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Insurance Distribution Tech: Innovation Boon?

What is the current state of distribution technology and technological readiness in the P&C Insurance industry today? Is it a boon or barrier to innovation? Does it matter?

There is significant investment in both new Insurtechs and by incumbent insurers, agents and brokers in distribution technology. Why the statement above should matter is where is this investment going and what is it doing: creating new customer growth, increasing profit margins and profitability or better customer experiences. Or at least opportunities for such innovations?

A glance at the consolidated distribution expense ratio is a good gauge to assess past and present insurance industry distribution efficiency. The consolidated industry Expense Ratios as reported by OSFI (Canada) and FOI (USA) shows that there has been no change in the past 10 years in either country. The short analysis is that industry innovation efforts have not had an overall positive effect on distribution expenses.

One could argue, why care about the industry if we are taking care of our own efficiency? You should care about the industry because insurance isn’t done in a vacuum. Direct writers still work with reinsurers and customers. Brokers and agents work with customers and multiple carriers who, in turn, work with multiple reinsurers. Success will be best achieved when a larger complementary set of stakeholders are prepared to participate in innovation.

The only way that the industry has seen even a slight improvement (which it has, albeit tiny) is that direct writers continue to nibble away at the broker channel. Although this is just taking away a much better product/service and offering a less featured inferior product/service in the name of lower prices. This is not innovation.

Given the facts, the industry still has a long way to go to achieve improved efficiency.

Not a boon.

Insurance technology today is a barrier. Too many stakeholders with too many solutions (and versions of those solutions) that were invented before today’s technology was even dreamt of. Yet, with another layer of duct tape, the industry keeps going for another year.

The problem is that now is the time to retire older solutions that are simply not delivering. Anytime a new solution is invented that “fits” the industry, ie. It works with existing systems (likely through integration of one form or other) that is not a “new solution”. It is new technology that is cobbled to work with old technology to overcome challenges caused by the old technology. This is a tweak to old solutions that won’t disrupt anything, hype or not.

There is good news, however, as newer technology provides solutions that work for stakeholders who are willing to collaborate. Solutions built with customers as the first priority using cloud platform bases to deliver significantly better customer experiences (that includes lower prices) and better margins for insurers, insurance brokers and reinsurers who are willing to collaborate.

The Rise of Ecosystems and Platforms

McKinsey & Co., in their “State of Property & Casualty Insurance 2020” predicts that almost 1/3 of all personal lines (which is over ½ of all insurance sold) will be distributed via B2B2C ecosystems. We predict it will be much higher than that and include increasingly larger volumes of commercial as well as life and health. This will be a clear win for the customer.

For those that may not be clear what a B2B2C ecosystem would look like, it is a cloud based shared platform for all stakeholders in the insurance distribution vertical. The key advantages are better customer experiences including lower prices and Real-Time processing for all insurance activities between stakeholders than older technology could imagine.

Mckinsey agrees with us that “In the future, increasing the value transfer of cheaper distribution to the customers will be key.”, although we call that lower prices.

The final eye-popper that they observed is that by comparing the UK insurance industry to the mortgage industry they found that insurance spends 3 times more on distribution than they make in profit. In comparison, the mortgage industry (which uses platform technology) spends ½ on distribution than what they make in profit.

Opportunity is great for beating the market and gaining profitable growth at the expense of slower moving or immobile competition.

Henry Ford and Steve Jobs are often quoted for saying that they didn’t listen to customers but, of course, they most certainly did. They both offered customers things that they wanted to buy at prices that they wanted to buy them at that competition could not match. If that isn’t listening to customers, I don’t know what is.

“Some people say give the customers what they want, but that’s not my approach. Our job is to figure out what they’re going to want before they do. I think Henry Ford once said, ‘If I’d ask customers what they wanted, they would’ve told me a faster horse.’ (He didn’tSK) People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.”

– Steve Jobs

What they really meant was that customers are often not able to articulate fulfilling a need without all the permutations of options out there. BUT, the basic knowledge that something was missing and finding out what that was and solving that problem is key to a successful business strategy.

For example, customers have been “shouting loudly” for a long time that they want lower prices. Even agents acknowledge that fact (the assumption being that they are the closest to understanding the customer in general). Yet, here we are as an industry developing solutions that are not delivering on that clear customer requirement.

“You’ve got to start with the customer experience and work back toward the technology – not the other way around.”

– Steve Jobs