Insurers engaging a platform strategy will surpass those that aren’t

This article, from McKinsey, is the most exciting article I have yet read about how platforms are going to transform insurance.  Its tag line is:

“Today, insurers win by offering a product. Tomorrow, insurers will win by providing access to prevention and assistance services—and by offering the right product to the right customer at the right time.”

It goes on to describe a pathway insurers can follow to realize the platform opportunity: strategy, enablement, and value generation.  It is an excellent article and I commend anyone interested in the future of insurance to read it. 

That said, the article seems to me to be lacking.  I cannot decide if the article is deliberately holding back on the scale of the platform opportunity or falling into what I think of as the Blockbuster trap of not realizing the biggest opportunity, and threat, to one’s industry being disrupted comes more often from without, than from within.

Looking at each of the issues in more detail:

1. The first difference concerns the way the article talks only about the insurance ecosystem but not how it sits in relation to other, bigger ecosystems and how platforms seem likely to me to transform ecosystem performance from the top down, not the bottom up. 

Specifically, the article doesn’t mention risk management.  In fact, the word ‘risk’ only appears four times in 8 pages; three times in relation to the risks assumed by an insurer, which are not the same risks that risk managers deal with, and once referring to the ability to identify the risk of contracting dengue fever in a given 30-day period. 

What I think the article therefore overlooks is that, as much as insurance is a big ecosystem in its own right, it is a sub-ecosystem of the even bigger risk management ecosystem.  In this bigger ecosystem, insurance is just one of many tools.  What risk managers look for is to understand which of their various possible combinations of tool choices will be the most effective given, for example, the nature of the risk they are trying to manage, the resources they have available to them, and the criteria against which they make this assessment.  Insurers can play a significant role in supporting and influencing this assessment but are rarely in a position to lead it.

As I have come to understand the role of platforms in ecosystems, it is to optimize systems in the interests of their end users.  I suspect that the orchestrators who most effectively optimize risk management platforms in the interests of risk managers will win, compared to orchestrators trying to optimize for any single risk management tool, like insurance.  This is insurance’s ‘man with a hammer problem’; not every problem is a nail and insurers will get less value out of ensuring risk managers have a splendid array of hammers than from playing their part in ensuring risk managers have a complete and effective toolbox.

2. The second issue concerns when and how an insurer might develop a value proposition for its approach to platforms and ecosystems and the boldness of the value proposition insurance might support. 

First, the article refers several times to lead generation and claims reduction as benefits insurers can expect from developing compelling ecosystem value propositions.  But the article puts the process of developing a compelling value proposition in stage 3 (after ‘Strategize’ and ‘Enable’) of its iterative approach to developing and implementing an ecosystem strategy.  This seems to me to be like the old joke about not being able to tell if you have arrived somewhere if you don’t know where you were trying to get to.  And self-referential benefits like lead generation and claims reduction would be beneficial results of the value proposition, but they are not drivers. 

The opportunity I think the article has missed is that commercial risk management, unlike commercial insurance, has moved on from seeking only to prevent negative events and to mitigate the consequences of events that cannot be prevented.  Risk management best practice, in the form of ERM, is to support the achievement of an organization’s most important objectives.  While preventing negative events is obviously still important, negative events tend to be rare and the risk and risk management decisions organizations take every day when they are thinking about their most important objectives are different than those they take when their perspective is limited to prevention and mitigation of rarities. 

Platforms and ecosystems present an enormous opportunity for insurers to support their customers to achieve their most important objectives every day.  Which insurer will be more valuable; the insurer that enables its customers to set ever-more ambitious objectives because they make it more likely their customers will meet their objectives or, as insurers are mostly limited to now, the insurer that mitigates the consequences of rare negative events? 

3. The third issue concerns the strategic decision the article suggests insurance executives need to make in relation to whether they orchestrate an ecosystem or participate in it. 

The article describes orchestration as “assembling various services into seamless customer journeys …or creating partnerships to integrate non-insurance services into the insurer’s realm to ensure scalability”.  Participation is what it sounds like and is, apparently, “often done to access new sources of lead generation”.  The article goes on to say that “while participation tends to generate less value and forfeits the customer interface, it is easier to achieve for a single use case and can still bring benefits.”  Basically, the article assumes orchestration is the better strategic decision.

Obviously, the value proposition comment above is one reason I think orchestrating insurance rather than participating in improving risk management would be to fail to realize the opportunity ecosystems present.  But there is also a more practical reason I think participation is preferable in terms of value generation, even at the cost of losing some of the ‘customer interface’.

My thinking is that few insurance executives would be able, over the long term, to resist the temptation to seek to optimize the ecosystem they were orchestrating in their interests; it is simply human nature for any of us to behave this way.  This is why I suspect a new form of risk management intermediary is inevitable. 

The entity I expect will win the risk management orchestration race will be the one that sees risk management as a system and optimizes the overall risk management ecosystem such that both sides of the risk management marketplace – risk managers and product and service vendors – collaborate effectively so both benefit from constantly reliable, constantly improving, and constantly adapting risk management.  As the pace of change generally accelerates, risk increases, and the importance of rapid adaptability grows, risk managers will increasingly be called upon to make and demonstrate reliably well-informed decisions, be able to improve their practices whenever necessary, and know when and how to adapt and be able to do so quickly. 

And so will insurers and other vendors.  They need exactly the same information because they can’t be caught out by change any more than risk managers can, whether because of self-interest or because they cannot serve their customers if they don’t understand what their customers need.  Simply, I think change has accelerated beyond the point where risk management can continue to be conducted in silos.  It is in the interest of everyone in the risk ecosystem to work together to understand and prepare for change better.  Developing the processes and incentives to make this work is something we can come back to another day.

Where we are today though, insurers cannot afford to be passive in allowing orchestrators to develop without their input; quite the contrary.  The article is clear about the need for insurers to act urgently and I agree.  It is essential insurers involve themselves in orchestrator design and development now, so their interests can be incorporated by design.  It will be far too late to influence designs once they are complete and there are too many ways ecosystems can access capital to bear risk that don’t need to involve a traditional insurer.

4. So, as you may have guessed, I think risk management platforms are both an enormous threat to commercial P&C insurers if they ignore them, but are also their future if they embrace them.  A little bit of my main reason for thinking this is in 5. below.  I also think the insurers that choose to influence the design of ecosystems and willingly participate in them, as opposed to trying to orchestrate them, will be bigger than current insurers, leaner, have lower frequency, severity and volatility, and will be more profitable than current insurers.

They will be bigger because their trusted role on the inside of the ecosystem they help to develop, and which is orchestrated in risk managers’ interests, will give them access to a bigger slice of a bigger pie of risk and premium.  They will also be the first to identify new product opportunities.

They will be leaner because so much of the activity in the current value chain is repetitive but, in an orchestrated ecosystem, the work will only need to be done once.  Insurers just won’t need anything like the same number of people or expense.

They will have lower frequency, severity, and volatility because orchestration will be focused on delivering improved risk management, which reduces all three. 

They will be more profitable because they will be enabling and contributing to the delivery of significant value to their ultimate customers, will be able to avoid poorly managed risks and price their products more accurately, and will have higher income, lower costs, and less frequency, severity, and volatility.

5. Though maybe I should have started with the ‘why’, the McKinsey article begins its closing remarks with:

“The emerging economic impact of ecosystems shows they should be regarded as something more than a fancy innovation.  In the end, ecosystems are another way of monetizing the classic components of the insurance value chain: product development, lead generation, pricing and underwriting, service provision, and claims management”.

So, three last things:

a) Ecosystems are not ‘another way’ to anything; in time, they may be the only way to monetize the insurance value chain.  It is possible insurance could become to risk management what a salad is to a burger; fries would be an automatic add on but a salad is optional and, in the grand scheme of risk management, only occasional.

b) Product development, lead generation, pricing and underwriting, service provision, and claims management are components of the insurance value chain but it is not the components of the chain that matter.  For one thing, these are the components of the current chain, which is unlikely to remain intact when an insurer actively participates in a risk management ecosystem platform.  For example, there are already plenty of commercial risks that are not individually underwritten. 

For another, the only thing that will definitely survive the transition to an ecosystem and have long-term value is the core element that runs through all the components; the information without which the insurance value chain cannot start and on which each stage relies.  The real value to be monetized is insurers information, which value will be optimized to the extent it is combined with the rest of the ecosystem members information.  Risk information held in silos is significantly less complete, accurate, or current than information which is aggregated from across the ecosystem and analyzed in real time. 

The biggest shift that I expect will need to take place in insurer thinking is that no insurer, however big, will be able to rely on having more information than anyone else in the insurance value chain to ensure they can operate successfully.  Information volume is no longer a source of competitive advantage; the ability to develop and deliver reliable insight rapidly will be one of the factors determining the winners and losers in the risk management ecosystem race and that will require information sharing across the ecosystem.

c) The shift around how insurers think about information is inevitable if for no other reason than that non-insurers won’t have to make the shift.  One of the most basic elements of information practice is that more information is good, better information is better; “information is power” and all that.  It won’t even occur to entities designing risk management ecosystems from outside the insurance industry to allow information silos to exist.  As difficult as turning centuries of insurance practice on its head will be, this central plank of the industry will have to go if traditional insurers are going to play any part in ecosystems and enjoy the significant benefits potentially available to them from empowering both sides of risk transactions.

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