The way we do business has both responded to and perpetuated an ongoing digital transformation. As businesses find new ways to leverage digital communications and platforms, our economy moves away from its dependence on physical location, as well as on tangible items like paper policies.
Included in this digital transformation is the rise of the platform economy, which groups economic activity around digital platforms rather than brick and mortar locations or discrete industries. While some insurtechs are already making strides into the platform economy, many incumbent insurers have hesitated to fully commit to the change.
Yet the platform economy has already made significant inroads in other industries. As it does, it changes customers’ expectations of insurance availability and behavior. Insurance companies that understand and embrace the platform model early stand to gain a competitive advantage over those who do not.
The economy of the past focused on creating and marketing specific goods or services. The new economy is transitioning to a platform-based approach. For a platform-based company, physical location matters less than digital presence.
“Companies in this category create digital platforms to enable interactions between individuals or businesses that need something and individuals or businesses that provide something,” says Mark Breading, partner at SMA.
The goods or services offered in the platform economy are as diverse as the imaginations of the platform creators and participants. And they represent a rapidly-growing segment of the economy as a whole. Estimated growth in the platform economy is expected to reach $335 billion by 2025, say Niam Yaraghi and Shamika Ravi at the Brookings Institute.
The platform economy represents a significant shift in the way we do business. “If the industrial revolution was organized around the factory, today’s changes are organized around these digital platforms,” write professors Martin Kenney and John Zysman.
These platforms are powerful: Kenney and Zysman predict platform owners will have even more power in today’s economy than factory owners had in the early years of the industrial revolution.
One way to think of the platform economy’s relationship to insurance is to think of insurance itself as a service, rather than as a product, says Tomasz Kurcyzk, digital transformation director at AXA.
This helps insurers better understand the ways in which technology drives the development of new coverage modalities, says Kurcyzk. Insurers also position themselves to better explain to customers why insurance is relevant and even essential in the digital era.
Insurtechs, along with some incumbent insurers, are already making strides into the platform economy with products like microinsurance and personalized, usage-based insurance (UBI).
The microinsurance market has opened up new customer bases for insurance by focusing on customers and claims which have traditionally been too small for insurers to cover profitably.
By focusing on small losses and underserved customer populations, microinsurance can reach customers who may have never had access to insurance before, says Julia Kagan at Investopedia.
Three of the main factors that used to inhibit insurance companies were high demand, high cost and uneven distribution of coverage. Today, digital platforms and their built-in methods of analysis (including artificial intelligence) make it easier to offer ample, affordable coverage across many geographies.
Often, these policies are parametric in nature. Their coverage triggers automatically if a certain set of quantitative requirements are met, according to an information sheet from the Insurance Information Institute. Their parametric nature means microinsurance policies can often be handled by computer algorithms rather than by human beings, allowing for a greater volume of claims to be processed in less time and at a cost savings for the insurer.
Platform-based models can solve one of the largest problems facing microinsurance today: distribution. By creating a platform to sell microinsurance, insurers can provide the access customers need to take advantage of this new form of coverage.
Usage-based insurance (UBI) has been developing for over a decade. From its start using telematics to track driver behavior and adjust premiums, UBI has developed into a way to tailor auto insurance coverage to each driver’s needs.
“Not only is UBI a popular choice among drivers to help reduce premiums, but it has also been adopted by insurers as a way to analyse driver risk,” says Mohsen Mohensinia at Aeris.
Dynamic UBI brings UBI-based risk analysis into the mainstream. It allows insurers to track and collect driver data in real time. Customers appreciate knowing their premium payment amounts are within their control. Insurance companies with a robust, reliable dynamic UBI system gain more granular data on driving habits, allowing them to accurately assess risk.
Because UBI depends heavily on data collection, transmission and analysis, significant challenges still exist. Not only must insurance companies know how to collect driver data, but they must also be able to analyze it effectively and to interpret the results of that analysis in a meaningful way, says Aaron Brandenburg at the National Association of Insurance Commissioners (NAIC).
Developing a strong platform improves insurer’s ability to engage with the demand for UBI in auto insurance. It also expands engagement to other fields, such as UBI insurance for smart homes and businesses with internet-enabled sensors.
Insurance companies are still set up primarily within the pipeline model, in which a carrier designs insurance products and communicates them to agents or other distributors, who then reach out to customers.
This model is becoming less popular, not only due to the rise of the platform economy but also because the pipeline itself is inefficient and demands an unsustainable quantity of resources, says Dartmouth College professor Geoffrey Parker, whose work focuses on the platform economy.
Insurance companies are in agreement that platform economies are more efficient. This is why many have turned to technological solutions like in-house digital platforms. Yet not all insurance companies entered these early stages of digital transformation with a clear end goal.
The platform economy offers a well-defined path for these companies. “Being able to efficiently participate in the platform economy is the logical end goal of insurers’ digital transformations,” says Mike Dwyer, CTO and executive vice president at EIS Group.
Internal digital transformations that de-silo organizations and make legacy data accessible reach their full development in the platform economy. There, information can be easily leveraged to create the relationships, products and quality of service today’s customers demand. We built BOLT X with this in mind. BOLT X unifies products, services and partners into a single platform so that digital distributing becomes seamless and informed by visibility into all aspects of the network.
The platform economy has already revolutionized a number of the businesses with which customers interact daily, from retail shopping to transportation. As customers grow used to engaging with platforms in other areas, they see more clearly the shortcomings of the traditional insurance pipeline model. Insurance companies that transition away from this model and into a platform world position themselves to meet customers where they are — and to build more loyal relationships as a result.
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