What are the threats to incumbent insurance companies? For those that are slow to respond to the changing realities of the industry, the threats are both real and immediate:
1. Squeezed out of customer interactions: Agile competitors will increasingly oust insurers from the customer engagement layer of the value chain unless insurers can create innovative offerings that add value. The process is already underway. For instance, in the property insurance sector, Google’s smart home solution, Nest, is now acting as an intermediary between homeowners and insurance firm Liberty Mutual, offering the customer a 5% discount if it allows Nest to relay data back to the insurer.
2. Losing access to data: As non-insurers respond to IoT adoption by introducing their own innovative solutions to customers, insurers risk losing access to valuable data that enables them to better understand and price risk. As one example, BMW is fitting telematics as standard in certain car models to offer drivers insurance premiums based on their usage. The German auto manufacturer is working in partnership with Allianz, but as increasing volumes of real-time data become available, insurance risks will be reduced, and there is little to prevent auto giants from cutting insurers out altogether.
3. Disintermediated by platforms: As we have seen with the meteoric rise of platforms such as Uber and AirBnB, innovative environments that recombine services present a significant threat to incumbents, as customers’ reliance on such intermediaries is reduced. Emerging platforms such as Friendsurance and Guevara are already threatening to steal market share from incumbents by offering customers more cost effective peer-to-peer (P2P) insurance solutions.
In many cases, the complexity of the regulatory environment and the need for large capital reserves to protect against unexpected losses may be significant barriers to startups hoping to steal market share from incumbents in the short term. But incumbents cannot take this for granted. The exponential rate of technological change, as illustrated by the figure below, will drastically shorten the shelf life of insurers’ existing models, if they fail to adapt them.
In this new digital landscape, where products and services can rapidly become outdated, and emerging technologies create urgent new demands from customers, insurers’ five-year strategic planning cycles are no longer fit for purpose. If they are to adapt their strategies in a timely manner, insurers will need to convert to much shorter planning cycles.