Out with the old, in with the new
Times have changed and the principles of diversion have changed. In today's knowledge based economy, old business models do not work. From the rise of the cloud and Big data technology, to the rise of the internet and the new economy, traditional business models and the old school way of doing business have been disrupted.
Inevitable end of an era
According to a McKinsey report, the end of the traditional business model is inevitable. The report states that for years, the life insurance industry conveyed its guarantee of financial security through intermediated dissemination channels. Complex products and services, fixed and inflexible processes and inconvenient client interactions did not, as a matter of course, hamper business achievement.
In the past decade however, the report highlights that the rules of the game have changed. Today’s consumers’ reward transparency, speed, and flexibility, new competitors are looming on the horizon, and the low-interest-rate environment makes the traditional business model a thing of the past.
This challenge is reflected in the sector’s financial performance: the life industry has grown by only 3.1% per annum globally in the past decade (and only 2% per annum in Europe), significantly lagging behind other mature industries such as banking or manufacturing, which have achieved a 5 to 6% per annum growth rate. European life insurance delivered an after-tax return on equity of around 8.6% between 2010 and 2015 — in line with the performance of banks (8.6%) and slightly above that of asset management (7.6%)—however still below other mature industries such as retailing (13.1%).
The life insurance value chain, according to the report, is increasingly losing share to players who are chipping away at the profit pool of incumbents. So how can incumbent life insurers keep pace in today’s fast-moving competitive environment and meet customers’ changing needs?
Where is the disconnect?
Here is an example from the report of the disconnect between life insurers’ value proposition and today’s customers.
Susan, a 34-year old who is expecting her first child decides to buy a life insurance policy. If she tries to shop for a policy online, she may be intimidated by complex products and technical terminology that is confusing and makes her feel incompetent.
If she looks for an agent and is lucky enough to find one that she feels she can trust, she is likely to have concerns about how much the policy will really cost, the meaning of all the fine print, and whether the agent is more interested in her needs or a quick commission.
If Susan overcomes these doubts and decides to buy a policy, she will begin what may be an arduous application process: lengthy forms with sensitive medical questions, weeks of waiting, and little transparency on where things stand. She may wonder why the process is so complicated and time-consuming when many companies in other industries offer convenient, fast (and mostly digital) services. If she has questions on her coverage after buying the product or wants to change her policy, she will likely struggle with the limited self-service options offered by the insurers and may find that her agent has moved on. Such points may make Susan abandon the process or take her business elsewhere.
Keeping up in today’s new economy
Susan’s journey highlights some of the big challenges facing life insurance. There is low engagement leading to significant untapped demand. The distribution channel is often intermediated through brokers or financial advisers putting distance between insurers and their customers. There is the inability to meet and distinguish between the preferences and needs of Generation Y and Generation X. And lastly, IT systems are outdated because it is hard to change products or systems when some of the policies were sold 30 years ago.
Gareth Friedlander, Head of Research and Development at Discovery Life, says it is critical to remain up to date with servicing trends, but also to understand and design products around other key trends.
“It’s crucial to tap into technology to advance your level of performance and best meet your clients’ requirements. In a technology-enabled environment, insurers can continue to provide consumers with the best service, and most comprehensive benefits at the most affordable price. We have seen that the rapid increase in wearable and telematics technology provides insurers with access to real time data to enable more accurate dynamic risk assessment. This creates an opportunity to engage consumers in a very personalised way and enables positive behavior change,” continued Friedlander.
Friedlander mentioned that the continued trend towards digitalisation and online interaction also provides an opportunity to communicate with clients in an intuitive way to increase awareness and transparency of product features.
In keeping pace in today’s fast-moving competitive environment Friedlander believes in continual innovation in products and services. “Tie your model, technology and integrating insurance with various applications and platforms to give clients additional value. Find distinctive ways to make products clear and intuitive, and to keep the client experience simple, seamless and engaging.”
Editor’s Thoughts:
Whilst current trends will shake up and transform the industry it is only a matter of time before technology is accepted widely. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
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