(Image credit: Arek Socha.)
“Change brings opportunities. On the other hand, change can be confusing.” – Michael E. Porter
The increasing pace at which emerging technologies, such as artificial intelligence (AI), intelligent automation, telematics, and blockchain, are being adopted may be the big change story of the last several years. Insurers, reinsurers, brokers, and MGAs are revolutionizing business operations using modern technology and data sources, and the COVID-19 pandemic has only increased demand for virtual and paperless technologies, creating an urgency for insurers to make improvements.
Michael Porter is an American author and academic well-known for his books and articles on economics, business strategy, and competition. While his concepts were not conceived specifically with the insurance industry in mind, there are a number of lessons that can be learned by using Porter’s Five Forces to analyze the trends and events causing change in the industry today.
Michael Porter’s Five Forces Framework
Porter’s Five Forces, originally described in a 1979 Harvard Business Review article, is a model or framework that outlines five forces which shape every industry and which can be used to help determine an industry’s weaknesses and strengths. Each of the five forces, listed below, has specific application for the insurance industry today.
Competitive Rivalry: Pretty self-explanatory, right? It is defined by the level of competition in the industry and is a core influencer in the pricing and marketing strategies of products and services. Insurers compete with each other, as well as with government insurance programs, risk retention groups, and self-insured entities. Today, there is very little product differentiation, as product creation is primarily driven by external risks. The price of insurance products is also highly regulated, so the most opportune way for insurers to differentiate themselves is by the quality of policyholder services provided.
In terms of winning this competition, insurers need to rethink how distribution channels serve and satisfy today’s “digitally native” customers. Tools, such as web applications integrated with chatbots, mobile applications, and automated service, entice insureds with convenient, 24×7 availability. Such tools will also equip agents and brokers to create an experience economy by offering personalized insurance plans and faster service to policyholders, helping to build customer loyalty.
The Threat of New Entrants and Development: As with competitive rivalry, every industry faces the threat of new competitors entering the market and this threat plays a major role in determining branding and distribution and strategies within an industry. The InsurTech movement is giving rise to new entrants, partnerships, and operating models. From technology-driven underwriting products to new sources of property data, from usage-based insurance (UBI) technology to the internet of things (IoT) and drones, and from API-based insurance functional modules to white-labeled insurance products for quick integration and launch, change is afoot in insurance.
Additionally, insurers face the ongoing threat of big techs, like Amazon, Google, and Tesla, entering the insurance space. This kind of competition from industry outsider, heavy-hitter competition could prompt many insurers to give in to M&A pressures due to loss of market share or business operations becoming unsustainable amid price pressure. Traditional insurers may also look to partner with service providers to become more agile, without having to completely abandon legacy platforms or invest heavily in expensive technology.
The Power of Buyers: The next two forces, the power of buyers and the power of suppliers, speak to a basic law of business, which dictates the rules of supply and demand. Buyer influence, can be a force to be reckoned with in any industry if multiple alternatives for procuring products and service are available. In such a market, buyers have the power and can demand lower prices or higher product quality from industry providers.
While large corporate clients paying millions of dollars in premiums have bargaining power, with online aggregators and the emergence of social media, today’s individual policyholders are a force. With instantaneous awareness of coverages, pricing, and services, modern buyers demand more personalized attention and care for the premiums paid.
To meet these expectations, insurers need to build user-friendly workflows for customer-facing processes, including underwriting, policy issuance, endorsements, and claims. A streamlined customer experience is needed across touchpoints, on the website, with agents, and with customer service representatives. To that end, insurers need seamless integration between resources, including lead management systems, rating engines, CRM systems, policy administration systems, front-end portals, third-party data aggregators, and social media channels.
The Power of Suppliers: Acting as a polar opposite to the power of buyers is the pressure that suppliers can put on companies by raising prices, lowering quality, or tightly controlling product/service availability. Agents and brokers have historically leveraged the ability to influence policyholder choices into placing business with specific insurers. However, with insurers increasingly leveraging front-end tools to reach potential customers directly, the bargaining power of distributors is diminishing.
Reinsurers also play a big role in supporting insurance organizations for distributing risk and reducing capital constraints. An abundance of capacity in the reinsurance marketing can increase competition and lower rates, creating profitability pressure in the reinsurance market. Also, the regulatory requirements for standards, such as IFRS 17, could lead to potential redesign in products within the reinsurance segment.
The Thread of Substitute Products or Services: Finally, the buyer’s propensity to substitute a product or offering with another product to solve the same need constitutes the last force, the threat of substitute products or services. Traditionally, insurers have not had to deal with any substitute products or services. Today, however, the insurtech movement has made this much more of a reality by enabling innovation in insurance products, including on-demand and usage-based insurance products, which have great appeal to younger consumers looking for an alternative to the traditional.
Technological advancements put insurers in a strong position from which assessment and modernization of operating models and competitive positioning is possible. However, if the elements represented in the Five Forces are not approached holistically, the outcome can be drawn-out and counterproductive.
There are a number of challenges, including identifying processes that require automation, prioritizing the degree of automation required, and evaluating the right technologies to adopt. Again, while Porter’s Five Forces was not developed with the insurance industry in mind, the framework can be useful in conducting a modern analysis of any insurance organization’s business potential.