Tecnologia - 17 • 04 • 2020

Autore: Yuri Poletto

This article has originally been published on the magazine New Insurance in March 2020

In 2003, Apple launched the iPod and iTunes store, two products that revolutionized the music business and that marked the beginning of Apple’s rebirth after years of deep crisis. The innovation introduced by Apple with these two products consisted in making the use of digital music quick and easy, through the adoption of a new business model. With the iPod and the iTunes store, in fact, Apple gave up control of the element with the lower margin (music) to focus on the element with the higher margin (the hardware, or the iPod), building on it the customer base which in the following years became the launching pad for products of extraordinary success such as the iPhone.

The case of Apple shows the benefits that a company can get from adopting a new business model. Could this also be the case for the insurance industry? In an article published in 2011 in the Harvard Business Review, one of the most prestigious Management magazines in the world, three signs of crisis of a business model are identified: “The first clear stage is when next-generation innovations offer smaller and smaller improvements. If your people have trouble thinking of new ways to enhance your offering, that’s a sign. Second, you hear customers saying that new alternatives are increasingly acceptable to them. And finally, the problem starts to show up in your financial numbers or other performance indicators”1. Although with different intensities depending on the markets, there are signs of a possible crisis in the traditional insurance business model. The innovation initiatives implemented by insurers in recent years have concentrated mainly in the area of ​​process automation, and have brought remarkable results in terms of increased efficiency and productivity (the GWP per employee of European companies has increased by 14% percent between 2007 and 20172). A similar success, however, has not be achieved by initiatives in the area of ​​product innovation, where many parameters are worsening (one above all, the penetration of life and non-life insurance, calculated as the GWP / GDP ratio, has decreased by 15 percent between 2007 and 20172). An increasing number of potential customers, especially among the new generations, are looking for new offering models and open to buying insurance products from non-traditional operators3,6. The consequence of these and other crisis factors is a difficulty of the insurance industry to grow at appreciable rates: the GWP of European companies grew only by 7 percent in the period 2007–2017, and at the same time the density of the Life and Non-life policies (premiums per capita) grew only by 5 percent in the period 2007–20172. The current insurance business model can be basically defined as a marketplace, in which subjects who want to protect themselves from the economic consequences of a possible adverse event, meet with other subjects willing to take on the risk against the payment of an advance premium. The value that insurers currently offer to their customers is to ensure the correct execution of the processes and transactions that take place in the marketplace (distribution of products, collection of premiums and payment of claims). This business model has worked, works, and could continue to work for many more years. However, as seen, there are unequivocal signs that something needs to be fixed, and this something could be, as argued above, the business model.

In the search for a new business model, one direction that more and more insurers are exploring is to transform their organizations from “Managers of Transactions” into “Providers of Prevention and Protection Services”, rediscovering a role that insurance companies already had in the past (in the London of 1700 for example, when in the city the main risk was fire, the mutual insurance companies created teams of firefighters who intervened in case of fire). Insurance plays a key role in modern society, protecting individuals and organizations from the economic consequences of adverse events. When an insurer reimburses health care costs to a family, protects a farmer from natural disasters, or pays reconstruction costs for a company after a fire, it is protecting our future. Since insurance policies are essentially a tool for monetising risks, the insurance industry benefits from the improvement of socio-economic conditions. The reduction of car accidents, the improvement of people’s health, helping organizations to be better prepared to face new risks, all these changes have relevant positive impacts on insurers’ balance sheets. In addition, when insurance coverage is available, individuals and organizations can undertake initiatives that involve taking greater risks, and which allow them to be more innovative and productive, thus contributing to the advancement of society. There is therefore a virtuous circle that links the success of the insurance business to the improvement of socio-economic conditions4.

So how can insurance activate this virtuous circle? Through the adoption of a new business model, focused on creating and sharing value with policyholders. To do this, insurers must adopt a different approach to business, no longer guided by their “risk appetite” and limited to the research for internal efficiencies, but oriented towards the achievement of positive externalities, such as improving the behavior of policyholders.
The adoption of this business model allows insurers to reconcile business needs with the needs of society. Capgemini’s World Insurace Report (2019) shows that the evolution of the risk scenario is creating new demand for protection in different areas, such as population aging, climate change, and cyber risks. A growing part of the population feels exposed to these new risks, and is willing to share more personal data and adopt new solutions to cover this gap3. In this scenario, insurance companies are not currently well positioned to market themselves as partners to manage these risks: only a quarter of policyholders trust their insurer, and less than half would turn to their insurer to receive risk management advisory5.

Some insurance pioneeers are proactively tackling this new scenario.
Ping An, a Chinese financial group founded in 1988, initially was an insurance company, and then expanded beyond insurance into a wider set of ecosystems such as health, financial services, mobility and housing. Ping An’s evolution path began when their management started looking at which sectors were most relevant in their market, not only from an economic point of view but for the society as a whole, and identified ecosystems such as mobility, housing and health. Then they identified the key areas in each of these ecosystems where as an insurer they could have produced value for their clients. In the health sector, for example, Ping An reasoned around the fact that insurers are normally positioned at the end of the customer experience. They therefore decided to vertically integrate their offering, entering areas where insurers were not normally present, to capture the consumer at the beginning of his experience and increase Ping An’s “share of wallet”. Good Doctor, Ping An’s primary health platform, now delivers over 500,000 online consultations per day to consumers who are looking for advice on health-related issues, and has over 500 million online customers. Ping An also plays an important social role: in China, 55% of healthcare expenditure is borne by the public healthcare system, to which today Ping An provides, in over 250 cities, tools and services in various areas including claims management.

Discovery is a financial group founded in 1992 in South Africa, which offers life, health and auto insurance. Discovery’s mission is to encourage people to be healthier, facilitating and protecting their lives through an innovative business model. In 1997 Discovery launched Vitality, a health insurance program which, through a rewards-based incentive system, encourages customers to conduct a healthier lifestyle. The Vitality model leverages on the principles of behavioral economics, using techniques and tools such as prizes and discounts, and digital technologies such as wearable devices and smartwatches and data analysis, to encourage changes in customer behavior. Vitality’s business model has proved to reduce disease and mortality rates, and consequently the cost of claims for insurers. Part of this “surplus” is returned to customers in the form of rewards and premium reductions, through an innovative personalized dynamic pricing system. In particular, Vitality’s members register up to 30 percent lower rate of recourse to hospital care, and live 13 to 21 years more than the rest of the insured population (up to 41 years more than in comparable uninsured population). After achieving 40 percent of the private health insurance market in South Africa, Discovery introduced similar models in the auto and life insurance sector, creating synergies between these lines of business (e.g. fewer road accidents, fewer health problems and mortality reduction). Thanks to partnerships with leading global insurers, such as AIA, Generali, PingAn Health and Sumitomo, Vitality now operates in 15 countries, where it has achieved over 5,5 million customers.

Changing the traditional insurance business model, focusing primarily on prevention and protection, with financial payments in the background, would be a more engaging value proposition for customers, and should be the priority for the insurance industry in the years to come.
When the payment of a sum of money is the expectation that the customer has towards the product, the result that is obtained is to turn insurance into a commodity, shifting the competition only on the price, sacrificing margins and exposing the industry to new, more efficient competitors capable of exploiting new technologies. This also don’t position insurers in a favorable way in the eyes of customers, as insurance presents itself as the subject who intervenes only when the worst scenario occurs (the accident), with the consequence that all customers who do not report a claim will see insurance as something of poor value, expensive or useless.
On the other hand, it has been shown that customers are much more involved and inclined to purchase a product if it offers a set of useful services, which can be used on a daily basis and which help to lead one’s life or business in a safer way. A product in which the payment of a claim is only the last resort in case the worst should happen, and not the only (or main) element of the offer.

1 S. CLIFFE, R. GUNTHER MCGRATH (2011) , When Your Business Model is in Trouble, Harvard Business Review, Boston

2 INSURANCE EUROPE (2015, 2019) , European Insurance in Figures

3 CAPGEMINI, EFMA (2019) , World Insurance Report

4 FSG (2017) , Insuring shared value

5 STARTUPBOOTCAMP, PWC (2016) , Insurtech as a force for good, London, StartupBootCamp

6 COTRONEO U., COSTA E., CIARLARIELLO G. (2015) , Digital Insurance in Italy, The Boston Consulting Group, Milano