{"id":9175,"date":"2019-03-05T13:18:00","date_gmt":"2019-03-05T18:18:00","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/digital-disruption-in-the-insurance-industry-winning-by-unlocking-the-value-chain\/"},"modified":"2019-03-05T13:18:00","modified_gmt":"2019-03-05T18:18:00","slug":"digital-disruption-in-the-insurance-industry-winning-by-unlocking-the-value-chain","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/digital-disruption-in-the-insurance-industry-winning-by-unlocking-the-value-chain\/","title":{"rendered":"Digital Disruption in the Insurance Industry; Winning by unlocking the Value Chain"},"content":{"rendered":"

If someone had asked you ten years ago which industry was going to be the first to be disrupted by digital innovations, many \u2013 including me \u2013 would have answer the insurance industry. This hypothesis was driven by the fact that if we breakdown the insurance business to its core, is basically an industry built on incomplete information, where insurance companies pools together subjects with apparently similar \u2013 but unknow \u2013risks, charging a flat premium that is calculated based on uncertain probabilities to cover the future liabilities originated by that group plus a profit. Then, when we think in digital disruption, as we experience today in many sectors, we think in multiples online applications and live tools that can close, in a smooth way, the information gap between people that need insurance and companies that are willing to provide it. \u00a0But what we have seen in reality is just the opposite, where the insurance industry and their legacy incumbents remained isolated for many years from the digital disruption wave. Several factors can be mentioned to explain why digital disruption was delayed in this industry including rRegulations (and over regulation!), capital requirements and several entry barriers such as\u00a0 historical data and long contracts.<\/p>\n

Today we are finally starting to see a credible wave of digital disruption that is changing the dynamic of this industry and is defining a new set of winners and losers. A quick proof that digital disruption finally has arrived at this industry is the amount of money that is going to \u201cinsurtechs\u201d, companies that are leveraging technology to compete in the insurance landscape[1]<\/a>.<\/p>\n

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The other side of the same coin is the value that incumbents\u2019 players have lost in the last few years. McKinsey, in the same report, has estimated that \u201cUS auto insurers have already lost on average $4.2 billion in underwriting profit a year over the past five, with expenses and losses consistently outweighing premiums\u201d <\/em>due to digital technology innovations in the industry. Insurance customers today are demanding better services, flexibility and customization, all features that legacy vertically integrated players are having a hard time to offer within their traditional business models that was successful for many decades. There are several studies that shows what is happening to customers in this industry, and how they are demanding new needs, greater flexibility, transparency and tailored offerings. One of the latest IBM reports[2]<\/a> shows exactly this phenomenon:<\/p>\n

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In this context, let\u2019s start describing who are the losers of the disruption. As we introduced before, the players are risk at this industry are those legacy companies with high levels of vertical integration competing all over the value chain (product design, marketing, distribution, pricing, claims, customer service). This high operational leverage is what constraint them to adjust their business model quickly enough to meet customer needs now that digital players are offering specific value prepositions for each module of the value chain. Does this mean that all traditional insurance companies are losing in this new disrupted competitive environment? The answer is no. What we are seeing in the market is huge variance in the results, where those legacy players that have failed to decouple their integrated business models and focus on those steps of the value chain where the add more value to consumers are losing a lot. \u00a0Below[3]<\/a> we can see the example of two traditional UK insurance players, facing different reality in this era of disruption, based on the actions that they have taken. Being a legacy\/traditional player does not mean that you are condemned to be a looser in this digital disrupted era, is all about how flexible you are in adjusting the business model.<\/p>\n

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When we talk about losers, there is a significant impact on labor as well. As legacy company start to break down their integrated business model in order to adapt and compete in this new \u201cmodularized\u201d environment we see how traditional jobs will be replace by digital tools (ej. Chatbox[4]<\/a>, online platforms, digital premium calculators, etc)<\/p>\n

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Now let\u2019s move to the winners in this new digital era. As we mentioned before, conceptually the winners in this industry are being those players that are focusing in one step of the value chain and are offering something unique and valuable to customer leveraging some digital capabilities. Key for the winners is to recognize their strengths \u2013 where they truly add value to customers \u2013 and partner with third parties as required. Let\u2019s review a couple of examples:<\/p>\n