It is significant to underline that the insurance space is too big to permit developing a model capable of fitting each of the organizations considered. To be specific, the value proposition, the market, and the structure of revenues and costs remain intrinsic aspects of every organization.
Insurance and insurtech firms obtain several points in common. Although the financial base of the former, in some cases, is significantly bigger than that of the latter, insurtech represent the natural evolution of insurance: according to Darwinian principles of evolution, insurtech is the outcome of a still-ongoing process of adaptation and mutual influence concerning the external environment.
By carefully choosing this perspective, a possible interpretation is as follows: The model aims to provide each company operating in the insurance business with general and practical guidelines for becoming a successful organization.
• Poor engagement: “Life insurers have long struggled to engage prospective customers and nurture relationships with present ones. The product purse high customer interest but low engagement, leading to significant untapped demand.” The high degree of intermediation between insurers and consumers does not help in reducing their distance; this is being due to agencies, banks, independent financial advisors, and brokers vertically operating within the distribution channels. The low digitalization of the entire industry does not satisfy the expectations of the modern generation of customers, such as the millennials. These customers do not rely on their private sphere, as family or friends, to get information. They prefer online reviews or social communities such as specialized forums and other online platforms. With the drastic diffusion of smartphones and other mobile devices, millennials affect the behavior of the old generation of clients. This is known as the “equalizing effect.” Its aftermath may constitute a critical issue for a static and low digitized industry that has always been targeting a market predominantly populated by non-digital natives. The organizations that have shown a management mindset, a forward-looking attitude, and digital firepower are relatively few, leading to open the door to agile, digital-oriented innovators: insurtech startups.
• Legacy cost and investment structures: New startups can deliver leading-edge propositions without incurring in transformation costs for incumbent organizations. This is not realistic in the case of traditional life insurance companies. They most likely maintain policies stipulated 20, maybe 30, years ago, implying an inflexible set of customers and policies that are difficult and costly to transform.
• Legacy ICT systems: However referring to life insurers, the rigidity of their stock of policies and customers goes hand in hand with the employment of old processes and ICT systems. The combination of the legacy cost structures and legacy ICT systems has caused the total expense ratio to decline by only 0.5 percentage points (2000–2013) in key European markets.
• Risk aversion: The insurance industry has often been static, averse to change and innovation: high product development cycles, low ICT investments, and slow delivery decisions have been serious bottlenecks for many insurance companies trying to grow.
As a first step, it is interesting to position the four key issues identified in the associated area. This is the macro-area of the business model that is supposed to affect (positively or negatively) the issue taken into account.
For better fitting the insurance industry, it is necessary to make some adaptations. To be specific, every insurtech startup should address its focus toward the following key elements:
(a) Market: focus on targets
(b) Products and services focus on value-added.
(c) Channels: focus on social and omnichannel.
(d) Customer experience: focus on a customer-centric approach
(e) Revenue: focus on customer lifetime value
(f) Processes and activities: focus on marketing
(g) Resources and systems: focus on technology
(h) Partnership and collaboration: focus on financial institutions
(i) Costs and investments: Focus on risks
This framework better fits the modern environment for a startup operating in the financial services industry. Considering different classes in fintech initiatives, the difference would represent the weight of the various items in the list, together with their specific aims and objectives. Considering the “partnership and collaboration” area, for instance, the weight of financial institutions is completely different when referring to an insurance company or a marketplace lending company; this being the reason why here the focus is not on “financial institutions”, but rather on “financial institutions and other strategic partners.”
It is interesting to analyze which kind of organization mostly benefits from the business model presented in this book. Even though this model is mainly applicable to recent entrants and to those companies that are willing to transform drastically their business, every organization that is performing its business in the insurance industry can benefit from the insights given in this chapter. Setting the stage for innovation and contextually being inspired by the change are elements that must lead the mindset of each business organization, both startups, and seasoned companies. It is important to never lose the overall view and not limit the transformation to one specific component.
Focus on Financial institutions and Other Strategical Partners
Insurtech companies should not address their focus only toward financial services.
Today, more than ever, the insurance industry has been experiencing significant changes in its structural components, exposing business organizations to increased risks and challenges. It is in this new scenario that insurance companies need to find vigor with the aim of more effectively pursuing competitive advantages. Cooperation is an effective tool that, if well managed, allows companies to produce more revenues while minimizing costs. Partnerships between financial institutions and insurers may not be identified as a recent trend; several business models have indeed been believed of to more effectively extract value from this type of relationship: most of them are encompassed by the bank insurance model (BIM), a new insurance branch which provides for innovative ways of doing business.
One potential first step for an insurance company is to establish a partnership with a bank.
Once, based on these elements, the insurance company has opted for single or multiple partners. Different scenarios are possible:
• The insurtech company has a leading position.
• The bank has a leading position. Or
• A joint venture is developed.
This differentiation aims to explain the strategical rationale behind every choice. Practically speaking, it gives interesting clarifications about the reason why financial institutions and insurers establish business relationships in each of the three scenarios.
Cooperation between financial institutions and insurtech companies is a necessary step capable of bringing about significant benefits to both organizations:
- Economies of scale and costs reduction
- Market share growth
- Achievement of synergies
Financial institutions and insurers decide to undertake cooperation to increase revenues while reducing costs, therefore being able to raise profits. This objective is the engine of any decision-making process: managers have to figure out thoroughly the impact of their decisions, contextually adopting the necessary mindset, which has to be forward-looking but always cautious.
Analytical components may affect two elements: revenues and costs, whereas combining and balancing these components are part of the decision-making process.
The first benefit that usually companies take into consideration is the enlargement of their customer base. Both financial institutions and insurers may merge their customer bases, contextually maintaining their one. This process is usually structured on a fee basis. Insurance companies apply a fee for every transaction generated between their customer base and the bank partner (and vice-versa), whereas the amount of the applied fees strictly depends on the bargaining power of the business organizations taken into consideration.
Sometimes, the relationship between insurance companies and financial institutions goes a little beyond the enlargement of the customer base, providing for the synergic development of innovative financial products and services. This may generate a competitive advantage.
Leveraging a partnership with a financial institution also has its effects on the allocation of risks, whereas the same concept remains valid for the geographical diversification. It allows preventing the concentration of risks in specific areas while increasing the customer base through the penetration of various markets.
Economies of scale, instead, produce effects in the cost area, allowing organizations to generate a cost advantage through increased output, thanks to the scaling of volumes.
Insurtech startups and incumbent insurance companies that are willing to effect serious changes to their business plans should deal with the general empowerment of their customers, at the same time, leveraging on them to achieve a competitive advantage.
- Processes and activities—Focus on marketing
- Customer experience—Focus on a customer-centric approach
- Channels—focus on social and omnichannel.
These three areas are very much interconnected. This interconnection justifies a combined presentation in insurtech.