Since the beginning of the insurance industry, distribution has been dominated by agents selling insurance policies for a commission or fee. The complexity and diversity of insurance products traditionally compelled consumers to seek out professional guidance when making coverage decisions.
About 10 years ago, the insurance industry began to make quiet steps to improve these operations. Early adopters pursuing such advancement include Insurance Noodle and Insureon on the commercial lines, as well as Esurance and GEICO on the personal lines side. However, most insurance companies resisted moving to digital distribution out of fear of disenfranchising their traditional brokerage networks.
Brokers had no incentive to invest in technology because business was so lucrative. Why spend a dollar on technology investment that could yield very uncertain outcomes when they could simply invest that dollar into buying a smaller agency and realizing the return? This lack of economic upside kept the insurance industry from evolving at the rate of other industries.
The early digital players claimed to be focused on customer experience, but all they really achieved was automating an inefficient quoting process that traditionally used question-intensive applications to provide speedier quotes. Allowing customers to apply and transact online was certainly a vast improvement over emailed PDF forms — however, this improvement was limited to only those products that were simple and easy to apply for. Restrictive, indeed; these players assumed that just because consumers could apply on the computer, they would have a better customer experience.
It wasn’t enough. Soon, more and more digital brokers began to emerge, fueled by an eager investment community motivated by the promise of modernization. In the meantime, insurance carriers started feeling the pressure to improve their back-end support systems and help traditional agents go digital. Some experienced moderate success in the space — but insurers overall did not significantly improve the customer experience.
As these 2.0 digital distributors started to really reflect on the existing process, their focus turned to the end-to-end customer experience. Emerging digital distributors worked outside the box with insurers who were increasingly willing to experiment with digital distribution and underwriting.
The drive to get at profitable risks more creatively with less friction, less questions, quicker quote generation, and — in some cases — more bind and issue capability, motivated innovation. While the 1.0 digital players faced technology as their biggest challenge, the 2.0 distributors seemed to have technology down; putting product behind the technology was their biggest challenge.
As we fast forward to today, we now see hundreds of entrants into the market looking for funding in what is quickly becoming a wildly crowded space with plenty of pent up capital. The 3.0 digital companies pursuing this investment are focused on leveraging usage-based rating models to allow customers more control over their costs. The inclusion of third-party data sets and technology (wearables, etc.) to create better informed underwriting and rating models is critical to that future profitable process.
Driven by conservative investment strategies by the VC community (i.e., smaller rounds), the 3.0 digital distribution start-up companies are coming into the market with verticalized/specialized distribution strategies. These tactics stand in contrast to those deployed by 2.0 distributors, who provided a wide variety of products to their customer base.
In fact, we see many of the changes in the distribution system driven by investors who want to see a differentiated model supported by innovative customers who demand the improved experience. Innovation follows the money.
So, what does this mean for distribution?
- As a cohort, digital distribution has only captured a small percentage of the market. While we can expect that to accelerate, the question remains: Who will be positioned to benefit from that acceleration, and how much market share will be captured at the expense of bricks-and-mortar agents and brokers? Digital distribution will continue to migrate to a cloud solution provider that can manage a multi-tenant environment.
- The 2.0 digital distribution players are maturing. Without big stair-step growth, their business trajectories will likely mirror the slow and steady growth rate of brick-and-mortar shops. We should expect this group to be acquired for less than their initial projected and funded valuations. This makes them potential add-ons to larger carrier investment portfolios as opposed to the coveted IPO (i.e., cover wallet plays). Rather than betting on unproven players, companies should look to proven solutions that can be modified with a low code approach. This direction will allow the insurance organization to incorporate the changing business input and direction directly into the technology solution.
- The 3.0 digital plays now become very interesting. They pave the next wave of investment focused on highly innovative product sets, third-party data, and integrated buying behavior that capitalizes on the philosophy of doing one thing and doing it well. But do they have the reach to become billion-dollar, game-changing businesses? No; so, what does this mean for the future of insurance distribution? Insurance companies need to decide whether to move to a platform company and ride a systems integration capability or enter the cloud business directly.
The Future of Distribution
At Gerent, we see the future of distribution evolving in three key areas:
- Specialized 3.0 digital providers with low-code options and will begin to evolve into embedded platforms for distribution and service through partnerships or homegrown insurance offerings. These cloud-based platform providers align core businesses (e.g., more workers’ compensation sold through payroll, property through real estate transactions, cyber through tech security vendors) and other outlets that represent where the customer goes to buy. This path evolves the buying behavior, as opposed to simply morphing the customer experience.
- New, usage-based (e.g., gig economy) product offerings will continue to evolve in creative ways. Customers across the board are opting for use-based pricing plans, so shifting to them for insurance is not such a huge leap. Insurance organizations are going to need to build the capability to rapidly create and deploy products — or else risk missing out on these new growth markets.
- There will be an opportunity to aggregate highly-specialized and verticalized distribution technologies into cohesive, low code cloud ecosystems that put the customer in control of their information, providing them access to options, services, and education. Agents will be incorporated in new ways into these emerging ecosystems. Transparency into distribution compensation systems will drive the level of services customers are willing to pay for, as they will now control the level of service they expect. For auto insurance, compensation may be close to 1% whereas for exotic professional liability insurance products, it may be higher than traditional compensation.
The future of digital distribution will be based on these emerging ecosystem platforms, which will raise the level of customer experience that buyers will require in the future.
For more insights on the digitization of the insurance industry — and advice on how your organization can prepare for the future — contact Gerent today.