Insurance Distribution: The Great Disconnect
Since the birth of the insurance industry, distribution has been dominated by agents selling insurance policies for a commission or fee. Because insurance products have been so complicated and diverse, professional advice has historically been needed to help make the right choices.
About 10 years ago, the insurance industry began to make quiet steps in the direction of improving how it did business with the evolution of companies like Insurance Noodle, Insureon on the commercial lines and Esurance and GEICO on the personal lines side, and others who made early big bets in the space.
However, most insurance companies resisted moving to digital distribution out of fear of disenfranchising their traditional brokerage networks. Brokers had no incentive to invest in technology because business was so lucrative. Why spend a dollar on technology investment that could yield very uncertain outcomes when they could simply invest that dollar in buying a smaller agency and realizing the return quickly? This lack of economic upside is the dynamic that kept the insurance industry from evolving at the rate of other industries.
The early digital plays claimed to be focused on customer experience, but really all they achieved was automating an inefficient quoting process that traditionally used question-intensive applications to provide speedier quotes. And rightly so – allowing customers to apply and transact online was a vast improvement over emailed PDF forms. This improvement was limited to only those products that were simple and easy to apply for, with no need for external assistance. Restrictive, indeed. It assumed that just because you could do it on the computer you were offering a better customer experience.
But it wasn’t enough. Soon more and more digital brokers began to emerge, fueled by an eager investment community driven by the promise of modernizing our industry. In the meantime, insurance carriers started feeling the pressure to have to improve their back-end support systems to evolve with the goal of helping traditional agents go digital. Some experienced moderate success in the space but overall did not significantly improve the customer experience.
As these V 2.0 digital distributors started to really look at the process in total, the focus started to turn to the end-to-end customer experience. Emerging digital distributors worked outside the box with insurers who appeared to be increasingly flexible in experimenting with digital distribution and adjusting their underwriting box. The drive to get at profitable risks more creatively with less friction, less questions, quicker quote generation, and in some cases, bind and issue capability, started to drive the solutions that emerged. While the 1.0 digital players faced technology as their biggest challenge, the 2.0 distributors seemed to have technology down – putting product behind the technology was their biggest challenge.
As we fast forward to today, we now see literally hundreds of entrants into the market looking for funding in what is quickly becoming a wildly crowded space with plenty of pent up capital looking for an outlet. The 3.0 digital companies getting this investment are focused on leveraging usage-based rating models to allow customers more control over their costs. The inclusion of third-party data sets and technology (wearables, etc.) to create better informed underwriting and rating models is critical to that future profitable process.
Driven by conservative investment strategies by the VC community, meaning smaller rounds, the 3.0 digital distribution start-up companies are coming into the market with verticalized/specialized distribution strategies, as opposed to the 2.0 distributors who provided a wide variety of products to their customer base.
In fact, we see many of the changes in the distribution system driven by investors who want to see a differentiated model supported by supported by innovative customers who demand the improved experience. Innovation follows the money.
So, what does this mean for distribution?
- As a cohort, digital distribution has only captured a small percentage of the market. While we can expect that to accelerate, the question remains: Who will be positioned to benefit from that acceleration and how much market share will be captured at the expense of bricks-and-mortar agents and brokers? Digital distribution will continue to migrate to a cloud solution provider that will have the ability to manage a multi-tenant environment.
- The 2.0 digital distribution plays are maturing and without big stair-step growth, their business trajectories are, in many cases, looking like the slow and steady growth rate of brick-and-mortar shops. Expect this group to be acquired for less than their initial projected and funded valuations. This makes them potential add-ons to larger carrier investment portfolios as opposed to the coveted IPO (i.e., cover wallet plays). Rather than betting on unproven players, companies should look to proven solutions that can be modified with a low code approach. This direction will allow the insurance organization to incorporate the changing business input and direction directly into the technology solution.
- The 3.0 digital plays now become very interesting. They pave the next wave of investment focused on highly innovative product sets, third-party data and integrated buying behavior that capitalizes on the philosophy of doing one thing and doing it well. But do they have the reach to become billion-dollar businesses? Significant enhancements to today’s emerging processes, yes, but real game changers to the industry? No. So, what does this mean for the future of insurance distribution? Platform, Platform, Platform. Insurance companies need to decide if they are going to move to a platform company and ride the investment and systems integration capability that is being built or look to enter the cloud business directly.
The Future of Distribution
We see the future of distribution evolving in three key areas:
- Specialized 3.0 digital providers with low-code options and other entrants will begin to evolve into imbedded platforms for distribution and service through partnerships or homegrown insurance offerings. These cloud-based platform providers align the core businesses (e.g., more workers’ compensation sold through payroll, property through real estate transactions, cyber through tech security vendors) and other outlets that represent where the customer goes to buy. This path evolves the buying behavior as opposed to just morphing the customer experience.
- Significant support and introduction of new usage-based (e.g., Gig economy) product offerings continue to evolve in creative ways. Use-based rather than buy-based behavior. Customers across the board are opting for these types of pricing plans, so shifting to them for insurance is not such a huge leap. Insurance organization are going to need to build the capability to rapidly create and deploy product or risk missing out on these new growth markets.
- Massive opportunity to aggregate great distribution technologies that are highly specialized and verticalized into cohesive low code cloud ecosystems that puts the customer in control of their information, provides them access to options, services, and education. Agents will be incorporated in new ways into these emerging ecosystems. Transparency into distribution compensation systems will drive the level of services customers are willing to pay for as they will now control the level of service they expect. For auto insurance, compensation may be close to 1% whereas for exotic professional liability insurance products it may be higher than traditional compensation.
The future of digital distribution will be based on these emerging ecosystem platforms that will drive the delivery of the level of customer experience that buyers will require moving into the future.