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Is Insurance an industry that is immune to disruption?

Aroop Gupta, 1/12/2017

Traditionally insurance has been viewed as a means of transferring risk of an unforeseen event from the insured to the insurer in exchange of a premium. But is there a way we can look at it differently. The very definition of insurance gives a feeling of being a reactive product where the insured compensated after the unforeseen event. However, can insurance be viewed as a means of proactive defense and reactive compensation? A defense mechanism that does everything to prevent the unforeseen event from happening and compensates us in case the event actually happens.

For example consider wearables helping people stay healthy (by the standards set by the consumer) and a warranty car insurer mandating a free car inspection periodically to keep the car running smoothly. This changes the reason for having an insurance from being reactive - compensating after the unforeseen event to being proactive – preventing the event from happening.

It is not that for a Job to be Done of ‘Proactive Protection’ there are no solutions available. It is just that today, few of these are offered by the insurance providers. Wearables for health, safety inspections & driver training for cars, and remote home monitoring solutions are some of the options consumers hire to get this Job done. These could possibly be the non-traditional areas from where we may see disruption emerge in the Insurance industry. A frim offering proactive protection (front ending company) integrating backward to offer insurance. In other words, such competitors flip the value proposition for the consumer from just being a re-active compensation to a combination of proactive and reactive protection. For example imagine Fit Bit or Apple offering health insurance along with their wearable devices.

The other possibility of how it may unfold is, that such competitors control the large numbers and start negotiating huge discounts with the insurance providers. One of the fundamental principles of the business models of insurance is the law of large numbers. The large numbers allow the insurer to distribute the risk, by accumulating a pool of capital of paid premiums, from which claims of a small group of affected people are paid out. So an entity that controls the large numbers, has access to a key element in the business model and has the potential to demand the most value in the system.

This is exactly what Professor Clayton Christensen describes in one of his theories of disruption – Law of Conservation of Attractive Profits. The law states that “when modularity and commoditization cause attractive profits to disappear at one stage in the value chain, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage”. So this would mean, as one of the key elements of the insurance business model (large numbers) moves to the front ending companies, the ability to earn attractive profits gradually shifts to them. In other words, the front ending company, establishes a strong connect with the customer to offer its ‘Proactive Protection’ and partners with the least cost insurer for the re-active compensation. In such a scenario, the insurer has little control on negotiating the premium for the risk that it is underwriting.

However it is not that the incumbent in the insurance industry cannot respond to this challenge. The incumbents do have all the resources to respond and may just need to strengthen the ‘Proactive Prevention’ part of their offering. After all one of the ways the insurance companies make more profits is by reducing the number of claims from the money pooled from premiums. So a car insurer would want to regularly train people and incentivize safe drivers to keep them away from accidents. Similarly a health insurer would want to keeps its insured customers healthy by offering gym memberships or periodic medical checkups. The business models on how this would work needs to be worked out. However if this catches up, it is a fundamental shift in the reason why and how we choose insurance. In such a scenario the industry is also forced to think new ways and means to underwrite risk.

So to conclude, the insurance industry unlike other industries has been immune to disruption for a very long time. However does that mean that the industry is cannot be disrupted? Amongst the multiple cases of disruption, we have seen that disruption is just a question of a new business model and a target customer base with a Job to be Done. The players who get these two right, are well positioned to challenge the status-quo. Hence in the insurance industry, though disruption may not have taken roots till now, it may be a good time for the incumbents to think about changing the value proposition for the end consumers before a new entrant thinks about it.