Insurance industry to see profits eroded by InsurTechs and digital rivals

22 March 2017

The insurance industry is beginning to face the prospect of digital innovation affecting their business models. While outright disruption to the industry remains unlikely - the industry remains complex, well-regulated and has large balance sheets - new technologies and market entrants are likely to finds ways of whittling away at value on a number of fronts – even while back-end technologies allow insurers to improve their operations.

In a new report from McKinsey & Company, titled ‘Time for insurance companies to face digital reality’, the management consulting firm explores the key trends affecting the insurance industry more widely, as well as key moves incumbents can make to avoid finding themselves lagging behind. One of the key insights of the report is that insurance companies, like companies in the wider economy, are likely to see their respective revenues negatively affected by digital technologies.

The growth of insuretechs

Startup risks

Insurance companies are likely to be able to improve their overall performance in the coming years on the back of new digital technologies that allow them to better quantify risks, improve their customer journey through, among others, improved touchpoints services, and meet their increasingly fickle expectations. Insurance firms may also benefit from creating products and services that insure customers and clients against a range of possible cyber-attacks. Further value may be found in the automation and digitalisation of front-end and back-end processes.

While insurance companies have an opportunity to create value, value may also be destroyed by digital technologies. The firm notes that digital technology across a range of industries, on average, shrinks revenue growth by 3.5% per year, and earnings before interest and taxes growth by 1% per year. Some industries are harder hit, suffering 12% revenue growth shrinkage of 12% and EBIT shrinkage of 10%.

Loss of revenue growth comes from a range of factors. One possible area is startups, which, in the case of the insurance industry, means insurance tech. The startup scene has attracted considerable venture capital support in recent years, in 2015 total investments hit more than $2.6 billion before falling back to almost $1.7 billion in 2016 – in line with wider slowdowns within the industry.

Where insuretechs are focusing

Insurance tech firms have focused their activity across a range of segments within the wider insurance value chain. The largest activity is in the distribution element of the P&C sector, with around 17% of startup scene activity engaged there, this is followed by health, at 11%, and life at 9%. Other areas in which the considerable activity is taking place includes the pricing arena of P&C, at 10%, the product arena of P&C, at 8%, and the claims segment of P&C at 7%. Areas with little interest from insurance technology firms include life products, and all marketing segments.

Profit projects for an auto insurer digitalising business

Three risk areas

While startups are capable of affecting the industry directly, cross sector activity – including from startups in other sectors – are also likely to see considerable value destruction for insurance, even while for other sectors, and consumers, value is created or added.

One way in which value is likely to deteriorate in the insurance industry, is through risk mitigation. A range of technologies are likely to reduce risks, particularly in the auto industry where new ADAS technologies [note!!], including collision avoidance, blind-spot assist, and adaptive cruise control, are reducing accident rates, and fully automated vehicles will see risks shifted to manufacturers rather than consumers – according to the firm the technology is likely to see risk premiums reduced by 25% by 2035. Risk prevention too is likely to be introduced in other sectors, from machinery being better maintained reducing risks, to better education across the board whereby people are less likely to take unnecessary risks.

Another area in which revenues are likely to be affect is by leveraging data to improve risk profiling, allowing insurers to better judge relative risks and thereby improve premiums. Considerable ethical and moral questions exist on the leveraging of data for this purpose however, with legislative intervention likely – the private sector, Facebook, has already begun to prohibit insurers leveraging data from its users for risk assessment in the UK.

A final area in which digital technology is likely to affect insurers, is through institutional investors seeking to generate returns on their investments by backing various insurance related instruments in the hope of finding improved yield in the current low-interest rate environment. The risk is that non-insurance companies may leverage their data and devices to sell customers related insurance services, backed up by institutional investors, thereby bypassing direct insurance companies.

Effect on automotive insurance industry

The long-term picture looks relatively grim for certain segments of the insurance industry, the firm argues, particularly if they do not keep up with rapid changes within the market segment. In the short- to mid-term digitalisation of key processes are likely to see profits double over the course of five years.

The effects of changes to the insurance market from new technologies are already being felt, with US auto insurers noting losses of already having lost $4.2 billion in underwritten profits on average over the past five years. Expenses and losses are likely to continue to see the market lose profitability, at between 0.5% and 1% if losses can’t be offset by other means.

The “winner takes most” effect

The current market has another issue, which is that it is rapidly tracking towards a ‘winner takes all’ environment. In the US for instance, one company generates 70% of all profits, leaving other players to fight over a small pie – which, if they lack the capital to transform, may mean they cease to exist. Similar stories are found in Spain and Germany – with the latter even operating at a loss in 2015.

According to the authors of the report, “Insurers should not underestimate the changes that digital will bring to their industry and the challenges they will pose. Neither should they overlook the significant short-term profit improvements that are within their grasp if they digitise their core businesses, nor shy away from innovating to be part of an exciting future that is unfolding for the industry. If they act decisively, they will be among its leaders.”


Four ways digitalisation is transforming car brands and dealers

16 April 2019

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”