Future of Insurance Distribution
Role of Changing Customer Preferences, Connected Devices & Platforms
Over $10 billion has been invested in insurtech since 2012. A substantial portion of this investment, often more than half, ends up with innovators in the insurance distribution space. The trend largely continued even in the first half of 2020, based on the information available about funded startups.
To understand the forces behind this prevailing focus of investment and startup communities, it helps to digest some of the key emerging trends in the insurance market.
44% of insurers rank connected devices for personalized insurance as top 5 priority to drive revenue growth in next 3 years. 30% include products based on internet of things among their top distribution tech investment priorities. 46% have launched or are testing personalized real-time digital/mobile services to help customers identify, manage and prevent risks.
As per a WEF report, innovation in financial services is deliberate and predictable; incumbents are most likely to be attacked where the greatest sources of customer friction meets the largest profit pools.
Customer friction areas and emerging preferences
A growing number of insurance customers are willing to consider alternative distribution models, including buying from non-insurers, likely due to their disillusionment with service levels compared to more digital industries and the low touch nature of insurance. Strong consumer appetite for insurers to add value in their daily lives through real-time interactions provides a chance for brands to increase engagement. Such dramatic shift in customer expectations is expected to cause 25 percent of incumbents’ economic profit to be at risk, if they delay building digitized distribution models.
Costs of distribution and Channel Profitability
In the case of Lloyds, the acquisition cost ratio has risen from the low twenties in 2004 to the low thirties now, an increase of 8 percentage points. The increase in acquisition costs is despite 113 percent net earned premium growth since 2004. For the top 30 global carriers, the increase in acquisition costs was 7 percent, from 18 percent in 2004 to 25 percent in 2018.
A key factor impacting digital enhancement or disruption is the insurance market’s distribution mix, with exclusive company networks being most exposed to competition from digital natives. Exclusive agents still lead distribution in most personal lines, with a cut of about 50 per cent. Independent intermediaries account for 35 per cent. At less than 15 per cent, the share of direct sales is still small, pointing to a significant potential for digital technology.
While the pie of digital continues to grow, contrary to widespread belief, there is not necessarily a trade-off between the lower distribution cost and loyalty levels. The chart above from life insurance industry shows that digital distribution can achieve both drastically lower sales costs and more persistent client relationships.
Geico, Progressive and USAA, three of the industry’s most aggressive advertisers, collectively gained 17% market share over the past two decades, according to a 2016 BCG/Morgan Stanley report. That growth came “at the expense of both larger and smaller competitors who were unable or unwilling to adapt to the changing consumer preference,” according to the report. In 2018, auto insurers spent nearly $2.4 billion in advertising, up significantly from $201 million in 1998, according to Kantar Media. Pricing and brand engagement continue to dominate in the crowded and competitive auto / home verticals.
What is happening in banking?
In banking, as a consequence of higher digital adoption, customers are visiting branches less in every country surveyed. In Germany, the percentage of people visiting a branch once a month declined from 60 percent in 2012 to 31 percent in 2018, while in Sweden, it dropped from 27 to 8 percent. Overall, customers are more and more likely to use digital channels and reserve their branch visits for special advice, to solve complicated issues, or to purchase complex products such as mortgage.
The challenge for retail-banking leaders is to manage a shift away from a distribution paradigm that, in just a few years, has become almost obsolete. In many markets, people bank almost exclusively through phone apps, and many would probably go 100% mobile if the opportunity were available.
Banks are using various levers:
a)Implement intelligent routing of customer requests between digital and assisted channels (reported profitability increase of 5% to 15%)
b)Shifting from contact centers to customer care platforms (reported profitability increase of 2% to 8%)
c)Embedding “distribution” on partner platform services through APIs (reported profitability increase of 2 to 8 %)
d)For most banks and in most markets, reducing branch networks while, at the same time, taking steps to optimize the remaining branches. (reported profitability increase of 2% to 8%)
What are the emerging models in insurance?
Distribution models are still evolving and there is no best-fit model. Leading players find it necessary to mix and match digital with traditional approaches to advance in new digital enablement, while running and improving core businesses.
Customers desire new ways of purchasing insurance and managing risk — including more fit-for-purpose coverages and services and more immediate delivery — and are fueling new sales and marketing opportunities.
Emerging distribution models:
a) Virtual insurance advisor: Combining digital, social and customer-provided data, an Amazon like shopping experience is offered.
b) Everyday risk coach: In partnership with device vendors and data providers, personalized risk profiles /holistic risk advice.
c) Plug and play insurer: Buying insurance while shopping for other needs. 40 % ok to buy from a car dealer, 30% from a retailer, 29% online providers.
d) Ecosystem orchestrator: Aggregate and offer value-added products / services that cater to full range of financial needs via data-driven partnerships.
e)P2P network operator: Abundance of social and digital data enabling new ways to identify and pool customers.
While these new models will evolve in the next few years, many of the legacy, years-old models will continue to thrive in new iterations. Taking a step back in history will enable one to appreciate how distribution has become a rock-solid growth driver for insurers over the last centuries.
In the early years, insurers hired agents, often on part-time basis, to enroll applicants for insurance. Agents, who were captive or exclusive, represented a single company. Others, similar to today’s independent agents, worked for multiple companies.
At the same time these two agency systems were expanding, commercial insurance brokers (often underwriters) set themselves up in cities. While agents typically represented insurers, brokers represented the clients buying insurance. As technology evolved, alternative channels did too, including direct sales by phone, mail and later the internet. Insurers were soon tying up with other types of outlets, such as banks, workplaces, associations and car dealers to access potential policyholders.
In the beginning of the 19th century, companies in the US created networks of agents, assigning them specific geographic areas, and set up branch offices managed by general agents, known as MGAs. Compensation changed from fees for applications to percentage commissions for premiums collected. The Hartford was the first insurer known to have attempted direct marketing in 1810.
Today, agents are licensed by the states in which they do business and sell coverages for the companies they work with. Independent agents sell more commercial lines insurance than personal lines, while the reverse is true for captive agents. MGAs focus more on commercial risks and have authority from carriers to accept business on their behalf.
Over the decades, distribution systems have changed. Some insurance companies that started in business using their own sales force switched to independent agents because as companies started to write business in unfamiliar locations, they needed to rely on local people who knew the area.
Recent Distribution Led Startup Activity
It is worthwhile to examine some of the funded startups from H1 2020 and the areas they are innovating in the distribution space. While startups like Agentero are digitizing processes for agencies, others such as Neosurance and Clyde connect directly with retail customers or merchants to sell insurance using leading edge techniques from AI/ML.
Imperatives for Insurance Distribution
Insurers will increasingly find it necessary to embrace models blending human talent with digital technologies in new ways to create fast, intuitive and digitally enabled experiences for customers. Such an approach will need to build on foundation blocks such as creating a digitally enabled sales force, expanding the reach of distribution and optimizing distribution economics.
The proof in the pudding of such hybrid distribution models, for early adopters has been that productivity rose by 15 to 20%, time to market cut by half or more, net promoter score improved by 20–40% and revenue by 5–10%.
Traditional omnichannel and multichannel methods do not have agents as superhero at the core. However, a hybrid model deploys agents who can add value at key moments in the customer journey and who are supported by an easy-to-use digital experience when their expertise and assistance is not needed. This means simple products and low-value activities should be fully automated and migrated to digital channels, while complex, high-margin, bespoke activities are managed by people who are supported by digital platforms and tools.
End Note
The agility and dexterity in moving towards hybrid physical/digital distribution models will serve as a critical value lever for carriers. It will enable them to strengthen their digital reach, while augmenting the quality of advice of their physical network and promote more convenient, lower-cost channel options for low value interactions. In this new phygital model, customers will find themselves transferring smoothly between channels while giving physical channels the opportunity to drive higher value, long-term advice-led relationships.
As customer expectations continue to grow, and as distribution becomes the focus of many new entrants ranging from insurtech to non-insurers, insurers will become more competitive in their traditional and emerging distribution models. While distribution wont be the only area to contribute to future successes, it is where many decisive battles would likely to be fought.
