On January 30, 2018, Amazon, Berkshire Hathaway, and JPMorgan announced that they were forming an independent healthcare company.
The news threw the insurance market into a tizzy. CEOs of other large insurers met in the days following the announcement to explain how they were technologically future-proofing themselves. While the new company’s focus will be on their employees – combining Amazon’s customer engagement, BH’s insurance and reinsurance know-how, and JPMorgan’s relationships – the alliance represents a significant disruption in the industry.
Why did this partnership cause such consternation among industry incumbents? According to a recent report of Venture Scanner, there are at least 1500 insurance companies globally, with funding of USD 20 billion. And there are other promising game-changers on the horizon. South African insurer Discovery’s Vitality program has made significant waves in the health insurance industry, and startup insurers like Lemonade, Metromile, and Trov are transforming the models for insurance across the engagement cycle. But none seem to have created dissonance on the same level as the Amazon-Berkshire Hathaway-JPMorgan alliance.
It’s safe to assume that the reason has much to do with Amazon, as Berkshire Hathaway and JPMorgan have existed as they are for years. What makes Amazon such a major disruptor? The company brings a strong, scalable, and, most importantly, proven platform for digital customer engagement across a multitude of categories – both B2B and B2C. Digital is the key.
Why is digital such a game-changer for insurance?
Arguably, digital has been the most-discussed topic in recent times in the insurance world. The new age heralded by hyperconnectivity, cloud computing, supercomputing, and smart technologies promises to completely transform this industry from its traditional operating model of the last 300+ years. A massive shift is anticipated as the interplay of digital technologies now offers new possibilities, such as:
- Complete individualization of risk for all assets, life, and health
- Significant disintermediation of distribution and engagement
- Embedding insurance in digitally enabled ecosystems like wellness, mobility, etc.
These possibilities have spawned a new breed of innovators known as insurtechs. Most insurtechs are either focused on customer acquisition or are targeting a part of the insurance value chain to help drive efficiencies. In either case, they are working with an insurer to influence the latter’s operating model. However, a handful of these startups are attempting to completely disrupt the conventional business models by engaging directly with the insured.
Most established insurers today know that it is just a matter of time before their business models completely transform. However, their investments in, and revenue dependence on, existing operating models act as a deterrent from proactively seeking disruption. Instead, some insurers are trying to avoid impending disruption by nurturing startup accelerator programs or committing investments into independent units within the company to incubate new business models.
Despite these strategic investments, these companies continue to resist the “Uberization” of the insurance industry by rejecting the convergence of innovation and scale. A quick analysis of successful disruptors like Uber, AirBnb, and TripAdvisor shows that these disruptors have done three things very effectively:
- Large-scale aggregation: Created a huge canvas of choices at the consumers’ fingertips
- Complete delayering: Removed intermediate layers to allow direct customer engagement
- Self-contained ecosystem: Built and leveraged a large, strong ecosystem of product or service providers, logistics, payment, financers, etc. to enable significant efficiencies of cost and/or time
All of these companies had to get providers on board to bring scale, but once they had achieved a reasonable scale, the other two factors ensured a huge customer base, leaving other providers little choice but to join their platform.
What does it take to disrupt the insurance industry?
If we look at the insurance purchase process today, except for the very simple low-ticket items, most purchases start on a digital medium and remain there for a while – until the customer consciously seeks a sustained physical engagement in the validation phase and selects either a physical or digital closure. A good part of the decision-making happens while the digital touchpoints are being traversed and the digital content is being consumed over proprietary or curated third-party forums and social media.
Talking to digitally inclined customers who have completed an insurance purchase reveals that there are a number of different journeys customers can follow. Most are “phygital” – i.e., customers jump between digital and physical touchpoints during their journey. In my opinion, most digitally inclined players in the insurance industry – including insurers, distributors, and aggregators – are just starting to understand and align with customer journeys well enough to influence conversion or closure.
Many insurance manufacturers have recently been investing in advanced digital marketing and marketing automation tools to influence the pre-purchase process. The jury is still out on these, as the visible impact on the top line is not yet clear. At the risk of sounding repetitive, I feel the critical gap has been the limited ability to track and align with customer journeys. The fact that insurance is a “push” rather than a “pull” business adds to this complexity.
In the light of the above, the entry of Amazon and others adds a new dimension to the industry. Such marketplaces bring unique capabilities, including:
- A strong understanding of how to track and influence customer journeys
- A large, loyal customer base that comes to them to purchase anything and everything
- A large portfolio of products with a natural affinity for bundled insurance
In my opinion, the likes of Amazon are ideally placed to disrupt insurance distribution. They have a set of core strengths in digital customer engagement. This, complemented with insurance product and process know-how, can help create innovative models for insurance when carefully orchestrated in tandem with the manufacturers. Berkshire Hathaway and JP Morgan will act as strong accelerators to build scale on the provider side; in many countries, this model can also be affected by a large progressive insurer and a hospital chain.
What could the marketplaces do differently?
Insurance marketplaces could consider the following three tactics:
- Maximizing bundled insurance – For products like mobile devices, electronic appliances, etc. where “bundled protection” is a possibility, insurance can be calibrated to the buyer’s profile and protection requirements – which should be cheaper than current stand-alone offers. A “digital exchange,” where insurance manufacturers can push real-time quotes based on appliance buyer’s profile can be a game-changer in this segment. Customer journeys could also be analyzed to optimize the insurance purchase during and after the mobile/appliance purchase.
- Innovating for millennials – For millennials whose first port of call is the digital marketplace, “bite-sized” innovative lifestyle protection products could gain traction. Products that are simple to understand and straightforward can bind this segment for good. This approach will also expand the market by creating a completely new product-market segment that can be engaged for deeper portfolio penetration through lifestyle/life events mapping.
- Algorithmic targeting – Insurance purchase and retention, like any other purchase, can be predicted. Analytics-led digital targeting for stand-alone insurance purchases has been proven to drive retention and life insurance renewals (also called persistency). With their proven competence in consumer analytics, digital marketplaces are much better positioned to monetize this. This approach will require a strong interplay among actuarial, sales, and analytics teams. Eventually, it will be key to building a profitable life insurance portfolio, which will be critical to drive scale for a marketplace.
Digital marketplaces can eventually work with insurer product teams to target long-term insurance products, including pensions and annuities, to build profits of significant scale through “phygital” customer journeys.
The next 6-12 months will see decisive moves by Amazon, BH, and JPMorgan – first for their employees and then for the larger U.S. market. Flipkart, a marketplace that’s larger than Amazon in India, will launch its own insurance offering there, and it’s likely that other evolved marketplaces in other economies will also make plans to enter the insurance market.
While Amazon will have Berkshire Hathaway and JPMorgan for insurance expertise and a provider ecosystem, the pace of entry and success for other newcomers will depend on their ability to develop and grow similar partnerships. I believe that marketplaces will carve a niche for a large category of insurance products and disrupt insurance consumption for good.
For more insight on digital disruption in the insurance industry, see The Must-Do Bucket List For Insurance Providers Moving Into 2018.