By Jenny Sutton
The classic example of a value chain is a manufacturing company that buys raw materials, transforms them into an intermediate or finished product, and then distributes them, with each step increasing the value compared to the cost of the original inputs.
The great explosion
Analysis of the value chain to identify outsourcing has allowed companies to introduce a more flexible coupling of steps. Moving or outsourcing the factory floor to China, the legal team to India, or the call centre to the Philippines have all resulted in the modularisation of businesses. Modularisation and the accompanying data deluge have opened the door to disruption from new entrants who can attach themselves to the value chain.
The value chain has exploded into an ecosystem.
Customer migration
As a result, now, more than ever before, customers have choices. Pick and mix services from multiple suppliers along the chain. Or switch to disruptors that have built entirely new ecosystems with better, faster and cheaper services than the incumbents. Like Uber or Airbnb.
Already today, customers can source many of the activities in the insurance value chain from other providers – the insurer no longer controls every interaction with the customer. And with less direct customer engagement, insurers risk becoming even more disconnected from their customers.
Product designer to manufacturer
Some innovative insurance products in the last decades have been created by insurance companies. But too often insurers have designed products in response to agents’ requests, or to reduce their risk or capital requirements, seldom based on primary research with customers. In doing so, insurers have failed to fulfill their role in the value chain of developing products from the perspective of the consumer.
In the future, new products will be conceived by companies other than insurers, who will provide specifications to insurance companies and select the best provider. Insurers will effectively just provide the capital to cover the risk, while product features, packaging and benefits will be under the control of the external party – often the distributor.
Distributors will repackage and bundle life and non-life products together, configuring an insurance solution from the best of breed products for each customer based on their needs and with the flexibility for customers to change the mix over their life time.
Realignment of channel power
Affluent customers requiring advice- based, face-to-face, personalised financial planning will seek out independent advisers or brokers, who can provide solutions from a variety of sources for all their customers’ financial needs. These advisers or brokers will be aided by sophisticated real-time portfolio management tools and robo-advisers.
Insurers, hungry for market share at the top end of the market, will cooperate in the hope of capturing a disproportionate share of the affluent segment. For customers whose financial needs are more straightforward, on-line distribution channels will dominate.
Fearing channel conflict with agents, and without the back office infrastructure to enable a completely straight through process, insurers will work with independent digital brokers who will provide a single point of contact to meet customers’ evolving multi-line insurance needs.
Distributors will “own” the customers
Commission has become a dirty word in insurance. As customers demand more transparency, distributors leveraging their increasing channel power, will attempt to source products at cost from insurance manufacturers, charging a markup or an advice fee commensurate with the real value they add as they pass insurance products on to their retail consumers. Distributors will no longer be product pushers and order takers for insurance companies. Instead, the distributor will have to add value by being a true problem solver on behalf of the customer. The distributors (rather than the insurance company) will increasingly “own” the customer, and will see themselves as a representative of the customer, not the insurer. They, not the insurer, will be the ones to reward loyal customers with discounts or other benefits.
Continuous underwriting
Underwriting will no longer be a discrete step in the value chain. Automated underwriting at the point of sale is already a step in this direction, but ultimately risk assessments will be incorporated into the sales funnel. Rules between distributors, insurers and reinsurers will be agreed in advance. Underwriting will be conducted as a continuous process using either predictive or forward underwriting approaches, drawing from public data sources, and personal data shared by the customer, with distributors filtering out unsuitable applicants at each step, long before they get to the checkout.
Insurance companies will not have an operational role to decide which risks to accept, and which ones to reject. Based on agreed rules and pricing, they will automatically insure any customer that has made it through the buying journey, making fast track manual underwriting processes obsolete and no longer a source of differentiation.
New approaches to servicing and claims
Customer service functions will primarily exist to provide second level support to distributors. Most customers will serve themselves online, or via their distributors. The system of record, long held in the mainframe, legacy policy administration systems, has the untapped potential to add value to the insurance contract for the customer. Distributors, impatient with the lack of insight into customers provided by their insurance partners, will build their own CRM systems, data warehouses and analytics teams. Distributors, or third parties, will ultimately assert their positions as the primary record holder, with insurers just holding replicated copies of the bare minimum data required to execute the insurance contract.
Submitting a claim is the moment when the customer (or their beneficiary) knows whether what they have bought will actually deliver the expected value. As distributors see themselves more and more as the buyer’s representative, they will play a greater role in the claims process – assisting customers to file and negotiate their claims. Distributors or other industry participants will go into the business of factoring claims – buying claims from customers and negotiating with the insurance company for their own account.
Ecosystem or extinction
As insurers have focused over the past decades on products that reduce their risk and/or capital requirements, they have undermined their source of value and differentiation to the customer, and created the opportunity for others to deliver the missing value.
With this hollowing out of the insurance company, the lines between life insurers and reinsurers will blur as insurers function more like today’s reinsurers – sources of capital, with very little contact with the customer.
Insurance companies will become factories – centralised, data-driven, financial storehouses. Financial strength, signified by strong capital positions and effective investment strategies will be their differentiators, unless alternate, collateralised, crowd-based sources of capital disintermediate this last remaining role of the traditional insurer.
Insurers will be faced with a choice – either spin off standalone businesses to independently participate in the ecosystem and deliver parts of the value chain at an arm’s length, while focusing on the core business of providing the financial backing for a highly customisable range of products in the most cost-effective way; or transform the business to compete with new players as a vertically integrated end-to-end provider, delivering customer value at each and every stage. It should be an easy decision!
Originally Published in Asia Insurance Review 1 July 2016
