A strategy is only as good as its ability to build a real competitive advantage. And ideally that competitive advantage should be sustained over the long term.
It is easy to see why Insurtech and Digital disruption, on paper at least, could be a challenge too far for incumbent life and pension insurers:
- Revenue margins are being squeezed in life insurance and pensions and will continue to decline due to regulation, technology and eroding tax advantages. As an incumbent, is it really feasible to transform the existing operation? Can you survive on a third or a fifth of today’s revenue margin?
- Legacy is a distraction. There is a high regulatory burden as insurers grapple with implementing new conduct and capital rules for these old books. And old legacy products and legacy systems add a lot to the complexity and cost of running the business.
- Meanwhile Insurtech will leapfrog the incumbents by creating much better (digital) experience and service for new generations of customers.
Will David beat Goliath? … Will Insurtech beat Incumbent?
We don’t think that it has to play out that way.
It is becoming clear that Insurtech faces its own problems in growing up, and the barriers to entry in the life and pensions industry in particular are significant.
Incumbent insurers can also mobilise the significant business assets that they, and not the startups have, as an effective strategy:
- Distribution relationships that can be powerful if supported in their efforts to improve customer experience
- Existing balance sheets and operating models that comply with complex regulation.
- A large in-force business with existing customers
If incumbents can bring these assets into play reports of the death of Goliath are wildly exaggerated. Some sort of ‘symbiosis’ between the old and the new is much more likely.
The in-force as a strategic asset
Some insurers still see the in-force as a problem to manage away: it adds complexity and cost to the business; it slows innovation; it saps significant management time; it has significant regulatory cost and risk.
But managed effectively, the in-force business is also a strategic asset from which to create competitive advantage:
- The in-force customer base is largely unmined and unengaged today. Either directly, or in partnership with distributors, insurers can use the existing customer base to feed future business
- The in-force provides largely stable cash and profit for the foreseeable future. A stable and low cost source of funding such as this is a great advantage when it comes to investing in future business models
- Effective management of the in-force has a halo effect on new business. A ‘fitter’ in-force business in terms of managing expenses, improved retention, or claims experience can feed directly through to significant pricing benefits for new business and improve competitiveness there, winning share and distribution
In our view, the in-force is both an operational headache and strategic blessing. As it is not easy to offload the in-force to someone else (as we will cover in a future post) most incumbent insurers will have to deal with the operational headaches. If incumbents want to be relevant in the longer-term for customers, they also need to work out how to activate the in-force as a strategic asset.
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