Why insurers should act urgently
While the shift to ecosystems will take time, winners will likely realize exponential growth. The pace of change is a big risk; it may seem as if radical change is still some way off, but once underway, the pace builds dramatically. Laggards that are late to the party will face harsh consequences.
Tectonic shifts in the basis of competition are another big risk. Competition will come not just from other insurers, but from any firm that customers trust with their finances. Successful ecosystems built by shopping sites, payments players or ride-hailing apps may ultimately prove to be competitive threats to insurers. Ecosystem winners will be the firms that know their customers best and can offer propositions that customers trust to deliver superior value.
In highly regulated markets, as many European markets are, it’s easy to think that it will be too hard to scale ecosystems. For example, the UK has seen a number of early ecosystem plays that have mostly remained niche or foundered on the complexities of regulation or the necessary permissions to distribute multiple product lines.
Still, the direction of travel is clear: regulatory thinking on advice and guidance is looking to unlock the benefits of Open Finance. The 2021-22 Business Plan of the Financial Conduct Authority (FCA) took care to remind the industry that these benefits are a long-term priority. Other jurisdictions are aiming for a similar endpoint, but the pace and direction of change is set by the starting point of each market.
Who’s winning with ecosystems and how
Some insurers are already building ecosystems around their core products. Others are looking at how they can build the strategic capabilities to deliver short-term benefits and provide optionality for the future. What’s increasingly clear is that ignoring the global ecosystem trend is risky.
Early adopters have shown how ecosystems can drive innovation and growth. Vitality uses ecosystems to pay off its promise to make people healthier and enhance their lives. The company uses technology and a set of connected partners to address behavioral risk and prompt healthier lifestyles, an approach that pays off for both insurers and insureds.
John Lewis, a leading UK insurer, offers an ecosystem designed around household policies. The central platform includes various InsurTechs that provide key capabilities, including those that give customers greater flexibility to match their coverages to their unique needs.
There’s equal potential for collaboration. In Asian markets, some competitors play on each other’s ecosystems. They have standardized on common digital wallets rather than offering competing ones, often because customers were voting with their feet over that preference.
Because ecosystems concentrate value in the ecosystem itself, insurers must carefully consider when to compete and when to collaborate. We estimate that in established ecosystems as much as 75% of the value is in the customer relationship, with the underlying products priced at wholesale margins. Traditional, manufacturing-focused providers will need to ask themselves some tough questions about whether they can operate at these margins or whether they need a share of the relationship value.