The current period of digital disruption is rightly described as a revolution - the Fourth Industrial Revolution - because of the scale and intensity of change. In the first instance, this change is destructive to existing structural constants, whether business models or wider societal organizations, and requires deliberate leadership response.
Several industries have already been disrupted beyond recognition, including how we book our flights and hotels, and how we access ‘content’ - music, video and news. Even the nightlife business in the UK has been dramatically affected by dating apps. Banking, as an adjacent industry to insurance, has had a headstart with fintech and can offer some lessons. The traditional insurance companies, the incumbents, are buffeted by at least three forces:
- Changes in customer behaviour and expectations brought on by technology
- Regulations that require greater capital and more regulatory reporting
- A challenging macro investing context and a dearth of long-term investable assets
The ASEAN life insurance industry manages assets of $438 billion. This will increase substantially as premiums grow in the years to come. However, it is estimated to distribute only 2% of these assets to infrastructure. If the community commits to increasing the share of assets allocated to infrastructure, this will make a significant contribution to the ASEAN infrastructure financing gap.
Below are seven steps that incumbent insurers can adopt, in order to respond to and harness the forces of the Fourth Industrial Revolution.
1. New reality
The first step is to acknowledge the dramatically changed context. Previously, growth used to be about increasing market share. Companies pursued the same methods to target the same set of competitors in the same market. That kind of linear approach doesn’t work anymore. We need to look at the entire value chain, from product development to marketing, distribution, claims management and the feedback loop back to product development.
We need to embrace and assess the current lines of attack, and appreciate the fact that we could come under attack. We cannot afford to be blinkered by the belief that traditional barriers to entry (a high capital base or a long-standing brand name) will continue to protect against competition. Thankfully for ASEAN, the existing market is underserved and under-covered. Insurance take-up is still a small part of a growing middle class, so the avenues of top line growth are nowhere near being exhausted.
ASEAN also provides opportunities on the investment side. Both authors have served on the World Economic Forum’s Global Future Council on Long-Term Investing, Infrastructure and Development. Infrastructure needs in ASEAN’s real economy should create avenues of returns for the region’s life insurance companies. The ASEAN Insurance Council (AIC), a regional platform for the insurance industry, has issued a major call-to-action to insurers to help accelerate infrastructure investment.
Following the call, leading insurance companies WanaArtha Life, AIA, Allianz Life and Taspen signed a strategic agreement to invest $224 million in an Indonesian state-controlled toll road operator, Jasa Marga, through PT Mandiri Manajemen Investasi. The call was made in conjunction with the IMF-World Bank Group (WBG) 2018 Annual Meeting in Bali, where AIC had a speaker at a discussion about infrastructure financing.
So relatively speaking, ASEAN has room to grow old lines of business more efficiently, by using new IT productivity tools and by digitizing existing processes. But that’s just a first-order and short-term response. A durable response must recognise that the fourth industrial revolution is much more than digital efficiency. The second-order response requires a fundamental revamp of the value offering and redesign of the ecosystem.
2. New focus
The new reality also requires a new focus on the customer at the centre of our activities. Our design process should revolve around the customer journey, the customer environment and the customer experience. Over recent years, the customer’s daily life has changed. In Shenzhen for example, you buy fruit from roadside sellers by zapping on QR codes. Contactless payment is used there for virtually everything, even for donating to buskers.
We used to think that a banking app competes with the customer’s experience of walking into a bank branch. That was not the right comparison: the app has to compete for convenience and look-and-feel with other unrelated apps that the customer is already toggling on her phone. Many of these apps allow facial recognition or ‘one-click’ action. Motor insurance claims have to be processed instantaneously using image and video recognition. For too long, regulations have helped established banks ignore ‘customer convenience’, as switching bank accounts was extremely onerous. Now pro-innovation regulations (such as the sandbox program in Singapore) are helping start-ups compete with customer services as a key design feature.
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3. New approach
Central to the digital response is data, both public and personal. There’s a lot that can be done with publicly available aggregated data - data about the weather, for example, or about crop performance or about the spending habits of anonymized cohorts of people. It can help us thin-slice the insurance offering. For example, you can now buy insurance for a trip just as you are about to take off. It is valid for a specific location for a specific duration, and as soon as the trip is over, the policy is over. Micro-insurance in bite-sized pieces is now feasible in a way that it wasn’t so in the past.
In addition, there is personal, private data. With appropriate consent and the right ethical framework, personal data allows for extreme customization (“segmentation of one”) and gamification (where certain behaviours are rewarded with discounts). Data about driving patterns, grocery shopping and exercise habits can be utilized to fine-tune insurance premiums.
4. New value
Data analytics should enable the creation of genuine new value to the insured, so that it justifies margins paid to the insurer. This new value is created mostly in the form of reducing or preventing risk during the life of the insurance contract. For example, the device in my car monitoring my driving pattern can make suggestions that improve my driving style - for example, the speed at which I tend to approach roundabouts. Value is created in risk avoidance, and there is no reason why today’s insurers cannot have a revenue line built around that. Value is also created in making insurance more inclusive. Technology, coupled with alternative forms of peer-to-peer or mutual insurance, could enable previously uninsurable groups to gain coverage.
5. New risks
New sources of insurance revenue could come from new risks that have opened up as a result of technology. The Internet of Things creates closely coupled complex systems. The demand for cybersecurity at various operating levels will only grow in significance.
6. New competition
Today’s established players must anticipate competition from unexpected sources. InsureTech start-ups aim to cherry-pick businesses that are profitable, leaving aside pieces that large organizations carry as loss-leaders. One approach is to embrace start-ups. Recently, Aviva took a majority stake in Neos, a “smart technology” provider that lets customers monitor and protect their homes through connected devices - for example, by alerting them at work if a tap at home is starting to leak. Several banks host and sponsor fintech competitions, occasionally collaborating with contestants.
However, it is not just small upstarts that pose a competitive threat. Large tech-driven marketplaces such as Amazon or Alibaba provide aspects of payment and banking services. As distributors of third-party products or as cloud-based providers of back office services, these platforms can claim informational advantage and directly provide online insurance. Other players such as car companies or manufacturers of sensors can also claim some informational advantage in the provision of insurance.
Platform-based insurance can also have a disruptive pricing model. “Mutual insurance” products do not require any upfront payment of premiums. Some value the entirety of their platforms as a bundled ecosystem. In the same way that a club may offer discounted drinks during happy hour in order to build critical mass, insurance can be “thrown in” as a loss-leader that enriches the data in the network.
Insurance companies must look at every product line as an ecosystem. There is a healthcare ecosystem, as there is a real estate ecosystem and transport ecosystem. The consumer looks at healthcare as a process ranging from online diagnoses to video consultation to digital prescriptions and delivery of medicine. Similarly, when it comes to renting or buying property or a car, the consumer looks for end-to-end service. Increasingly, insurance must be nested within that process, not as a stand-alone product.
7. New organizational culture
In a world of constant change, nobody has a monopoly of ideas. Organizations with a large headcount have a “wisdom of the crowd” to tap on. This should provide scale in organizational learning that is not available to a small start-up. However, this advantage is only utilized if the organization engages its people in a deliberate and non-hierarchical manner. Without an operating culture that promotes creativity and experimentation, organizations forgo speed and agility, which are the hallmarks of success in the Fourth Industrial Revolution. Companies should also update their key performance indicators to reflect aspects of the customer experience. Every case can be tracked like a courier package and every encounter can be rated, as on TripAdvisor or Uber.
Finally, a key differentiator of organizational culture is its ability to execute on change while maintaining successful pre-existing businesses. At least for a temporary period, it is important to manage initiatives around “running the firm” separately from those around “changing the firm”. The tone at the top, ideally from the CEO, and allocation of resources must support new ventures and reinforce the direction of travel.
You can watch a keynote speech on this topic here