 By Yves Colomb and Charles Wolstein, U.S. based consultants with Towers Watson
Online insurance communities are expected to emerge due to new technology and promise to revolutionise the way insurers do business, making it prudent for insurance leaders to evaluate the impact of online social insurance.
Fifteen years ago, it would have been far-fetched to predict the fall of certain iconic multinationals that consistently broke new ground in their industries. And yet, because they did not keep up with the technological pace, that is exactly what has happened, with some going bankrupt and others being bought at fire-sale prices or simply fading into oblivion. These are compelling reminders that new technologies have transformed business models and reshaped entire industries.
Relevance to insurers
Technology has already significantly changed the insurance industry. Most, if not all, insurance companies are now present and sell their products directly online, and insurance price comparison websites have upset many mature insurance markets and put pressure on profitability. Telematics motor insurance, or usage-based insurance (UBI) as it is known in North America, promises a revolution in individual risk behaviour and insurance purchasing patterns.
But these changes – however disruptive – are still part of an initial phase of the industry’s transformation which started in the early 1990s and has brought immense variety, transparency and choice to many aspects of people’s lives, and empowered them to make more informed decisions. Price comparison websites merely apply Expedia’s business model to another industry, providing consumers with top-down, one-way information flow. Telematics motor insurance, although a dramatic departure from traditional insurance models, is essentially a product of the individual empowerment age: Policyholders trade information on their vehicle usage for the promise of lower premiums and a fairer, more accurate assessment of their risk.
If the empowerment of individuals represents this initial phase of the insurance industry’s evolution, the next stage will see insurers’ top-down, vertical relationships between entities and individuals supplemented with horizontal and bottom-up activity (including peer networks, both social and technological). In other industries, this second phase of ‘social recombining’ has already led to the emergence of multiple layers of online social groups.
People, businesses and organisations sharing similar economic interests have banded together to purchase insurance coverage (or provide it to their peers) for as long as insurance has existed. But current technology encourages new associations to form. It is now relatively easy for individuals sharing similar interests to identify one another and associate online. Indeed, technology enables these previously unconnected people or organisations to identify their peers in ways that were never possible before. For instance, Groupon helped households save money during the last recession by offering group discounts. Importantly, participants were not connected in any way before joining the platform and would probably never have identified their shared interest without the help of technology.
In the near future, people or organisations seeking insurance could meet online and decide to form potentially large, grassroots online social insurance groups (OSIG). These groups could, for example, comprise all the good risks of a specific insurance product or people seeking to insure similar risks. Or it could be a large group from, say, the worst 10% of drivers banding together to obtain better coverage or lower premiums. Individuals would gain more clout and increased bargaining power by becoming part of a group of homogenous (and ultimately more desirable) risk profiles.
Finding favourable conditions
Challenging macroeconomic conditions can increase the perceived value of bargaining power. Sustained economic hardship would accelerate the transition to alternative insurance, as the demand for UBI in the United States after the 2009 global downturn illustrated. The insurance cycle can also push groups of insureds to seek alternative solutions. A strong hardening of insurance rates would provide a compelling incentive for favourable risk profiles to segment themselves away from other insureds. This is routinely observed with corporate captive formation and usage.
Risk profiles historically treated as either marginal targets by traditional insurers or niches by specialists (due to their inherent risk or their low volume), or ignored by both, also have incentives to form social insurance groups to build scale and increase their bargaining power. This is similar to the affinity-group strategy that senior drivers in the UK have used to make coverage more affordable over the last decade. An OSIG could also benefit would-be drivers pushed out of the market by prohibitive premiums and may even help reduce the number of uninsured drivers.
Preparing for online social insurance
Insurers have always worked with interest groups but have not always succeeded at regularly signing or sustaining profitable deals with them. In preparing their online social insurance strategies, insurers may need to:
♦ Counter the inherent volatility of online groups. Technology fosters the emergence of OSIGs, but also makes membership volatile, even though maintaining cohesion is essential to preserve its benefits. Online ‘games’, effective communication and frequent introduction of new features can help prevent member attrition.
♦ Anticipate where OSIGs will flourish, and position themselves to be the insurer of choice. For some groups, the insurer might try to be the moderator (although brokers will compete hard to own this space).
♦ Review their sales capability so that they have the right number of well-trained, properly focused people pursuing opportunities. Most insurers have some very good people in this area, but often their expertise is thinly spread.
♦ Recognise that sales may depend on meeting wider needs than just price. If OSIGs emerge, they are likely to have a common interest and may well prefer a provider that has some link with that shared interest. For example, a supporting wiki website aimed at motorcycle enthusiasts in the UK has proved to be an effective tool.
♦ Balance underwriting and sales. Sales are important, but should not dominate the process, because deals done primarily to grow top-line results often generate sustained underwriting losses.
♦ Recognise the potential impact on margins. If customers organise into groups, they will be better positioned to drive hard bargains and reduce profit margins. Efficiency, a firm control over expenses and a clear, realistic understanding of the economics of such arrangements will be especially important.
The online social age is already a major part of our daily life, but the insurance industry is not a front-runner in this evolution, and it could be several years before it enters phase two. Even if the next phase is not imminent and differs from other industries’ experience, insurers would be prudent to consider the emergence of online social insurance and how their companies would react.
Drawing lessons on transformational market forces from front-runner industries requires keeping an open mind to all possible futures, even if seemingly far-fetched. Some formerly great companies probably wish they had done more of that.
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