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My business school professors managed to hammer a single idea into my head about corporate strategy, and that idea is that there are only two ways to build a sustainable competitive advantage. You can be better or you can be cheaper. That’s it. A company can approach these strategies from many different directions, but at the core, these are the options. In order to create a long-term advantage over the competition, a company has to build a coherent strategy and create an organizational structure dedicated to that strategy. A company that plans to beat the competition with technology must invest in R&D, and a company pursuing a low-price strategy shouldn’t spend millions on lobby artwork. A corollary of this idea about a strategic approach is that existing companies are not blank slates.
This corollary is especially true in the insurance industry, which largely consists of established companies with established ways of doing business. Those established methods are sometimes focused on price, sometimes on product, but all have a coherent strategy and organization. Startup culture looks at insurance and sees lumbering dinosaurs. In some cases this view may be accurate, but it’s important to remember that dinosaurs ruled the earth for 180 million years because they were very good at being dinosaurs. Insurers today are very good at being the kind of insurers they are.
For these reasons, I believe that some insurers have been looking at digital disruption in the wrong way. In some areas digital has the potential to radically transform the insurance market, but in much of the market, digital is more of an environmental transformation rather than a world-shattering meteor.
This question about the ultimate impact of the digital and technology revolution on the insurance market is the single most important one facing insurers today. Each insurer must look at his or her market, products and organization and decide if digital is a meteor or a slow warming. If this change is a meteor, it may be time to look at acquisition strategies. If this change is environmental, then the considerations are different. No digital strategy is going to fundamentally change an insurer’s nature. Most insurers need to use technology and digital strategies to reinforce their current strengths, not attempt to be something that they are not. An insurer’s already-determined strategy and focus should set the stage for who they are digitally, not the other way around. Using this approach, let’s consider some traditional insurer structures and strategies, and ways that digital can fit into what these companies are already doing.
Focus on Price
The first and most obvious insurance strategy is a focus on price. A low price strategy is common in personal lines, because most automobile and homeowner’s insurance does not differ widely between companies. Innovation in personal lines tends to be more focused on creative distribution and service delivery, rather than on innovation in the insurance product itself. There is potential for disruption on the product side, most notably in the areas of autonomous cars, telematics, and “pay as you go” products. However, a company that is focused on price rather than product innovation has some interesting digital strategies to pursue. Automation and efficiency are traditional rewards of technology investments, and in this situation each insurer must decide which technologies have the highest potential return. Blockchain is a common topic of conversation, but realistically how useful is an unbreakable public ledger of transactions to a company that sells automobile policies? Cognitive computing, on the other hand, could fundamentally transform the cost structure of such a company by automating the routine administrative tasks that occupy so much insurers’ cost structures. What does an insurance company that fully embraced cognitive computing look like? No one really knows, but my best guess is that it would not much resemble the companies of today.
Focus on Customer Experience
The second common insurance strategy in personal lines is a focus on customer experience. The idea behind this strategy is that if products do not differ between competitors, then service can be a key differentiator. This customer-focused strategy is not a new idea in insurance, but traditional distribution channels create major challenges. Direct writers sell over the web or through the phone, both of which are traditionally low-touch, low-experience channels. The major alternative distribution channel is through independent agents. In this second channel, insurers have outsourced much of the customer experience to these agencies, over whom the companies have limited control. In either case, if an insurer is focused on improving customer experience, then that insurer must have a strategy that both maximizes customer touchpoints and ensures that each of those touchpoints is positive. Technology has a major role to play in this strategy.
For agency writers, building a new distribution channel is not feasible and the digital strategy has two parts. One, enable agents with technology to provide customers the digital experiences those customers want. Two, build direct contact with those customers through mobile and web. For direct writers, technology provides the only contact channel, so these companies must focus on improving what they are already doing. In either case, technology investments in customer communications are critical, because most insurance customers do not have routine contact with their insurer. Insurers must maximize the value of these outbound communications, because these communications may be the only available touchpoints.
These two approaches are far from the only viable ones available to insurers. Insurers focused on product or underwriting excellence will take advantage of the revolution in data analytics to create new kinds of insurance products and price those products more precisely. Insurers focused on distribution innovation will use digital technologies to deliver their insurance through new channels to new customers in new markets.
Not Whether, but Where
In all cases, insurers that are not facing complete market disruption should adapt their current structures to this new environment, rather than attempting to become something that they are not. To build an effective digital strategy, all insurers must evaluate their market, their organization and their goals to decide where to invest in digital, and how best to profit from those investments.
Digitizing Insurance Customer Communications: A Conversation
Nice job, Andy. Very insightful.