We are used to talking about disruption as a force on the global insurance stage – or even as a way to provide cover for the billions of people in developing countries who remain uninsured.
Here, however, we turn the telescope around to look instead at what insurance disruption means for a mid-sized national market – in this case Ireland, comparable in volume of its domestic premiums to markets such as Belgium, Sweden and Austria:
Source: Solvency and Financial Condition Reports 2019
So, has insurance disruption come to Ireland’s shores, or are traditional barriers to entry protecting it from change? Do Irish incumbents play defensively or offensively? And how do they best shape their innovation efforts?
We answer these questions in today’s post, as well as in our accompanying report: Irish Insurance 2021 – Set the disruption agenda, developed with the support of Insurance Ireland. Ultimately, we believe that Irish insurers still have everything to play for, and that their experiences and prospects can serve as a litmus test for comparable markets, both in Europe and beyond.
The high hanging fruit just came lower
Traditionally, mid-sized national markets like Ireland have been tougher nuts for potential disruptors to crack.
They don’t offer the mature scale of the US or the pristine opportunities of East Asian markets – meaning business generally has to be won from established competitors. At the same time, they require costly product localization and customization, for example in the form of a physical sales force or historical data sets on customer behavior and claim trends, as well as compliance with a new set of regulations.
However, these hurdles – technology, distribution and regulation – have come down significantly in recent years, changing the disruptive calculus.
It is getting easier to start an insurance business. Much of the value chain can be replicated by leveraging platforms, outsourcing and cloud technologies. In addition, digital distribution means that a high street presence is no longer important.
This evolution from high upfront costs to as-a-service approaches — far from unique to insurance — is enabling innovators to dip their toe into smaller markets in a way that wasn’t possible before. And, at least in the European Union, regulatory convergence is driving greater economies of scale in compliance costs, with disruptors able to merge multiple smaller areas thanks to passport rights.
Insurtech carriers looking to enter markets like Ireland face lower barriers to entry than ever before. Take Lemonade, for example, which launched in Germany in 2019 with a cloud-based business model, digital distribution and a right to sell across the EU. However, the fact that the thresholds are lower doesn’t make them low, as our broader Insurtech trends attest.
Cooking the frog
Despite massive valuations, Insurtech carriers make up a thin slice of the overall Insurtech industry — just 41 globally, according to Accenture’s Insurtech Watchtower. Plus, they seem years away from the kind of scale their existing competitors enjoy. Lemonade, despite all its pan-European ambitions, is still only sold in Germany, France and the Netherlands.
Source: Accenture Research Insurtech Watchtower 2020
This failure of insurer start-ups, so far, to turn the industry upside down underlies one of our key findings in the Irish market: the disruption, according to those on the ground, is modest. However, this lack of clear challengers should not lull incumbents with a false sense of security. There are several less obvious ways that disruption can still throw them off balance.
One possible future is for start-up insurers to crack larger markets and then transfer the successful model to smaller ones, grafting themselves into a market presence, rather than nurturing one. Another possible future – indeed, one that we deem more likely – is what we have called compressive disturbance.
With 89% of Insurtechs in the “operational enabler” and “digital agency” categories – collaborating with incumbents rather than competing with them – it seems that incumbents could become the main vectors of disruptive innovation and the digital competition between them can easily increase.
So, as leading companies seek competitive advantage through incremental innovations in the value chain, those that don’t follow suit will slowly see their margins compressed – and, with them, their ability to innovate to get out of trouble. Like the proverbial frog, stragglers can cook slowly.
Become a company that is ready for innovation
Predicting the future of insurance disruption is a silly game because this is a book with many possible endings. If the past 18 months have shown us anything, it’s that traditional stories can be rewritten overnight. However, insurers can still increase their capacity to respond to the ever-changing story – or even write their own.
The organizations that have done well during Covid-19 are the ones that have been able to innovate quickly and reimagine their products, services and ways of working. And this willingness to innovate when the situation calls for it will help them win again as we move into the “new normal”.
Being ready for innovation isn’t necessarily about having the biggest spend on technology or innovation. Rather, it is about having the right organizational and governance structures to support the innovation process from start to finish. We have identified three key areas:
- Innovation strategy: most large companies manage innovation centrally – usually under a Chief Innovation Officer or a dedicated innovation committee.
- Innovation talent: Not only do companies need technologists, they also need generalists and portfolio thinkers to evaluate the business cases underlying various technology choices.
- Start-up involvement: if disruption becomes a technology-driven battle between incumbents, better access to start-ups means better tools for your arsenal.
As we show in our report, Irish incumbents outperform others in some of these areas, so there are certainly ways they can further increase their innovation readiness. And now might be the right time to take this seriously, not just for Irish insurers, but also those in other national markets.
Indeed, the current lack of major disruptions creates a valuable opportunity for incumbents around the world. Without firefights, they can take a more deliberate approach to future-proofing their business, arm themselves against disruptive threats, and even earn the freedom to seize disruptive opportunities themselves.
So far from a time to sit back, the second half of 2021 is an opportunity for incumbents to move forward, not necessarily by spending a lot of money, but by building their readiness for future innovation – because there may tougher battles lie ahead.
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