8 minute read 28 Jan 2021
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How insurance subscription models are impacting the industry

By Penney Frohling

EY-Parthenon Partner, Financial Services Strategy, Ernst & Young LLP

Financial services strategy practitioner. Helps clients navigate financial crises, new regulations, transformative customer, technology, geopolitical and environmental trends.

8 minute read 28 Jan 2021

Subscription models have disrupted many industries, and insurance could be next, which presents real challenges and opportunities.

In brief
  • Evolving customer expectations and industry convergence are pushing many insurers toward subscription models.
  • Subscription models provide policyholders with more control and flexibility to change their coverages as their needs change.
  • Clearly defined strategies, advanced technology and strong data analytics are essential for insurers to win with subscription models.

Subscription models have been a hot topic of conversation in the insurance industry for several years. For some, the prospect of subscriptions becoming the dominant model for engaging customers and delivering products and services engenders serious concern about being “Uber-ized.” Specifically, that means subscriptions will open the door to new competitors, including big tech, banks and dynamic digital-first start-ups, while marginalizing traditional insurance brands. Conversely, other insurance leaders see subscriptions as a means to unlock badly-needed growth, strengthen customer relationships by enriching the core value proposition, and boost combined ratios and overall profitability. 

The COVID-19 pandemic revealed that insurers can – and should – interact with customers more nimbly and responsively, and that products must be adjusted to reflect the “new normal” (e.g., flexible automotive premiums due to dramatically reduced commuting). At the same time, the crisis has raised customers’ interest in new protections and more personalized, flexible solutions that map to their unique needs at different points in time. EY NextWave Consumer Financial Services research found that 51% of US consumers aged 35-49 are interested in subscription models, with higher interest relative to marriage, having children and other life events. 

Similarly, recent UK insurance consumer EY survey found 55% of respondents aged 35-54 are somewhat or very interested in subscriptions.

Other long-term trends also point the way toward insurance subscriptions, including: 

  • The relentless digitization of every part of life and business 
  • The merging of traditional lines of insurance business
  • The convergence of financial services sectors with other sectors, embedding insurance at the point of sale for purchases of a wide range of products (e.g., automobiles, vacations, consumer electronics)
  • Increasing customer expectations for on-demand access to all kinds of products
  • The mainstreaming of the gig economy, which is opening a new and potentially significant route to market for insurers

These developments make subscriptions look more attractive in the dynamic future that lies ahead. There are threats that insurers must take into account, as well as significant barriers to change, from finite capital resources to weak levels of consumer trust to technology constraints. And some customer segments or lines of business may not prove to be a good fit for subscriptions. Still, we expect subscription models to steadily gain traction in the years to come, sparking innovation and growth for insurers and delivering more value for customers.

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Chapter 1

What an insurance subscription really is

Subscriptions offer greater flexibility and customer control.

Given the market buzz about subscriptions, it’s worth defining our terms. Traditionally, insurance has been paid for via lump-sum premiums, with an annual renewal that also gave customers an option to switch providers. Customers might have choices for various levels of coverage and add-ons, but coverage was generally fixed within yearly cycles, which facilitated the pooling of risks. 

Subscription policies offer ongoing coverage with a monthly payment, with increased flexibility to modify coverage or add options on-demand (e.g., insurance for trips, for gig economy work). They may also provide access to ancillary services (e.g., home security and monitoring, concierge auto maintenance) offered via a trusted network of providers. The addition of high-value content to help consumers reduce their risk profiles and lead healthier lives may offer more opportunities for value-adding engagement. 

More than product bundles, subscriptions are designed around highly intuitive digital experiences, with insureds able to “turn on” and “turn off” coverages and features (e.g., adding or removing family members from policies or additional locations to commercial policies) as easily as they might a streaming service. Predefined packages keyed to life events (e.g., buying a home or having a child) make it easier for customers to understand their needs and find the right solution and features. Premium “flexing” may be based on usage, with certain rebates applying. Risk is still pooled, though distribution can vary (e.g., via agents or brokers, directly through company websites or within digital journeys).

Again, it’s possible that some segments will resist subscription models, but the idea behind them – that customers can more easily access the coverage they want – will drive broad appeal, in our view. While subscriptions may feature some on-demand and usage-based capabilities, they don’t equate to standalone “pay as you drive” or “pay as you live” policies. Typically, those products are built around mobile apps enabled by global positioning systems (GPS), telematics and artificial intelligence (AI) that automatically turn on coverage and shift risk responsibility to policyholders.

It's worth noting how insurance coverage is embedded in the subscription models offered by other companies, which changes insurers’ route to market. As more automotive manufacturers offer flexible leasing, purchase or subscription access to vehicles, insurance is typically embedded in a single price or fee.

This arrangement can be advantageous for insurers in lowering the cost of distribution by minimizing the need for brokers and price comparison websites. Customers may like the convenience of a fully integrated customer experience. However, carriers with visible brands and strong loyalty may view white labelling of policies as a threat when it could actually create opportunities for co-branded partnerships and new routes to market.

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Chapter 2

What happened in other industries and what’s in it for customers

Stronger customer relationships and accessible data stand out.

The experiences of other industries confirm that the growth of subscription models in insurance is inevitable. Media and entertainment companies have attracted hundreds of millions of consumers via subscription models. So too have video conferencing companies. Ecommerce, transportation and ride sharing, travel and hospitality, automotive manufacturing, corporate IT and technology, commercial banking, fitness and wellness – all of these sectors have felt the effects of the subscription revolution. 

Underlying all the disruption is a shift in generational preferences toward digital business models and distribution – as well as more customer willingness to share personal data in exchange for better services. Other tech trends that have enabled the subscription revolution include:

  • Increased accessibility of data from the Internet of Things (IoT)
  • Cloud-based data environments that make it easier to collect, manage and analyse such huge data volumes
  • The growing sophistication of application programming interfaces (APIs) to share data across platforms

The ever-increasing usage of IOT-connected devices also bears mention. In 2017 there were roughly 7 billion connected devices in use. Today, that number has exploded to 30 billion and is expected to continue growing to 50-75 billion by 2025 and 125 billion by 2030, according to IHS Markit.

All of these forces have fundamentally changed consumer behaviour and expectations. Put simply, for any interaction with any type of business, consumers expect ease of purchase, flexibility, tailored offerings and personalized pricing. That’s the baseline, and subscriptions can help companies meet it.

Subscription insurance offers a number of clear benefits for policyholders, including the ability to buy policies not as discrete products, but as a set of dynamic services. It also puts the consumer in control – targeting a common critique of the insurance industry – with advice and information available as needed. Beyond personalized services and attractive pricing, consumers like a higher number of interactions and having more data available, as demonstrated by early adopters of subscription models in homeowners’ and specialty lines.

With pay-as-you-go insurance baked into subscription models, insurers can stay ahead of other emerging consumer trends. For instance, new products can offer appropriate protections for the growing cohort of customers who avoid outright ownership of cars, homes and other assets, as well as those who fear being over-insured (a fear that spurred the development of usage-based policies in the first place).

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Chapter 3

Key considerations for insurers

Ethical and capability concerns are top-of-mind.

While consumer interest in subscription and pay-as-you-go models is growing, such offerings seem to contradict the industry’s efforts to convince consumers that insurance should be essential, rather than optional. However, the embedding of insurance in consumers’ everyday lives speaks to the industry’s purpose of providing protections when and how consumers need it. Indeed, insurance may seem more essential and valuable when protections are adjusted more often than an annual renewal. 

Insurers’ responsibilities are also a factor. What if a temporary driver forgets to switch on coverage? Clearly, effective communication is crucial. But ethics also play a part. Targeted insurance rewards low risks, removing the societal pooling of the many paying for the misfortunes of the few, leading to an uninsurable underclass. 

Thus, insurers must strike the right balance – not least because regulators are paying more attention to issues like fair pricing (e.g., the UK and EU gender directives).

Mastering the data and technology requirements is also critical. First and foremost, insurers must up their games in managing and analysing the large data volumes and new data streams necessary to win with subscription models. The industry’s struggles in these areas have opened the door to some new entrants though insurers have a huge advantage in owning the end customer data. They must learn to mine their existing data assets more effectively and augment them with third-party data to generate higher-value insights. 

To realize the growth and innovation potential of subscriptions, insurers must:

  • Develop clearly defined customer journeys, flexible customer experiences and digital distribution models
  • Seamlessly coordinate between and integrate systems used by different business lines and product sets
  • Strengthen their capabilities relative to key technologies, including AI, APIs and advanced analytics
  • Consumer trust and permission is also mission-critical, particularly in terms of using data for personalization.
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Chapter 4

Looking ahead: subscriptions in context

A difficult but richly rewarding process.

We believe the adoption of insurance subscriptions is inevitable. However, the future will likely involve a hybrid of traditional, subscription and pay-as-you-go formats – what we might call “precision insurance”. Fixed fees with extended flexibility following customers’ current needs would be a core component. Continuous coverage will still make sense for some lines, such as health and life, though subscriptions could be used to offer a richer array of services “wrapped” around the core coverage. 

Though it won’t be an easy evolution for insurers, the business case is clear and compelling. More frequent interactions mean better engagement and, with customer permission, stronger data and customer insights. That means more stable revenue and higher customer retention, particularly since annual renewals would be eliminated. The value of insurance will be more apparent, rather than an afterthought. 

Precision insurance rewards low risks and penalizes high risks, which raises questions about fair customer treatment. Furthermore, organizations will need to have customer permission to use the massive amounts of new data that such models promise. That means cultivating positive relationships, and offering enough incentivizing returns, will be critical. The technology requirements present formidable barriers. 

In other words, the journey to success with subscriptions will be challenging. But because of the lessons learned by other industries, the compelling growth upside and ability to increase customer engagement, it’s a journey that insurers simply must make.

This article was co-authored by Tony Sault, UK General Insurance Associate Partner, EY and Krisztina Bakor, Senior Manager, EY.

Summary

As subscription models become more common across industries, insurers must take stock of the opportunities and risks – from greater growth and stronger customer relationships, to the potential downside of new competitors. As with any transformation effort, developing the right data and technology capabilities is vital to effectively implementing such models.

About this article

By Penney Frohling

EY-Parthenon Partner, Financial Services Strategy, Ernst & Young LLP

Financial services strategy practitioner. Helps clients navigate financial crises, new regulations, transformative customer, technology, geopolitical and environmental trends.