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The Industry’s New Dynamic Duo

Insurers are full of economy-speak these days. We have the gig economy, the digital economy, the data economy and the sharing economy. There is the economy of one, the economy of the many, the service economy and, of course, the experience economy. These concepts are all real and vital considerations for insurers, yet most deal with the implications of external impact, asking, “How will the world affect our business?”

In one striking case, however, we are faced with an alternative question: How will our operations affect our world? We are in the midst of the digital age race where survival and winning will require rapid adaptability and innovation. The digital age represents a seismic shift in the insurance industry, pushing a sometimes slow-to-adapt industry by challenging the traditional business models and assumptions of the past 30-50 years. The business models of the past will not meet the needs or expectations of the future for digital insurance. So insurers will be drawing upon the strengths of a new type of economy that will provide internal energy to the organization and competitive drive to the industry.

This economy is the platform economy.

Cloud platforms are the future because they are the core of revolutionized business models. They are proven. They are intelligent. They combine sought-after technologies. Best of all, they fit an industry that has been trying to become consumer-centric.

Of course, there is an issue. The cloud-based, digital-ready platforms within the platform economy are easiest to plant in uncultivated environments. Most established insurers are in the thick of modernization of a different type and scale. When faced with the options, many will choose digital answers that are painted over modernized frameworks. At the same time, they will be flirting with the idea that a real platform shift may represent a hyper-jump into insurance’s agile future.

The Rise of the Platform Economy

In our new thought leadership, Cloud Business Platform: The Path to Digital Insurance 2.0, we note that the use of big data, artificial intelligence and cloud computing is changing the nature of work and the structure of the economy. Companies such as Apple, Amazon, Netflix, Facebook, Google, Salesforce and Uber are creating online structures that enable a wide range of activities. They have opened the doors to radical changes in how we work, socialize, create value in the economy and compete for profits. This is why a digital platform economy is emerging.

See also: Busting Myths on the Cloud (Part 2)  

Cloud business platforms represent a new era of impact and industry upheaval. A cloud business platform is one that can run key business applications and services to match the reality and requirements of the current business environment. That environment is characterized by constant disruption, heavy competition and growing market demands. Insurtech entrants are embarking upon business and technology initiatives that exploit untapped markets and address under- or un-met needs. Incumbents with outdated technologies are at a huge disadvantage because they are unable to respond with the flexibility, agility and speed that has become the hallmark of companies that are digital natives.

With investments in this market subset being tracked at just under $16 billion since 2010, insurers need to immediately take notice. Successful companies across all industries leverage technologies such as mobile, social and cloud to make better decisions, automate processes, strengthen their connection with customers/partners/channels and pursue innovation. They do all of this at an increasingly rapid pace, positioning them as “digital first” companies. The acceleration in the uptake of digital technologies and cloud foundations is a crucial first step to entering into the platform world and the shift to a new era of insurance we call Digital Insurance 2.0.

The implication from all this is that the digital age economy is powered by the platform revolution.

Digital Insurance 2.0

Traditional insurers must have digital daydreams now and then. What if we could have started like Amazon instead of like a traditional insurer? What if we had a digital native architecture like Netflix? Why couldn’t we have turned an app into a multi-billion-dollar business as Uber did? Google was disruptive because its framework and model were created to meet the future head on. How do we do what they have done while we are shackled to the constraints of insurance? The advantages these companies enjoy compared to the challenges faced by insurers can make digitalization of insurance seem like an impossible task. The reality is, however, that insurers now have every opportunity for freedom within traditional insurer constraints utilizing a Digital Insurance 2.0 framework.

What are the attributes of Digital Insurance 2.0? In every aspect, digital platforms are driving toward business models with fewer barriers and greater data access with improved flow. Digital insurance  platforms share these traits:

  • Maximized effectiveness across the entire customer journey with deeper, personalized engagement;
  • Process digitization that improves operational efficiencies and customer experience;
  • The ingestion and use of digital data-driven insights for better decision-making and to actively identify customer needs;
  • The ability to rapidly roll out new products and capabilities while expanding into new markets or geographies; and
  • Quick adaptation to rapid changes.

The crucial technology underpinning digital insurance platforms is cloud-based. The idea that a 10-year old technology like cloud computing could provide new opportunities for insurers seems far-fetched.

Cloud platforms, however, have become the option of choice for Greenfield or startup operations that are offering digitally-enabled traditional insurance products — like Lemonade, Slice and TROV. Cloud platforms are the basis of a new generation of core systems based on a micro-services architecture that is needed for innovative new insurance products like on-demand and micro-insurance offerings.

Shifting from Products to Platforms

Since the beginning of automation, the insurance industry has seen fundamental design, architecture and technology shifts in insurance core software solutions. First, we had the monolithic solutions running on the mainframe from the 1960s to early 2000s. This was followed with the best of breed components in early 2000s for policy, billing and claims based on J2EE and service-oriented architecture — but with each still using different business, data and technology architectures. Next, beginning in the early 2010s, came the loosely coupled “suites,” inclusive of the policy, billing and claims components but with a consistent and common business, data and technology architecture.

Yet, through these transitions, they maintained a product-focused business architecture view, emphasizing policy and billing and claims capabilities and with implementation primarily on-premise or in a private hosted environment, often a “pseudo cloud environment.”

Today’s digital shift will require cloud-based platforms that provide a great promise to address new challenges and opportunities that enable insurers to disrupt their markets before they are disrupted. This requires a new thinking of our solutions… one that makes the transition from products to platforms and is underpinned by three key attributes: ecosystem-friendly, centered on customer experience and enabled by cloud computing.

Unfortunately, too many insurers are taking a page from their old business transformation playbooks and are expecting it to work in today’s digital age. They are forging a new path by “paving the old cow paths,” which is simply creating greater complexity while moving in a direction that will not serve them well in the future. Instead, insurers need to look outside their companies to a new cadre of digital leaders and imagine the art of the possible. What can insurers do now that they could not do before because of technology, customer and market boundary changes?  Today’s emerging new competitors are answering these questions ahead of traditional insurers, positioning themselves as the new generation of market leaders in a time of significant disruption and change.

See also: ‘Core in the Cloud’ Reaches Tipping Point  

Fundamentally, to succeed in the digital age, an insurer’s strategy must focus on the following attributes:

  • Customer experience and engagement is priority No. 1 (People)
  • Business innovation is mandatory (Technology)
  • Ecosystems extend value (Market Boundaries)
  • Speed-to-value is the differentiator

For an effective digital transformation, it is important that core, data and digital capabilities are broken out into micro-services. They are then integrated back into the platform to provide a digital experience. Innovative, “digital-first” companies like Google, Amazon, Salesforce, Workday, Uber, Airbnb and Netflix have successfully used this architecture and technology that is disrupting industries. In the case of insurance, digital experiences are enabled by cloud economies of scale — an advantage that many digital-first companies do not have.

Why is this important? Because it will allow insurance companies to more rapidly position themselves in the digital era of Insurance 2.0 and enable them to:

  • Accelerate digital transformation to become digital era market leaders;
  • Accelerate innovation with new business models and products;
  • Accelerate ecosystem opportunities and value; and
  • Avert disruption or extinction by new competition within and outside the industry.

At the heart of this disruption is a shift from Insurance 1.0 to Digital Insurance 2.0 and a growing gap where innovative insurtech or existing insurers are taking advantage of a new generation of buyers with new needs and expectations and are capturing the opportunity to be the next market leaders in the digital age.

The path to a cloud business platform will evolve differently for each insurer undertaking it. Being open to operationalize around the cloud platform’s promise as a new business model paradigm acknowledges the role innovation will continue to play as insurers encounter future insurance ecosystems. The time for plans, preparation and execution is now — recognizing that the gap is widening and the timeframe to respond is closing.

Will established insurers suffer at the hands of tech-savvy, culture-savvy competition, or will they turn their digital daydreams into dynamic realities?

In a rapidly changing insurance market, new competitors do not play by the traditional rules. Insurers need to be a part of rewriting the rules, because there is less risk when you write the new rules.

New Era of Commercial Insurance

Despite a generally soft market for traditional P&C products, the fact that so many industries and the businesses within them are being reshaped by technology is creating opportunities (and more challenges). Consider insurers with personal and commercial auto. Pundits are predicting a rapid decline in personal auto premiums and questioning the viability of both personal and commercial auto due to the emergence of autonomous technologies and driverless vehicles, as well as the increasing use of alternative options (ride-sharing, public transportation, etc.).

Finding alternative growth strategies is “top of mind” for CEOs.  Opportunities can be captured from the change within commercial and specialty insurance. New risks, new markets, new customers and the demand for new products and services may fill the gaps for those who are prepared.

Our new research, A New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption, highlights how changing trends in demographics, customer behaviors, technology, data and market boundaries are creating a dramatic shift from traditional commercial and specialty products to the new, post-digital age products redefining the market of the future.

See also: Insurtechs Are Pushing for Transparency

Growth Opportunities

New technologies, demographics, behaviors and more will fuel the growth of new businesses and industries over the next 10 years. Commercial and specialty insurance provides a critical role to these businesses and the economy — protecting them from failure by assuming the risks inherent in their transformation.

Industry statistics for the “traditional” commercial marketplace don’t yet reflect the potential growth from these new markets. The Insurance Information Institute expects overall personal and commercial exposures to increase between 4% and 4.5% in 2017 but cautioned that continued soft rates in commercial lines could cause overall P&C premium growth to lag behind economic growth.

But a diverse group of customers will increasingly create narrow segments that will demand niche, personalized products and services. Many do not fit neatly within pre-defined categories of risk and products for insur­ance, creating opportunities for new products and services.

Small and medium businesses are at the forefront of this change and at the center of business creation, business transformation and growth in the economy.

  • By 2020, more than 60% of small businesses in the U.S. will be owned by millennials and Gen Xers — two groups that prefer to do as much as possible digitally. Furthermore, their views, behaviors and expectations are different than those of previous generations and will be influenced by their personal digital experiences.
  • The sharing/gig/on-demand economy is an example of the significant digitally enabled changes in people’s behaviors and expectations that are redefining the nature of work, business models and risk profiles.
  • The rapid emergence of technologies and the explosion of data are combining to create a magnified impact. Technology and data are making it easier and more profitable to reach, underwrite and service commercial and specialty market segments. In particular, insurers can narrow and specialize various segments into new niches. In addition, the combination of technology and data is disrupting other industries, changing existing business models and creating businesses and risks that need new types of insurance.
  • New products can be deployed on demand, and industry boundaries are blurring. Traditional insurance or new forms of insurance may be embedded in the purchase of products and services.

Insurtech is re-shaping this new digital world and disrupting the traditional insurance value chain for commercial and specialty insurance, leading to specialty protection for a new era of business. Consider insurtech startups like Embroker, Next Insurance, Ask Kodiak, CoverWallet, Splice and others. Not being left behind, traditional insurers are creating innovative business models for commercial and specialty insurance, like Berkshire Hathaway with biBERK for direct to small business owners; Hiscox, which offers small business insurance (SBI) products directly from its website; or American Family, which invested in AssureStart, now part of Homesite, a direct writer of SBI.

The Domino Effect

We all likely played with dominoes in our childhood, setting them up in a row and seeing how we could orchestrate a chain reaction. Now, as adults, we are seeing and playing with dominoes at a much higher level. Every business has been or likely will be affected by a domino effect.

What is different in today’s business era, as opposed to even a decade ago, is that disruption in one industry has a much broader ripple effect that disrupts the risk landscape of multiple other industries and creates additional risks. We are compelled to watch the chains created from inside and outside of insurance. Recognizing that this domino effect occurs is critical to developing appropriate new product plans that align to these shifts.

Just consider the following disrupted industries and then think about the disrupters and their casualties: taxis and ridesharing (Lyft, Uber), movie rentals (Blockbuster) and streaming video (NetFlix), traditional retail (Sears and Macy’s) and online retail, enterprise systems (Siebel, Oracle) and cloud platforms (Salesforce and Workday), and book stores (Borders) and Amazon. Consider the continuing impact of Amazon, with the announcement about acquiring Whole Foods and the significant drop in stock prices for traditional grocers. Many analysts noted that this is a game changer with massive innovative opportunities.

The transportation industry is at the front end of a massive domino-toppling event. A report from RethinkX, The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries, says that by 2030 (within 10 years of regulatory approval of autonomous vehicles (AVs)), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model called “transportation-as-a-service” (TaaS). The TaaS disruption will have enormous implications across the automotive industry, but also many other industries, including public transportation, oil, auto repair shops and gas stations. The result is that not just one industry could be disrupted … many could be affected by just one domino … autonomous vehicles. Auto insurance is in this chain of disruption.

See also: Leveraging AI in Commercial Insurance  

And commercial insurance, because it is used by all businesses to provide risk protection, is also in the chain of all those businesses affected – a decline in number of businesses, decline in risk products needed and decline in revenue. The domino effect will decimate traditional business, product and revenue models, while creating growth opportunities for those bold enough to begin preparing for it today with different risk products.

Transformation + Creativity = Opportunity

Opportunity in insurance starts with transformation. New technologies will be enablers on the path to innovative ideas. As the new age of insurance unfolds, insurers must recommit to their business transformation journey and avoid falling into an operational trap or resorting to traditional thinking. In this changing insurance market, new competitors don’t play by the rules of the past. Insurers need to be a part of rewriting the rules for the future, because there is less risk when you write the new rules. One of those rules is diversification. Diversification is about building new products, exploring new markets and taking new risks. The cost of ignoring this can be brutal. Insurers that can see the change and opportunity for commercial and specialty lines will set themselves apart from those that do not.

For a greater in-depth look at the implications of commercial insurance shifts, be sure to downloadA New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption.