The insurance industry at its core is built on incomplete information, where Insurers group subjects with similar risks together and demand a flat premium calculated through the probabilities of covering the liabilities of such a subject group. Even though digital innovation is beginning to close this information gap, for many years incumbents of the insurance sector were able to withstand the digital disruption wave through regulations, high capital requirements and entry barriers (e. g. historical data & long contracts) (Nicolás, 2019). Nowadays, due to ever-growing customer demand for “new needs, greater flexibility, transparency and tailored offerings” (Nicolás, 2019), technological innovations are beginning to stretch the boundaries of the market and changing its dynamics (Catlin et al., 2018), establishing new winners and losers in the insurance industry.
Insuretech companies have been the biggest winners in the industry in recent years as they are offering highly customized policies and dynamical premium pricing (Hargrave, 2019) through the use of the newest technologies in the field of AI, IOT and data analytics (MCKinsey, 2018). One of the main characteristics of these new market entrants is that they mainly focus on one step of the value chain (Product Offerings, Marketing, Underwritingand Claims Management), offering unique and simplified services (Nicolás, 2019). In the Product Offeringsstep companies such as Figo are creating solutions for unserved and underinsured markets, offering “usage or behavior based personalized insurance” (PWC, 2018). Figo Pet Insurance uses its integrated cloud platform to offer personalized healthcare insurance for pets (Smith, 2018). Insurtech firms such as Coverwallet are reinventing the customer experience (Marketing) though online comparison and streamlining and customized customer engagement platforms (PWC, 2018). Underwriting is also being revolutionized through data analytics, specifically in terms of remote data capture and analysis and the quantification of emerging risks (PWC, 2018). Through valuating geospatial data using deep learning and data science Cape Analytics allows customers to better understand the risk profile of their property assets (Cape Analytics, 2019). And in the last step of the Value Chain (Claims Management), robotics and as-a-service platforms are reforming the operation and expense structure (PWC, 2018). CLARA Analytics is using AI to anticipate needs of claimants reducing the cost of claims (CLARA Analytics, 2019).
The rise of Insuretech is threatening legacy incumbents, which traditionally have been vertically integrated in every step of the value chain. Their high operational leverage impedes them to meet the new customer needs as personalized and fast as their Insuretech counterparts (Nicolás, 2019). In order to survive in this changing insurance market incumbents have three strategic options in order to survive. They either both stop their high vertical integration and start focusing on core value chain steps in order to fight off their Insurancetech counterparts, form partnerships or engage in Acquisitions of Insuretech firms in each step of the Value chain they are competing in. If incumbents fail to implement one of these strategies it is only a question of time that they will be driven out of the insurance market.
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Hi Hans Philip,
Very interesting blog post and insights into what is happening in the insurance industry. I especially liked the three strategic options that incumbents have in order to survive in the changing insurance market. In my opinion, one of the largest incumbents, namely Allianz, utilizes all three options to stay relevant, yet especially focuses on forming partnerships with startups and acquisitions of InsurTech firms:
For instance, Allianz has its own digital investment unit called Allianz X, which invests in “digital growth companies that are part of the ecosystems related to insurance” (Allianz X, 2019). These ecosystems include Mobility, Connected Property, Connected Health, Wealth Management & Retirement, Data Intelligence & Cybersecurity.
Allianz X functions as Allianz´ corporate Venture Capital fund and invests in startups while “providing an interface between portfolio companies and the digital ecosystem within Allianz as well as driving innovation across Allianz’s operating entities and global lines of business” (Allianz X, 2019). As Allianz X seems to bear fruit and is well integrated into Allianz´ future strategies, the company decided to increase the size of its investments into Allianz X to €1bn. This, in my opinion, shows that this incumbent sees the changing market dynamics and employs the options to stay competitive you mentioned in your post.
What do you think, are there other incumbents also utilizing the three strategic options?
Allianz X (2019), Allianz X – Our Investments, Available at: https://www.allianzx.com/ [Accessed 06-Oct-19]
Fintechmagazine (2019), Allianz increases investment fund to €1bn to focus on insurtech. Availabe at:
https://www.fintechmagazine.com/insurance/allianz-increases-investment-fund-eu1bn-focus-insurtech. [Accessed 06-Oct-19]