Digital disruption has overturned conventional wisdom in many industries over the past few years. And now it’s coming to insurance.
In our latest Next Wave of FinTech report - conducted in partnership with the Stockholm School of Economics – we concluded that while we can’t be certain of exactly when the wave of disruption will break, we know it’s coming. In our view, every organisation should be preparing for the advent of Open Insurance.
Naturally, some in the industry will question whether the era of Open Insurance will dawn anytime soon – if at all. After all, there is no obvious game-changing catalyst on the horizon like the second Payment Services Directive (PSD II), which prompted the UK to pioneer its Open Banking initiative. But we believe we’re reaching a tipping point - the moment when changes in technology and consumer behaviour achieve the critical mass required to demolish established business models. The fundamental question is, are insurers agile enough to respond?
Open Insurance is already taking shape. Nimble, specialised InsurTechs are capturing value in niches of the Nordic insurance ecosystem, including distribution, personalisation, risk reduction and claims management. Platforms that aggregate consumers’ insurance relationships are also gaining ground. Min Pension in Sweden and Norsk Pensjon in Norway give consumers a comprehensive overview of all their pensions, connecting both occupational and individual pension providers and national pension schemes.
In our view, four environmental factors are now poised to accelerate this trend.
First, governments are pushing for greater mobility in insurance markets. The UK government is driving a pension dashboard initiative with the potential to create an Open Banking-style interface between rival providers. And in Sweden, new proposals have been brought forward to streamline the ‘free movement’ of occupational pension policies introduced in 2007.
Second, regulation is increasing the transparency of insurance costs and charges. MiFID II requires far greater clarity over the absolute and relative impact of costs on performance. Enhanced visibility will not only encourage consumers to seek out new, low-cost providers, it will help new entrants to identify and target the most attractive profit pools. The Norwegian Parliament has decided to establish an “individual pension account” where the individuals' occupational and individual pension funds will be accumulated. Among other things, this will increase transparency in the market and potentially reduce the fees that individuals pay for administration and fund management by more than 50%.
Third, consumer needs and habits are changing. Traditional distribution links between big insurers and big employers are becoming less important as more young people work for smaller enterprises and in the gig economy. These consumers and businesses are keen – and increasingly able – to seek out the best and cheapest options for pensions, life insurance and other services.
Finally, digital innovation is reshaping how insurance is sought, bought and used. Within the industry, examples include the growth of telematics and sensors, the ability of APIs to connect devices with distributors, and the use of data analytics in underwriting. Further afield, innovations such as autonomous vehicles promise to further disrupt traditional patterns of insurance.
So, will Open Insurance be bad news for existing Nordic insurance firms? Not necessarily. InsurTechs and other new entrants may have some important advantages, but so too do incumbents – not least in terms of branding, data, relationships and investment clout. But Open Insurance will herald the beginning of the end for many long-standing business models. The rules of strategy are changing, and firms need to change with them.
Insurers need to be ready for the likelihood that third-parties – the platforms – will take increasing control over how insurers and their customers interact. The growing power of platforms will confer far greater power on consumers, and radically redefine how insurers generate revenue and create value.
To respond, insurers and other firms in the industry should:
Once firms have identified the role they want to play in the future insurance ecosystem – whether as platform operators, customer experience enablers, product producers or claims administrators – the final step is to begin developing the technology, talent, culture and organisation they require to support this role.
Of course, that’s not a process that any organisation can complete quickly or easily. The good news is that firms can start small by trialling new ideas and approaches. There’s no need to panic. But it’s crucial for firms to understand how insurance is evolving, what might be coming, and to be ready to respond.