If there’s one thing that’s certain in life, it’s that we cannot predict the future very well. New market trends, change in customer behaviour & expectations, and new technologies unfold rapidly; thus creating a new unique environment for people and businesses to thrive in like never before.
The average S&P 500 lifetime has continuously been decreasing, which is also true in Europe (analysing the STOXX Europe 600 leads to the same result) and implies that the unfolding happens faster than it used to and that disruption theory where modern new alternatives replace big incumbents is more relevant than ever.
It’s with this knowledge that executives across the industry have been primed to look at avoiding disruption or even becoming the disruptor. Herbert Fromme, Germany’s Insurance media mogul, grills Insurance executives on their innovativeness. He highlights that their lack of data commercialization opens them up to a massive risk to disruption that comes from outside of the industry: Tesla, Google, Amazon.
But would a large technology company want to take on that regulatory burden? When Amazon’s cost of capital is close to zero getting into the regulatory game may be the last opportunity to seize. But Fromme and many others are, of course, right in calling the passive nature of insurance companies into question. Their comments shed light upon the inability of C-Level executives in the DACH region to recognize the need to expand into broader lines of business or their arrogance that the status quo will continue indefinitely (at least until they retire).
To understand why it is key to reexamine three cornerstones of disruption theory:
1. Disruption will come, and it will come from below.
This fundamental principle illustrated in The Innovator’s Dilemma has been proven since, time and time again. The neglected customer groups that get neglected due to company economic reasons typically allow new entrants.
It’s the remote living American with no Blockbuster store who signs up to Netflix. It’s the millennial who can’t get a green banking product at the Sparkasse that her parents signed her up for who opens an account with Tomorrow Bank.
The neglect from the incumbent’s side actually makes economic sense. If Deutsche Bank makes a 2 per cent margin on their retail side and a 20 per cent margin with their IPOs, which business does it make sense to chase? It’s not the retail customers.
Many corporations attempt to disrupt themselves and get back into the low margin game, and most of them fail due to governance mishaps, something that needs to be prevented at the CEO level. As a result, these opportunities are ripe and being seized by new entrants.
The perfect example of a lower margin disruptor in the German InsurTech landscape: ONE Insurance. Their business model is taking existing policies and pricing and giving their end-users 5 per cent off, something they can only do because of the technology-first approach to governing their business. Everything that requires several headcounts for insurance companies is something they can automate.
2. The trajectory for a disruptor, if executed well, naturally leads to higher-margin products.
Toyota always held up as the perfect disruptor brand for the US car industry, gradually moved from low budget mass-market cars into luxury sedans. They found launching a new brand, Lexus, for this higher-margin business, incredibly impactful, and other Japanese manufacturers took the same approach: Honda launched Accura and Nissan launched Infiniti. Typically once you’ve reached a certain level of saturation and growth post product/market-fit slows down, it makes sense to look at the most attractive customers amongst your base and solve a new problem.
Penta, the German challenger bank focussed on business banking, was designed for the smallest businesses at the low end of the spectrum: the neglected small SMEs. Since their inception, they’ve been getting requests from the larger companies, first in account management, then cards, expenses, accounting. It’s only a matter of time before they launch their higher-margin trade finance division.
For Insurance, this may be based on customer segments, and it may be based on trust in new products; though also here insurance executives should take the launch of Getsafe’s motor product seriously: “Yes, you can laugh about liability insurance but once life insurance is digitized the InsurTechs will eat your lunch.”
3. Don’t focus on the market, product, or consumer; focus on the “job to be done”.
The job to be done: This is the most sophisticated principle. Marketing departments have always looked at their customers and grouped them by characteristics: age, profession, relationship status. These data show a correlation between a specific persona and if they consume your product or service. However, they don’t make any claim over the causality, the propensity to purchase the product.
Instead, it’s best to think about any purchasing decision as a response to a job that arises in everyday life with the customer spending money to hire something or someone for the job.
When looking at Insurance, it’s clear that the job won’t always be rational and hardly ever linked to the insurance policies themselves. Asking my brother why he bought contents insurance (Hausratsversicherung), he said his landlord expected him to have one. The job to be done was to appease the landlord. Replacement products could easily be non-insurance: an iron bolt door to prevent theft, a wifi plug to avoid any appliance from going into a mode where it could catch fire.
For life insurance, there may be several jobs to be done – only one of which is to save up towards retirement. It’s clear here that other savings options that might be more intuitive to use and generate higher returns could do this job equally well, even if it’s an iShares ETF bought on Trade Republic.
Identifying this job to be done and using new technologies and a forecasted change in customer demand is what makes disruptors from outside the industry so successful, whether it’s Google for advertising, Sony for the digital camera, or Flix Mobility for the transportation industry.
ONE Insurance noticed that jobs don’t just accrue on the end-user, the insured’s side in the complex insurance landscapes. Brokers also have the job to make sure customers stay with them. To satisfy that job to be done, ONE specifically targeted brokers with the clear message that they can save their customers 5 per cent.
Disruption is already happening and will only speed up. Just like with the advent of the personal computer disrupting mainframes it’s a gradual process and once the corporate notices the disruption financially it’s too late. There’s plenty of opportunities to disrupt, even in the insurance industry where distribution channels are changing, more touchpoints are needed and consumer behaviour will completely reshape how people interact with this over a century old product.
Evolving technologies such as Edge Computing or Artificial Intelligence are accelerants rather than causes of disruption; large corporates are theoretically even better placed with more capital, both intellectual and financial, to leverage those and use their unfair competitive advantage to create new businesses.
Therefore, as an insurance company, you could either wait for more disruption to occur, lose market share and become an asset manager with a heavy balance sheet or be the disruptor yourself and create long term economic value for your company, shareholders, employees and society at large.