Coping with the Changing Nature of Insurance Distribution in Asia
This is the second article in a weeklong series on insurtech.
The first part of this piece looked at the changing face of insurance distribution in Asia, especially with respect to its digitization and through the emergence of new digital channels that are seeing different vendors enter the broader insurance space like never before.
The pace of change is tremendous, and the opportunities are large, but the recent developments have also given rise to new challenges that incumbent insurers and emerging insurance ecosystems will need to overcome if they are to remain relevant and create self-reinforcing ecosystems.
Potential Challenges for Insurance Ecosystems
Most e-commerce transactions are simple one-time exchanges of cash for goods. Once a transaction is completed, the relationship between vendor and buyer is over. Insurance is different as the relationship between vendor and buyer only begins after the initial transaction. There is a myriad of possible interactions that can take place thereafter. If only the initial transaction is provided by the ecosystems, but all other interactions take place beyond the ecosystem, there is little additional incentive for customers to buy insurance through the ecosystem.
Offering the full range of insurance-related interactions, on the other hand, requires an end-to-end integration between an ecosystem’s customer-facing platforms and all participating insurers. Unfortunately, the insurance industry is notorious for failed integration products and its lack of prevailing industry standards for IT systems and interfaces. Moreover, industry consolidation in the past decades has resulted in insurers having multiple disjointed core systems, many of which are bespoke siloed legacy technologies, further calling into question the scalability of integrating them into an ecosystem.
Finally, insurance core systems are also often built in product silos with very little compatibility between the different products silos, complicating integration further. When it comes to multichannel distribution, these difficult-to-integrate product silos get even further multiplied by the number of channels used by an insurer for distributing its products, making the entire distribution setup highly complex, costly and clumsy. Sound, agnostic and scalable technology that can onboard insurance partners and products quickly and cost-efficiently as well as create interoperability among the participating parties’ diverse systems will be the cornerstone of any successful ecosystem distribution for insurance products.
Potential Challenges for Insurers
Insurers are in a precarious situation as Southeast Asia’s large platform companies take hold of the insurance-customer relationship. Recent studies have shown that customers in Asia are increasingly willing to purchase insurance from big technology firms. Additionally, a recent report points out that the ASEAN region’s e-commerce business will more than triple from $72 billion in 2018 to $240 billion in 2025, driven by increasing mobile penetration and a tech-savvy middle-class population, which are the main drivers for insurtech as well. If this happens, incumbent insurers could become mere commodity producers for the powerful distribution channels if they do not adapt; and there are some major hurdles to overcome if insurers are not to fall behind.
Chief among these challenges is the technological gap. To take part in the new platform world that is nurtured by data and lives on modern, agile and integrated technology, insurers cannot rely anymore on the distribution channels approaching them for integration. The new platforms are—for now—focusing on adding value for their customers rather than targeting the exorbitant upfront commissions that have nearly become the standard for long-term bancassurance distribution agreements. Insurers have to pay and, generally, also provide a digital insurance distribution platform for the bank to integrate with its various digital front ends. The new ecosystem platforms are taking over this task, for the price of more competition to be paid by the participating insurers.
In the new high-speed technology-driven world, insurers that are prepared to and capable of integrating quickly with the modern distribution channels will be a far more attractive bet for platforms. A fast time-to-market is essential to the platforms’ value proposition and insurers will need to learn to run as fast as the digital platforms if they are to keep up.
Leveraging data paired with a fast time-to-market for new products and an iterative feedback loop is perhaps the most important attribute of a successful insurance ecosystem.
With exclusive deals hardly interesting for platform distributors that want to offer customers a wide range of tailored products, insurers need to think about their capability of integrating into multiple platforms. This additional level of complexity calls for a new approach to distribution. The rigid product- and channel-centric model of integration will need to give way to central and modular management of covers, wording, pricing and underwriting rules. Agile channel-specific adaptation of products and pricing are a must for avoiding channel cannibalization and for staying in control of the crucial product strategy.
Finally, insurers traditionally created off-the-shelf products and then sought customers willing to buy them. In the platform world, customers are accustomed to products being tailored to their specific needs on the spot using a wide range of available data. A modular approach to insurance that is based on cover-modules, rather than generic products, will allow exciting, tailored products to be assembled in real time based on a customer’s specific protection needs. Moving beyond the product-focused model demands both organizational and technological change. But becoming more agile is indispensable for the long-term health of any insurer in Southeast Asia.
The Race To Become Southeast Asia’s Dominant Ecosystem
Southeast Asia, with a population of 650 million and manifold regulatory environments, is a highly diverse and fractionated market. In all likelihood, there will be a number of insurance ecosystems emerging in different markets and covering different insurance needs. The large number of contenders and the myriad of initiatives make predicting winners impossible at this time.
There are, however, some aspects that all successful ventures will share. First, leveraging on all available relevant data paired with a fast time-to-market for new products and an iterative feedback loop is perhaps the most important attribute of a successful insurance ecosystem. The first-mover benefit is amplified by the self-reinforcing properties of digital platform distribution.
Second, the width of the platform offering will be crucial. Platforms that manage to scale their onboarding process are in a prime position to cover the entire range of their customers’ protection needs out of one hand. To benefit from the self-reinforcing properties, ecosystems need to reach scale.
Finally, there are several approaches to the technological development needed to realize an insurance ecosystem. Many of the recently seen partnerships have opted to build their own solutions from scratch. The deep pockets of the large tech players with armies of developers is taking the old build-versus-buy debate to a completely new level. In light of the track record of bespoke-built insurance integration projects, however, these bold projects come with substantial risks. Building an insurance marketplace without prior experience in dealing with the complexity of insurance distribution is hard.
Entering into a joint venture with an insurtech player, as Grab did with Zhong An, is another possible approach. The joint-venture model, however, comes with some inherent conflicts of interest. Platforms often have numerous partnerships with other platform providers, and building technology in a joint venture with one partner might scare off others, for fear of integrating into infrastructure partly owned by a competitor. Jointly investing with friendly platform peers (rather than competitors) into a co-owned insurtech company is a possible approach.
By creating bespoke solutions, insurers and platform providers also risk investing time and capital into the next generation of legacy systems. Embracing the pay-per-use approach characteristic for the on-demand platform industry, a platform as a service model may provide a safer and faster approach. In this scenario, a distribution partner can stay tech-independent and simply use the best technology provider available without any strings attached. Already today, there are dedicated multichannel sales platform vendors that offer all the functionalities described above, as the recently published 2018 Gartner Hype Cycle report concludes. A partnership model will greatly reduce time-to-market, investments and risk of failure.
Despite all the challenges, both platform providers and forward-looking insurers are racing ahead. The prize to be won is to become Southeast Asia’s predominant insurance ecosystem. In 2019, we will see the first insurance ecosystems—such as the Grab/Zhong An marketplace—rolling out, and by the end of the year, we may have a much clearer picture of who the winners will be of the digital insurance industry.