence pricing, the extensibility of the incidental platform/service to multiple insurance products, some combination of these or something else entirely?
Innovation in how insurance is distributed is an area of significant opportunity. We’re optimistic that both insurers and start-ups will employ the strategies above with great success and will also find other, equally interesting, approaches to deliver insurance products to customers.
If you ever took a marketing class, you probably remember the four “P’s” – product, price, promotion and place. While attention to all of these is vital to business success (including one or two new ones added over the years), the fourth P, place (which really is about distribution) has been getting a lot of attention lately in the insurance industry. From traditional channels with agents and brokers to new channels like Google, Compare.com, Gobear.com, Walmart and others, the place where prospects and clients meet insurers is worth a fresh look and an open discussion.
Celent recently reported that many insurers are investing in their distribution capabilities to spur growth and retention by adding or expanding channels and markets and optimizing existing channels. Celent predicted a steady market for investment in distribution management systems from 2014-2016 (“Deal Trends and Projections in the Distribution Management Systems Market,” September 2015). Gartner has indicated distribution management is one of its hot inquiry topics for 2016.
As I wrote in my last blog, distribution might also be the most tangible touchpoint to customers for product inquiries and purchases, outside of paying bills or making the occasional policy change. Interactions with our distribution channels are key opportunities to create positive customer experiences that lead to loyalty and additional sales down the road. Because only a fraction of our customers will have a claim in any given year, few will have the opportunity to experience the true value of insurance. That places the “burden of value proof” upon insurers, to continually reinforce protective messages, supplement with preventive knowledge and reiterate the comfort customers can have in knowing they are insured.
Distribution has always been the prime communicator of these messages and an extremely important part of the insurance value chain. Channels we use have evolved over the centuries, as insurance itself has evolved. (See the recent report from III, “Buying Insurance: Evolving Distribution Channels,” for a good history lesson). But numerous forces inside and outside of our industry have been rapidly transforming this important element of the insurance business model. As an industry, we can’t afford to think about distribution in the “usual” old ways.
Traditional channels are still vitally important, but having a broad array of distribution options is even more important in today’s marketplace. With consumers’ shopping/buying preferences and behaviors changing based on more progressive industries and companies, options and alternatives are critically important to capture and retain customers. While the digital revolution and fast-emerging technologies are intensifying this change, they have not replaced traditional agent channels, despite the predicted demise of the agent channel a few years ago.
Instead, consumers are using multiple channels (traditional and non-traditional) for shopping, buying and policyholding processes. In many cases, it comes down to whichever channel is easiest or whichever channel seems to fit the moment when the individual is ready to transact. This echoes a trend within all industries. For example, research by Deloitte reported by Business Insider found that consumers shop for groceries on average across five different types of stores, no longer needing a traditional grocery store when one is not convenient. Consumers are now buying groceries at warehouse clubs and super-stores like Costco and Walmart, where one-stop-shopping can save time (CBS Moneywatch). For retail suppliers, this means courting any and all potential distribution outlets.
Likewise, insurance needs to expand distribution channels beyond the traditional channel silos of direct mail, captive agent and independent agents to a new model, an omni-channel ecosystem that seamlessly interacts with and meets customers’ ever-expanding expectations. This doesn’t mean that insurers should rush out and go on a channel shopping spree. It does mean insurers must build a strategic action plan for their unique channel ecosystem using relevant channels, partners and capabilities that work cohesively together to optimize the customer relationship. The irony of this is that while insurers are doing this to make things easier for their customers, it can make things a lot more complex for insurers. Enter the growing need for effective distribution management, and systems that improve carriers’ capabilities to manage multiple channels and multiple factors. These factors include:
Compliance: Automation of key producer lifecycle processes, data capture and reporting saves time and ensures accuracy and timeliness.
Compensation: Moving from reliance on core systems and manual tracking and calculations in spreadsheets doesn’t just save time and increase accuracy, it also enables more targeted and creative programs to drive performance of your channels.
Performance: In addition to influencing producer behaviors, the right distribution management system makes available the volume and granularity of data you need to enable flexible reporting, as well as more advanced analytics like segmentation and predictive modeling. Majesco’s recent research report, “A Path to Insurance Distribution Leadership: New Channels and New Data for Innovative Outcomes,” provides some useful insights into how companies are using data to improve the performance of their distribution channels.
Self-Service: Portals for your producers and channel partners give them the transparency that’s vital for trusted, mutually beneficial relationships. Developing e-service capabilities for customers and agents was a high priority among insurers Majesco surveyed for the recent research report, “Digital Readiness in Insurance.”
You can have the best insurance products, pricing and advertising to build your market presence, but if you don’t have a distribution ecosystem underpinned by a robust distribution management system to optimize and maximize these channels, your customer growth and retention potential will remain limited. If it is difficult to effectively optimize compliance, compensation and performance of your channels, you could end up losing to competitors that can. Distribution management systems are no longer considered back-office systems; they are front-office enablers in today’s radically changing marketplace. That brings us back to the concept of place. Just like long-established retailers will remodel every couple of years, the place you meet your customers can’t remain untouched without your organization and its products losing their feeling of value.
Are you developing a distribution ecosystem? Do you have the right distribution management solution to optimize your established and newly developed channels to help you grow? Celent and Gartner are telling the industry that your competitors are considering and implementing modern distribution management systems. If you haven’t been considering distribution management modernization, now is the time to begin the conversation.
No insurance executive in touch with the marketplace would deny that traditional distribution is no longer a reliable way to deliver dependable sales and enduring customer relationships. The adviser-based model is under threat in most sector categories. Why? There are many reasons, but two at the top of the list are:
Customers are changing – the Millennial generation shops and buys differently than their Boomer parents, and even Boomer habits and expectations are changing in the digital world.
Technology has disrupted the distribution model, as it has disrupted everything else in its wake – the experiences, access, transparency, ability to compare and socialize at any moment from any location – dislodging practices that were deeply rooted for decades.
As a result, carriers are being forced to recast not only distribution itself, but also the entire ecosystem that enables distribution to do its job:
Product – must be simpler, understandable to the average person and offering a real benefit worth the price
Service – must be always available, accurate and helpful
Channels – must be consistent on all dimensions – as a client, I want to feel I am dealing with the same company wherever I go looking for you, whether online, on the phone or in person
Underwriting – must use data in ways that are respectful and pass the test of being reasonable in the client’s eyes
Perhaps most of all, insurers must put aside marketing myths and see marketing as more than an optional cost center that puts sponsorships in place, designs product brochures, supports trade show presence and runs advertising campaigns.
Marketing done right can become the function that unifies your business around the client, and fuels answers to these critical questions:
Whom do you really want to have as your customers?
What are their needs, both emotional and rational?
What are the ways you can meet those needs?
And how can you do so better than competition, within a good economic and risk structure?
The insurance industry seems to live by a series of unfortunate beliefs about what marketing is and what it is not. These marketing myths stand in the way of putting the huge potential of this function to work to meet your business goals.
To enable marketing to have the impact on your business that it can have, put these myths aside and empower a capable team to help drive growth.
“Brand” and “advertising” are synonymous.
Brand defines what your company stands for and connects people in ways that help them see you as relevant in their lives … leading to purchase and loyalty. Everything you do is a manifestation of your brand, whether or not you advertise.
Marketing is a cost center.
Marketing is an investment. Marketing is a leader in creating profitable and persistent revenue growth, by helping to identify the right customers, gather their needs and provide direction to the organization on how to fulfill those needs.
Marketing people are creative types, not business people.
Yes, as in every business function, creativity is demanded. But marketing today is a technology-driven function and drives P&L, so a close partnership between internal tech professionals and external providers is a must.
Product builds, distribution sells, marketing supports.
Insurance is an experience business. It’s not just about policy bells and whistles, it’s about the end-to-end experience of engaging with your brand from pre-sale to post-sale to continuing servicing and claims. This means internal silos must be eradicated and collaboration must be a defining attribute of your culture, or your customer will feel the negative effects of self-imposed internal barriers.
Marketing decisions are made on gut.
Marketing is a data-driven discipline, requiring a special mix of talent and skills to get the right data and use it to create customer experiences that will drive business results.