We are living in the age of digital transformation. Like every age, it has its very own specifics, as well as effects for the economy and society. The authors have identified four common, underlying factors we see in common among already heavily-impacted industries. These factors are outlined with respect to their potential impact on insurance, which can be seen as a late adopter to the emerging technological and digital advancements:

1. From non-transparent markets to customer transparency.
2. Substitution of middle man – direct producer-to-customer connection.
3. From many scattered players with high margins to few scaled players with low margins.
4. From supply-driven (company focus) to demand-driven (customer focus).

Let’s look at each of these in turn.

From Non-transparent Markets to Customer Transparency

In the past, customer market interactions, whether buying services or trading goods, were portrayed by the limited possibility to compare these with local agents or retailers. With the emergence of readily accessible information, this local focus widened and allowed for 24/7 active comparison and competition, e.g. via online direct sales or price comparison sites. In most Business to Customer (B2C) areas, the customer is now also able to validate a purchase intention based on peer reviews, which reduce again, at least perceived, uncertainty. The next level of transparency with the reduction of complexity – the matching of the customer’s available data with an automated customized offering of products – is already market standard for industries like fashion, news, music, and movies.^1,2

For the insurance industry, especially in the sales of Property and Casualty (P&C) and other standardized, self-explanatory products, this means a dramatic shift. Transparency of direct sales offerings should, in general, reduce principal–agent issues and information asymmetries and therefore cut into traditional intermediaries (agents/brokers). More available relevant information, e.g. reviews on after-sales performance, as well as stronger value-chain fragmentation and product specialization, will lead to even more holistic customer transparency as seen in price comparison sites like moneysupermarket, Check24, and GoBear. This will also be the case for complex and individual insurances as traditional impact balancing will be challenged and personal predetermination could lead to both personal and insurance predicaments and potentially stronger state involvement for basic coverage. Applying transparency already leads to major impact – sticking to the example of price comparison, this is evident for car insurance coverage where the customer journey nowadays typically starts online. This transparency of new digital intermediation will ultimately tip the scales.

Substitution of Middle Man – Direct Producer-to-Customer Connection

Digital advancements have allowed companies to offer products and services directly to the customer. Online platforms, ecosystems, and engines are the new middle man and they are substituting (parts of) the traditional supply chain and sales channels. In many industries new players have emerged, especially in retail, such as Amazon, Alibaba, and Rakuten, but also in, for example, aggregating transportation like Uber, Gett, and food delivery, e.g. UberEats and Takeaway.com. They started from excellent customer service and specialized products, finally expanding into various offerings and competing in all segments of previous offline-only intermediation.

Similar mechanisms will occur in the insurance (sales) industry. In a world where “online”/“cloud” is nowadays common for the consumer, intermediation will be based on, inter alia, social media profiling; automated recognition of needs; and guided, short, and simple customer data input. Easy to purchase (and cancel) products, direct- and event-based sales, and finally an automated real-time, traceable claims process will substitute the traditional broker. This is often talked about, but will finally happen at the latest in 2020, according to the authors’ assumptions. Customers will ultimately not feel this shift directly as they get used to innovation and new market players like Lemonade, Trov, One, and Element quite quickly.

Within a future landscape of declining product margins due to rising price competition and increasing claims ratios, human brokers are not made for scale as they cannot monitor all potential trigger points of customers in a fragmenting coverage landscape. However, brokers will remain a trusted source of advice for complex products that will not entirely be sold online such as pension planning, luxury individual products, and for customers unfamiliar with online services – for the time being.

From Many Scattered Players with High Margins to Few Scaled Players with Low Margins

The aggregation of data and automated processes have enabled scalable digital business models that can easily survive with small product margins. Transparency and intermediation transformation has already resulted in fundamental change to many localized, fragmented players like taxi services, lottery, fashion retail, and web services. They previously enjoyed high relative margins (thanks to personal customer relationships, information asymmetries, and local protectionism), but rather low absolute profit due to normally small absolute business size (limited sales reach and scalability, especially the high ratio of fixed/semi-fixed cost vs. variable cost, risk averse funding principles, and the like). With ongoing digital transformation, the trend in impacted industries resulted in many of these small players losing margin or even running out of business. On the other hand, a few players emerged, who built large scaled businesses and now enjoy high absolute profits (or internal investment like Amazon) with low relative product margin. Especially in insurance, we still see a localized, fragmented market, with many small players scattered across all sectors, nearly all with fully integrated, self-built legacy-heavy value chains.

New players are, for example, pure white-label insurance carriers like Element or “insurance factories” like One that can be plugged into their business client’s system with open application programming interfaces (APIs). Their focus will be on core business systems, i.e. underwriting and processing specialized, individual products – ranging from B2C to B2B2C, from unit size one to large scale roll-out – and could accelerate to industry leadership at unprecedented speed. Online, digital, social marketing, in combination with unparalleled pricing, provides the potential to overcome reach – however, still with the need of significant investment in areas most incumbents already “own”. Transparency, digital intermediation, and scalability are individual facts that need to be reflected in governance, organizational structures, and company culture, the last being the greatest advantage for new entrants, and the hardest to transform for incumbents.

From Supply-driven (Company Focus) to Demand-driven (Customer Focus)

This trend aggregates an individual customer-centric focus to the company level. As product purchases will be channelled through, e.g., ecosystems, the primary point of contact and visibility of insurance companies will shift. The impact of focusing on the customer instead of the company is illustrated in Figure 1.

Product suppliers, as well as sales, are currently powerful, mostly vertically-integrated, independent units within larger incumbents. However, they will face the impact of becoming supply factories, providing on-demand, efficient services at lowest unit cost. It will be critical to cater to customer demand whenever, wherever, and via whatever intermediation, through diverse but fully-integrated sales channels (via client relationship management (CRM) systems), whether directly attached to products (e.g. cars, electronics), external plug and play solutions, internal direct sales, or branded ecosystems. Insurance products will be developed from the customer’s viewpoint, bundled, fragmented, and specialized, not solely following current rules of push-marketing.

Furthermore, insurance products will evolve, as customers demand varying coverage, all-in-one solutions, or integration of underlying services. Insurance providers will focus on protecting personal data and preventing identity theft in a dedicated digital vault, for example Deutsche Bank Digital Identity, and mobility providers will provide all-in services where the customer does not need to assemble the different steps. The trend of offering core services with satellites will create “security-service-ecosystems” with an integrated customer journey, where additional, external services will no longer be needed. Whether existing insurers integrate external digital solutions or build in-house is dependent on their size and willingness to invest the large sums needed, and their ability to attract the necessary talent.

Incumbents Will be Among the Winners

Innovation is not new in insurance. However, the current wave of digitalization is coming faster, is more fundamental, and – most importantly – is awash with new serious competitors. Hundreds of startups are emerging and billions of dollars are being bet on new technologies, as has been the starting point in many other industries. However, some incumbents are aware of the challenges they are facing and will transform themselves in order not to be overrun by new, innovative, or even disruptive players like AXA and Allianz. The flexibility to adapt to new technology, new customer demands, and unprecedented (external) ecosystems and platforms will be the winning formula for smaller players. Larger players will also have the option to stay relevant and profit from customers with greater willingness to pay for positively-perceived brands, but only on state-of-the-art digital offerings in a fully digitalized value chain. Challengers will also face many hurdles: high barriers of entry due to regulation, complex country specifics, high customer acquisition costs, and (compared to the banking industry, for example) a currently still not deconstructed and easily accessible B2B offering along the whole insurance value chain (e.g. no “Carrier-as-a-service”). Between 2010 and 2016 the authors observed that most investment ultimately goes into customer acquisition, and only a smaller fraction into real digital and technological advancements like insurance industry specialized implementations of machine learning as demonstrated by Digital Fineprint. This should be a clear sign for incumbents that the race is on. However, with the right digital strategy, significant tech investments, and a talent and culture initiative, incumbents are in an excellent position. The remaining option of collaboration between incumbents and startups is tempting, but also hard due to difference in governance, speed, culture, acceptance of new technology, as well as sales and corporate-level buy-in. As the insurance industry is in absolute and relative money terms very attractive and currently not end-to-end digitalized, we will certainly see significant investment and many winning models. A few will ultimately emerge as fully-integrated digital champions – and reap the resulting high absolute profits and valuations.