Insurance beyond digital: The rise of ecosystems and platforms

Editor's note: This piece has been reposted with permission from McKinsey. Jahnavi Nandan, Shirish Sharma, and Andreas Waschto also contributed to this piece.

An ongoing drive toward digitization has put the insurance industry on the verge of a paradigm shift. The pace of change has accelerated thanks to tremendous increases in the volume of electronic data, the ubiquity of mobile interfaces, and the growing power of artificial intelligence. In the early years, companies that digitized were at the forefront of the industry. Today, digitization has permeated every level of the competitive landscape. Society’s growing reliance on digital technologies is not only reshaping customer expectations but also redefining boundaries across industries. Insurers cannot avoid this phenomenon: as traditional industry borders fall away, the future of insurance stands to be greatly influenced by platforms and ecosystems.

A platform is a business model that allows multiple participants (producers and consumers) to connect to it, interact with one another, and create and exchange value. The most successful companies in the digital era, including Alibaba, Amazon, and Facebook, were all designed on platform business models. An ecosystem, meanwhile, is an interconnected set of services that allows users to fulfill a variety of needs in one integrated experience. Consumer ecosystems currently emerging around the world tend to concentrate on needs such as travel, healthcare, or housing. Business-to-business (B2B) ecosystems generally revolve around a certain decision maker—for example, marketing and sales, operations, procurement, or finance professionals.

This article examines the rise of ecosystems and the trend’s implications for insurers. To succeed in ecosystems, insurers will have to take a hard look at their traditional roles and business models and evaluate opportunities to partner with players in other industries. They must also understand how ecosystems will shift value pools and change the nature of risk. Adopting an ecosystem mind-set will be an arduous journey for many insurers, but those that understand this evolving landscape can take the first steps to creating new revenue sources.

Ecosystems will account for 30 percent of global revenues by 2025

Extensive use of digital technologies in everyday life has become the new normal. It is common to vacation in Airbnb properties, to hail an Uber ride from a cell phone, and to order dinner via GrubHub or Seamless. Apple is now much more than a technology manufacturer, and Facebook is a way of life. Customers wake up to a world in which their every need can be addressed through their smartphones. Putting customers at the center of every digital activity has not only scaled adoption but also allowed companies to capture previously unimagined value. Seven of the ten largest companies by market capitalization are ecosystem players—Alibaba, Alphabet, Amazon, Apple, Facebook, Microsoft, and Tencent—and that only hints at the power of digital.²Uber, founded in 2009, now operates in more than 630 cities across 80 countries,³Airbnb amassed an inventory of one million rooms a staggering 50 years faster than Marriott did, and WeWork has sublet ten million square feet of office space globally since its inception in 2010.

Through digital ecosystems, companies are betting big on opportunities that have the potential to realign global markets, thus ushering in an era of “sectors without borders.” The benefits of digital ecosystems won’t be distributed evenly, however. McKinsey research shows that while digital technology propels some companies to become clear market winners, it depletes corporate earnings and overall value for many others.

By 2025, as this revolution gains speed, McKinsey expects 12 distinctive and massive ecosystems to emerge around fundamental human and organizational needs. These 12 ecosystems will account for $60 trillion in revenues by 2025, or roughly 30 percent of all global revenues. The actual shape and composition of these ecosystems will vary by country and region, both because of the effects of regulations and as a result of more subtle cultural customs and tastes. In this new world, while insurance could be featured as the risk-mitigation service for each of these 12 ecosystems, there’s no reason why insurance companies could not constitute their own subecosystems that cater to individuals and institutions (see sidebar “How ecosystems could help cyberinsurance prosper”). The ecosystems most relevant to the insurance industry—and that thus represent the most salient entry points—include mobility, housing, health, wealth protection, and B2B services.

Ecosystems typically provide three types of value:

• They act as gateways, reducing friction as customers switch across related services. Facebook Messenger, for example, enables users to shop, check into a hotel, message a friend, read the news, and chat with a doctor—all through a single interface. Users need not toggle between portals, manage separate log-ins, or spend mental energy maintaining multiple services.
• They harness network effects. Google Nest, the maker of an ecosystem of smart-home products, provides its customers with a monthly report card that illustrates their energy use and compares it with that of their neighbors to give the numbers context. At the same time, the company creates value for utility providers by providing consolidated information about demand to help them optimize production.
• They integrate data across a series of services. One healthcare-data company extracts high-fidelity data from the healthcare ecosystem and applies it to patients’ lives to improve human health.

Insurers in digital ecosystems

For insurers, shifting from an industry to an ecosystem perspective requires a significant change in how they define their role in the economy. Currently, insurers act primarily as risk aggregators. They have a passive and limited relationship with customers, which increases their exposure to disintermediation, disaggregation, commoditization, and invisibility. If insurers were to lose their distribution and customer relationships, they would be left with few options to reinvent their business models. Adopting an ecosystem perspective—reevaluating the traditional business model and considering partnerships with players both within and outside the industry—could reinvigorate insurers’ digital strategies.

Role of the new insurer

Insurers can play multiple roles in an ecosystem. For example, the personal-mobility ecosystem offers a range of opportunities to expand into areas such as vehicle purchase and maintenance management, ride-sharing, carpooling, traffic management, vehicle connectivity, and parking. As a result, insurers have a range of opportunities to expand their roles (see sidebar “Ping An: Ecosystem orchestrator”). Mobility is in the midst of a significant tech disruption, with Lyft and Uber leading the charge in on-demand services, and giants such as BMW entering the fray with car-sharing club DriveNow. In addition, Apple, Google’s Waymo, and Tesla are competing to automate cars one function at a time. Most of the traditional automotive players seem to be at a disadvantage in the mobility industry and face a pressing need to reimagine their roles. Some are starting to see opportunities to move toward an ecosystem mind-set. For instance, Toyota has invested $1 billion in the Toyota Research Institute, which seeks to use artificial intelligence to address issues across the mobility ecosystem. The institute articulates its mission as follows: “We are dedicated to making automobiles safer, more affordable, and more accessible to everyone, regardless of age or ability, and to expanding the benefit of mobility technology beyond automobiles, for example to in-home support of older persons and those with special needs.”

A look at today’s connected-car ecosystem illustrates the benefits and risks that lie ahead for auto insurers. Innovation has caused significant disruption, resulting in the emergence of four natural stakeholders in the ecosystem: original equipment manufacturers (OEMs), high-tech players, insurers, and telecom providers. As mobility evolves, first movers will have the opportunity to transition from stakeholders to orchestrators in three key areas: customer relationships, network and service management, and analytics. (For an example from the agriculture industry, see sidebar “John Deere: A pioneer in agriculture ecosystems.”)

Insurers already have a strong foundation in mobility thanks to their current customer base, distribution power, and stock of personal data from auto insurance policies. To position themselves as true ecosystem players and to fend off moves by other stakeholders, insurers need to build capabilities in a number of areas, including mobile sensors, analytical tools, and customer interfaces. For example, insurers have made significant inroads using telematics, but profit pools are still under threat due to stiff competition. As more OEMs conceptualize line-fitted telematics devices and ride-sharing providers such as Uber grow ever stronger in network management, it is incumbent on insurers to move from risk aggregation to risk prevention. At the same time, executives must understand that while insurance products and related security services will always be at the core of the insurance business, services such as telematics are a way of developing meaningful customer relationships.

Insurers could work with OEMs higher up in the value chain to develop products that address the added risks auto manufacturers might bear as the market embraces autonomous vehicles. As individuals relinquish control over their vehicles during driving, insurers could shift coverage from personal lines to commercial lines, hence widening the scope of engagement. A stronger relationship with OEMs and high-tech players could allow insurers to assimilate risk into existing offerings: pay-how-you-drive and pay-as-you-drive modeling, loyalty and gamification, emergency and breakdown services, crash assistance, and theft reporting.

Partnerships will be critical

As ecosystems enable and necessitate a focus on risk prevention, forging partnerships will be a critical priority. For reference, executives need look no further than their recent efforts to partner with Internet of Things (IoT) providers, which they pursued in an effort to offset their disadvantage from a lack of customer touchpoints and engagement. Insurers should embrace a similar mind-set to assemble fruitful alliances.

The industry has already seen a number of high-profile partnerships between established insurers and tech and analytics start-ups. Progressive, for example, partnered with Zubie, a vehicle-tracking and engine-diagnostic device, to give customers visibility into how their driving habits affect their premiums. Nest partnered with Liberty Mutual to help offset the cost of a Nest Protect smoke detector and offer a monthly discount on homeowner’s insurance in the United States. Manulife is collaborating with Indico Data Solutions to develop a deep-learning tool that analyzes unstructured financial data. Digital Partners (DP), a global venture established by Munich Re to win the confidence of and subsequently partner with insurance disruptors, is nurturing an ecosystem that supports the development of start-ups, including Trov, an on-demand insurance provider, and Wrisk, an insurtech venture that delivers motor, travel, and home insurance directly through smartphones.

Insurers have been targeted in all parts of the value chain by insurtech companiesas much as by other industry players. Although these newcomers are populating every part of the value chain, their focus to date has been on the more easily accessible slivers of the industry—mainly distribution, particularly in property and casualty insurance. Since innovation from insurtechs actually aims to contribute to the insurance value chain (except distribution for large players), insurance executives should view potential partnerships with insurtechs as positive.

The rise of ecosystems involves multiple firms coming together in symbiotic relationships to achieve greater value for themselves than they could capture alone. For example, in its bid to participate in the health ecosystem, Apple launched the Healthkit open platform, which offers Apple device users the option to share their health and activity data across affiliated applications on their smartphones. This integration allows users as well as participants from the world of medicine—including physicians, researchers, hospitals, and developers of healthcare and fitness apps—to access valuable data to inform patient care, research studies, marketing, product development, and so forth.

This article has been partially reprinted with permission from McKinsey. Click here to read the entire piece.