In this last article of our ongoing insurance series, Eric Veron and Ian Wittkopp provide an overview of the competitive advantages that insurtechs and incumbent insurers hold, assess whether those advantages are sustainable, and describe how the long-term competitive landscape could change as ecosystem players thrive.
Find article 1 here: https://bit.ly/3gUQMR8
Find article 2 here: https://bit.ly/3hVtjRa
Find article 3 here: https://bit.ly/2ESMug9
Find article 4 here: https://bit.ly/33AWioy
Insurance Outlook Series (1) Accelerating Change
Insurance Outlook Series (2) InsurTechs
Insurance Outlook Series (3) Commercial Insurance
Insurance Outlook Series (4) Reimagined Processes
Insurance Outlook Series (5) Insurtechs vs Incumbents
The insurance industry is being pushed by changing consumer tastes and technology to innovate. In response to this, two types of insurtechs have formed: friends and foes. ‘Friendly’ insurtechs help incumbent insurers to compete, while ‘foe’ insurtechs represent a competitive threat. These ‘full stack’ insurtech challenger insurers hold distinct advantages in their ‘processes’ and ‘intentions’ that incumbents try to match by leveraging their assets. Incumbent insurers must face the threat from full stack insurtech challengers while also hedging threats from ecosystem players that appear to be friendly collaborators in the short term but could turn into threatening competitors down the line.
This article provides an overview of the competitive advantages that insurtechs and incumbent insurers hold, assesses whether those advantages are sustainable, and describes how the long-term competitive landscape could change as ecosystem players thrive.
Mapping the insurance competitive landscape
We can classify entrants into the insurance ecosystem as friends or foes. However, a simple classification like this ignores the complex challenge that incumbent insurers face from non-insurance companies. Therefore, we need a third category, ‘friends or foes’.
Below we analyse each category:
- Friends: In response to increased transformation needs in financial services, an entire ecosystem of friendly collaborators has emerged. These collaborators focus on improving one or more areas of the insurance value chain. For example, CarpeData, a U.S. based insurtech focusing on the claims process, partnered with Zurich Partners to reduce increasing claims cost by leveraging “publicly available web data for real-time assessment and automated decision making”.1
- Foes: Full stack insurtechs (those with a full license who underwrite internally) represent a clear competitive threat, although current gross written premiums relative to incumbents are low. Lemonade, the industry leading insurtech focused on home & renters insurance, had US$133M of in-force premium compared to a renters insurance market of roughly US$3.5B – good for an estimated market share of 3% to 4% (in the US market).2 However, the threat from insurtechs is amplified by their ability to quickly integrate with distributors, including ecosystem distributors. ‘Forward integrators’ represent an increasing threat to incumbents as they threaten valuable profit pools such as auto insurance. Tesla has long viewed insurance as an important opportunity, partnering with Liberty Mutual and Aviva on the ‘InsureMyTesla’ program in Hong Kong and North America. Recently, they launched ‘Tesla Insurance’ in California with State National as a partner.3 Tesla’s goal is to gain more control over the process with most risk being reinsured by a third-party.
- Friends or Foes: Recent insurance headlines have been dominated by news of ecosystem players partnering with insurers. Amazon and Acko General Insurance, an Indian Insurtech, partnered to launch two – and four-wheeler insurance policies in India that can be bought on Amazon pay or the Amazon App/website. Other high-profile partnerships include Grab’s partnership with Chubb to offer insurance products to driver partners and even smaller, regional, partnerships like SingLife and GCash, a mobile wallet, partnering to offer microinsurance solutions in the Philippines. Ecosystem players like Grab and Amazon seem to be ‘friendly’, offering convenient distribution channels to incumbents and insurtechs alike. However, as they gain expertise in the market, they could take advantage of their direct customer relationships to manufacture their own products without an insurance partner. There are numerous reasons why this is not widely practiced, including licensing and regulatory barriers, but there is some precedent. ZhongAn, the first Chinese online-only insurer, is owned by Ping An Insurance, Ant Financial, and Tencent (the owner of WeChat).4 Other ecosystem players like Amazon, Google, and Uber could also decide to create entities fully focused on insurance.
Forward thinking incumbents need to face two threats: the current threat of insurtechs with highly digitized processes entering the market and the quickly emerging threat of ecosystem players skipping partnerships and going directly to consumers with their own offerings. Developing strong partnership capabilities and incubating digital ‘challengers’ to compete in other segments represent strong initial responses, but more needs to be done.
Mapping competitive advantages in insurance
In this section, we focus on the dynamic between incumbent insurers and full stack insurtechs. Sources of competitive advantage in insurance are no different than other industries – they arise from different assets, processes, and intentions of the organization.
Below we examine each type of competitive advantage:
- Assets – Incumbents have access to large balance sheets, agent forces that have taken decades to build, and historical datasets that allow them to underwrite and evaluate risk more accurately. They’ve used these assets, as well as their processes and intentions over the years to build strong brands. Brand is the biggest competitive advantage in an industry that is defined by trust. Therefore, incumbents, by nature of their long tenure, derive a majority of their advantage from their assets.
- Some insurtechs though have found creative ways to earn trust. For example, SingLife understood that succeeding in the HNW space required trust and deliberately used a lion as their logo to draw parallels to older and well know-insurers. With their reputation established, they recently rebranded and changed their logo.
- Process – While incumbents hold a distinct advantage in assets, insurtechs hold an advantage in many processes. Incumbents have invested heavily to improve their processes but are naturally less flexible in product development and slower in time to market. Insurtechs have not only embraced agile techniques that get products into the hands of the customer faster for feedback (some full stack insurtechs have development cycles that are as quick as 7 weeks), they also have an IT infrastructure advantage that can lead to quicker partnership integrations. Additionally, without demands (in most cases) from short-term shareholders, they can afford to truly build customer centric products.
- Intentions – Intentions, or values, are the ethos of the organization. Large incumbents, especially in the insurance industry, are defined by caution and predictability. Since their product development cycles are long and costly, it is natural that they target groups with scale and high margins. Conversely, insurtechs have lower marginal policy costs and can afford to target niche groups and customize products for different partners. In short, they have flexibility that incumbents lack.
- Realizing that their strict risk management and decision-making processes would choke internal start-ups, some innovative incumbents have spun off ‘start-ups’ to operate independently. This structure allows the internal ‘start-up’ room to grow separately while the larger corporate can avoid channel conflict and confusion over branding.
Incumbents have a well-defined DNA. Insurtechs, conversely, are always changing. The challenge for insurtechs will be to keep the processes and intentions that make them unique, while also protecting a brand that increases in value. Incumbents need to close the gap in processes by winning the battle for tech talent and decreasing bureaucracy where possible. Differentiation in intentions will remain as incumbents continue to be stable and predictable and insurtechs maintain a level of agility even as they scale.
How insurers could respond?
Insurers are already investing to sustain their differentiation in the market and to strengthen their value propositions. We believe that the current landscape offers an opportunity to accelerate transformation in the following ways:
- Customer and intermediary experience transformation
- Data driven enterprise transformation
- Insurance operations transformation
Do not hesitate to contact us if you are interested in ascertaining whether Evolution Partners can support your business transformation.