New Routes to Profitable Growth: Where to play and how to win as insurance markets digitise
Today, the majority of publicly-listed insurance firms make negative 'economic profit' (profit after cost of capital). This is forecast to get worse as digitisation accelerates. Embedded insurance is predicted to be a $3.5 Trillion market opportunity, but how can insurers best capitalise on it? And what are the organisational and operational changes needed to industrialise impactful innovation and profitable growth at incumbent insurance firms?
Simon Torrance, Founder & CEO at Embedded Finance & Super App Strategies and Dan White, Managing Partner at Ninety Consulting, joined WORTH’s CEO, Mark McNally to share their insights on the future of embedded insurance and the opportunities for incumbent insurers.
In this article, we’ll explore some of the key takeaways from the event, highlighting how insurers can best take advantage of new market opportunities, and set themselves up to succeed.
The fundamental industry problem
The insurance industry has long struggled to make economic profit. Acquiring and retaining customers is expensive, and the consumer relationship is typically limited to sale or claim. Retention is usually maintained through undercutting the competition, which makes growth and profitability hard.
There are ample opportunities for growth which can be found in the abundance of digital data at our fingertips. The acceleration of digitisation has also highlighted ever-widening protection gaps which need filling, and we are surrounded by a growing digital population that are facing new and more severe risks and challenges.
Digital Business Model Archetypes
There are a number of different business model archetypes that enable you to expand and enhance your existing business model. One example of this is developer enablement - where you harness resources from outside your organisation to solve problems for your customers. For example, the service provider Uber uses Twilio to embed messaging and communications into their customer facing service, and Stripe to embed a payment processing service. Through utilising these additional services, Uber has created a seamless digital experience for the customer booking and paying for their services, without needing to create the capability themselves.
Source: Simon Torrance for the World Economic forum 2020
In the insurance sector, XCover from Cover Genius is the equivalent - it helps developers and digital companies reconfigure insurance components (products, capabilities, underwriting) to create new experiences for their customers, either as stand-alone new offerings or invisibly making existing offerings more attractive.
There are other examples of digital business model archetypes with higher profit margins, for example the B2B platform Shopify currently makes 50% of its revenue from offering financial services to its users. Or, if you own the data, then you can own the narrative altogether. Eg Tesla in the automotive industry is well-placed to significantly undercut the market through providing personalised car insurance packages based on real time car and driver data.
Source: Simon Torrance
A new value stack is emerging
Non-insurance brands have much closer relationships and more regular interactions with end customers than insurers do. They are often looking for upselling opportunities or ways to add greater value to their customers, meaning insurance is becoming a part of their proposition. Even traditional retailers or small brands that never could afford to sell insurance in the past can now create more accessible and convenient solutions. So brands collectively have the potential to aggregate new demand for insurance protection.
Real time data is a key asset, and this tends to be held by the brands. In the case of Tesla, being able to provide real time data on how a person drives enables them to provide custom car insurance packages not readily available on the open market.
Source: Simon Torrance
Sitting behind the brand is the organisation enabling this, or what we might call ‘embedded finance and insurance operating systems’ which is a new breed of player in the market. Increasingly they will orchestrate multiple products and capabilities from multiple companies, to enable the brand to deliver its embedded insurance proposition to its customers.
As an insurance incumbent it’s time to decide the roles you want to play in this new value stack.
Traditional affinity partnership model - providing products to the operating system to be made available to their customers.
Creating an operating system of your own - to enable embedded insurance for third party brands.
Enhancing your own brand proposition - by increasing and utilising your interactions with customers, and offering them more than just insurance products.
The embedded insurance market potential
Source: Simon Torrance
Current business adoption of digital embedded insurance is under 1% of the total gross written premiums in the world (life and non-life insurance worldwide). With current trends and projections, it’s estimated that in the next five years it could rise to 5%, and potentially make up for 15% of global insurance spend in 10 years. This means that by 2032 nearly $5 trillion of insurance could be distributed by non-insurance brands using new embedded insurance infrastructure.
What does it take to play in this space?
Cover Genius is one of the leading pioneers currently playing in this space. They started by focusing on simple products around travel insurance and extended warranties, but they are currently displacing quite a few of the partnerships traditional insurers have had with brands across many sectors. They do this by re-thinking all aspects of the insurance experience, using new technology, data science and behavioural marketing skills.
Source: Simon Torrance
What are the key challenges for incumbents trying to play in this area?
A peer group of ten of the leading insurance companies from around the world recently identified the three biggest challenges incumbents face in taking advantage of the Embedded Insurance market opportunity. They were:
Organisational structure, culture and skills
Customer adoption
Internal technology
Typically incumbent insurers are slow to take advantage of new trends, or if they are given the opportunity, they aren’t resourced properly from within. A common problem with adopting new technology trends is the tension between maintaining existing business and trying to create a new business model. Often the IT department doesn't have the capacity or the right capabilities to do this. To do both at the same time requires taking an ambidextrous approach to new business development - separating out your business into two separate strands to allow for new ventures, whilst still protecting the core business.
Source: Simon Torrance
Final thoughts
Every company is now a technology company. There is no time for innovation theatre, to take advantage of this opportunity businesses need to make the mental shift and re-position themselves as technology companies that sell insurance.
You don’t have to play in just one space. The embedded insurance market is a growing ecosystem, providing multiple options and opportunities to play in different spaces. If you follow the ambidextrous model, it will give you the tool kit to go after new, or even multiple positions.
Blended leadership models are the way forward. Bringing product leadership to the table can help blend delivery, strategy and customers needs at the top of a company, and help you move beyond actuary-focused decision making.
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