Where is the disruption in the insurance sector?
Innovation in the insurance industry so far has been lagging. This is why.
Commercial banking, investment banking, asset management and payment services all have been truly transformed and will never be the same again. The traditional ways of business transactions are gone. The times where you had to contact your local trusted banker to transfer money overseas or sell some stocks feel further away than ever before, as the pace of change keeps accelerating.
New players entering the market continue to transform these industries by challenging the incumbents, offering superior services at lower costs. As an example, payment platforms Stripe and Adyen have market caps of US$ 95bn and US$ 56bn respectively. These are higher than most European Banks. ETF broker Etoro has a market cap of US$ 10bn. As for insurance, a sector with a fungible and knowledge-based product, the degree of disruption has been far lower than in most other sectors.
Good ol’ Insurance
When we take a look at the insurance industry, challengers in the western world like Lemonade and Wefox still lag behind with market caps well below US$ 10bn. It is also interesting to note that the performance of incumbents in terms of premium and customer numbers are still relatively unaffected to date.
What is it that such an esteemed technology company did not foresee? What has caused the insurance industry to be relatively untouched to date? And is change predicted to arise in the future?
The insurance sector that we see today has a fungible and knowledge-based product, making disruption highly probable.
Insurance is not popular nor top of mind
To better understand why disruption in the insurance industry is slow in the western world, we need to acknowledge two important aspects of insurance, which is that insurance falls within the “low interest” and “low touch” bracket in the minds of consumers.
Woody Allen once said: “There are worse things in life than death. Have you ever spent an evening with an insurance agent?”
You do not interact on a daily basis with your insurance company. If you do talk to them, it is not because it gives you a lot of pleasure. Mobile phones are in the opposite bracket. They are “high touch” and “high interest”. People use their phones on average 100 times a day and also like most of these interactions. That is why people camp outside the store when a new Apple Iphone is launched whereas the introduction of a new insurance product is hardly ever an exciting event in the lives of consumers. In the property and casualty market, often the only interaction with your insurance product is receiving the annual renewal invoice.
We buy insurance because we want to avoid or reduce the impact of a painful event. We do not buy it for pleasure or enjoyment. When you consider the complexity of the product, the so-called small print with all sorts of exclusions, it is clear that insurance is not a very popular product.
Why insurance is stuck in the dinosaur age
Nokia and Blackberry both lost their leading position in the mobile phone industry in the course of a few years. In a high interest, high touch market, the best players with competitive advantages quickly rise and the competitors with inferior propositions fall out of grace just as fast.
In the insurance industry however, there are a lot of Nokia’s and Blackberry’s still making a lot of money. They have an inferior proposition, but because customers do not actively compare, they can still retain their market position. For new entrants, with great propositions, it is hard to convince customers to switch. Their growth is relatively slow, because of the same market dynamics.
So insurance is low touch, low interest and it has negative connotations. It’s no question why consumers want to spend as little time invested in finding an insurance plan best suited to them. Consumers do care about having a plan and protection against unforeseen events in place. However, they are unlikely to search for a better proposition in the market and ultimately change insurance providers. Most people are more likely to just renew their insurance without checking alternatives, unless change is initiated by a substantial increase in premiums or as a result of bad customer experience.
Captivating the Insurance Market
Where we see new entrants in the insurance industry making headway, is in market segments where people buy their first insurance or where existing customer relationships are leveraged. Lemonade has a strong market amongst millennials and Wefox is dominant in selling through brokers. But the real market growth for new entrants is happening in Asia, where Ping An has over 200 million retail clients, Alipay’s Hu Bao added 100 million customers to their mutual in one year and WeChat has over 50 million insurance clients.
The East Takes the Lead
Let’s try to understand why these new players are dominating in the east. The propositions offered by Chinese companies, Ping An, Alipay and WeChat have some commonalities:
- Propositions are data driven, often leveraging customer data from other services offered by the group, using this data to make the plan relevant to consumers.
- Propositions are supported by a strong technology infrastructure and can therefore be managed in real-time at large scale against low costs.
- Customer journeys are easy. Either it can be bought in a few clicks or the insurance is embedded in a larger customer proposition.
- Interaction with the customer is maximized through other services and loyalty programs.
- The image of the insurance provider is more positive towards the customers in comparison to traditional insurance providers, due to the fact that these companies are part of a larger ecosystem with additional high interest and high touch services offered.
The West Follows
WeFox and Lemonade are working on positive reputations through supporting charities and climate. Like their Chinese counterparts, they are data-driven, on demand and allow for simple customer journeys. However, they are not part of an existing high touch ecosystem, so interaction is still relatively low. The customer journey may be easy, but if you cannot find the proposition, you cannot start your journey.
Customers of WeChat or Alipay’s insurance platform find the insurances in the same interface they use for other services. That last point, as well as the presence of a large upcoming middle class, who buy insurance for the first time now, could well be the reason why in Asia things are moving a lot faster than in Europe or the USA.
The times they are a-changin
Does that mean that the market in the western world will stay the same and that there will be no fundamental changes in the future? We believe that the big change in the insurance industry is actually happening as we speak. There are many challengers in the market who have potential to become the Apple, Google and Amazon of this industry. It just takes a lot longer for them to gain ground compared to other sectors because of the specifics inherent in the insurance industry.
Once these challengers have successfully captured market share, it will also be hard for any other competitor to take it away. It all comes down to a relevant proposition, increasing interaction, increasing interest, easy customer journeys, superior technology and developing a positive reputation. Those companies who focus on these aspects, either as incumbent or challenger, will dominate the insurance sector.
Wait, but what about crypto coverage?
These lessons are not only important for the insurance industry, but are also applicable to the providers of crypto covers. Crypto covers are also low interest and only slightly higher touch, in comparison to conventional insurance covers. Nobody is looking forward to buying cover for the crypto currencies they hold. Most people just take the risk of their crypto’s being hacked, finding the process of buying cover currently too cumbersome and expensive to invest time and money in. However, with that being said, nobody wants their crypto’s to disappear due to a hack of the protocol where they hold their crypto currencies either. If it was an easier process and more affordable, many more people would likely be willing to pay to cover their cryptocurrency.
Bright Union bridges the gap
At Bright Union, we have a mission to make risk markets work. That means we are not just an aggregator comparing the terms and prices for crypto covers and allowing our users to buy and stake and manage covers from a single interface. We also want to make sure that customer journeys improve, that covers are relevant and can be embedded easily. We want covers that can move with your funds and are accessible on demand.
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