According to McKinsey research, by 2025, ecosystems will likely account for 30 percent of global GDP. This prospect alone makes it of utmost importance to include ecosystems in strategy discussions. In this interview Jörg Mußhoff and Simon Kaesler (McKinsey) argue that insurers need to actively shape the opportunities that ecosystems offer. And they share the critical factors to turn this into a success.
Jörg Mußhoff is a Senior Partner in McKinsey’s Düsseldorf office. He leads McKinsey’s Financial Institution Practice in the German-speaking countries. Simon Kaesler is a Partner in the Frankfurt office and leads all digital insurance distribution activities, including insurtech. Both have a long-standing track record of serving insurance companies and other financial institutions. Given the increasing importance of digital platforms and ecosystems, these make up a large part of their current day-to-day work with clients. McKinsey is a knowledge partner of DIA.
So many very different definitions are being used for ‘platforms and ecosystems’. How would you define these two?
Jörg: “Ecosystems are customer-centric networks in which various companies in different industries offer a range of products and services that together address a certain customer need. In the housing ecosystem, for example, one player may offer mortgage options while another provides property insurance and another smart home applications. Often, an ecosystem offering is bundled by a large orchestrator that provides the primary point of contact to the customer.”
Simon: “At the heart of ecosystems lie platforms: digital systems that allow multiple participants – including both consumers and ‘producers’, such as retailers, service providers, insurers, etc. – to connect, interact with each other, and create and exchange value. It is this connective power under a ‘single point of contact’ – provided by the digital platforms – that makes ecosystems so powerful.”
Is ‘platforms and ecosystems’ just another hype or is this here to stay?
Simon: “The basic idea is economically logical from the customer’s perspective, so we see it putting down roots and think it’s here to stay. There are already several big ecosystem players in the financial and insurance space, especially in Asia. Rakuten with Rakuten Ichiba – Japan’s largest online retail marketplace, for example – has built up a vast ecosystem with over 70 businesses that extend to industries as diverse as energy, health and beauty, parking, and financial services, including insurance. Rakuten’s instant messaging app Viber has around 800 million users worldwide, its travel portal is one of Japan’s largest, and the company has issued credit cards to tens of millions of people. These complementary services cover every point along the customer’s life cycle.”
Jörg: “When it comes to insurance ecosystems, one impressive example is the Chinese digital insurer Ping An. It has a single customer access point called “One Account” that serves as a gateway to offerings such as Good Doctor for healthcare, Lufax for finance, or Pinganfang for housing. With One Account, Ping An has built up an extensive ecosystem of convenient, value-adding services used by around 350 million people every day. Through this network, Ping An can reach its customers at various touchpoints and offer the right insurance solutions as well as other products and services in a super-convenient way for the customer. Given that Ping An now has more than 160 million buyers of insurance products in its ecosystem, we see its model as another example that the ecosystems approach is here to stay and should not be ignored.
And ecosystems are also being developed in other geographies, such as the US and Europe. Major players such as Amazon are increasingly looking to include financial services in their ecosystems. This trend will continue – not only for financial services and insurance but also for other industries. Our research suggests that, by 2025, ecosystems will likely account for 30 percent of global GDP.”
What trends are driving the growing importance of ‘platforms and ecosystems’?
Jörg: ”Across the globe, technology such as the mobile internet as well as increasing capabilities in advanced analytics and artificial intelligence have dramatically reshaped customers’ expectations. Customers are now looking for fully personalized solutions and are showing impatience with any sort of complexity, waiting time, or suboptimal customer experience. To address this kind of demand, ecosystem orchestrators need to be both extremely data-driven and fully customer focused. At their best, they are able to predict customer needs in order to connect customers with suitable producers and providing a truly integrated, end-to-end digital experience. In a way, it’s the customer who is driving this transformation, with digital technology and data capabilities making it possible.”
Simon: “Another important role is played by APIs – application programming interfaces. These interfaces make it easy to integrate technologies and services across businesses and sectors, and thus make it possible for ecosystems to grow and adapt. The connective capability of APIs allows companies to access new value outside their own businesses and their own technical capabilities. For an insurer, this might mean building up partnerships with other insurers and collecting quotes from these players via an API to include them in their own offering, for example, as a white-label product. By doing so, they can serve customers with a broader product range via one single point of contact and provide the benefits of an enhanced customer experience.”
What is your vision on ‘platforms and ecosystems’? What kind of platforms and ecosystems’ do you think are key to the future of insurance?
Jörg: “By 2025, McKinsey expects about a dozen distinctive and massive ecosystems to emerge. These will be shaped around fundamental customer and organizational needs, rather than around the industry structures we see today. This builds on the fairly intuitive assumption that different companies, operating in one ecosystem, can create greater value together – also for themselves – than on their own.
Customers in the future will still rely on insurers to protect them against risks. The ability to transfer risk across groups and over time is and will remain valuable. Therefore, insurers can be part of every single one of these new ecosystems by offering risk mitigation and related services, such as prevention. That said, we do consider five ecosystems as particularly relevant for the insurance sector. These are: mobility, housing, health, wealth protection, and B2B services.”
Mobility, housing, health, wealth protection are examples of domains in which all sorts of other well players are active as well. Think of car manufacturers, tech giants such as Apple and Google and even banks. To what extent are platforms and ecosystems an opportunity for insurers, and to what extent a threat?
Simon: “The ecosystem approach is an immense opportunity, and insurers are well positioned to capture some of the value in this new way of organizing around customers’ needs. Take analytics as an example: insurers have strong analytics capabilities, also relative to peers in other industries. Digital ecosystems offer insurers the opportunity to use analytics both to create new business models and offerings, and to offer analytics-as-a-service to companies in other industries – for example, predictive modeling.”
Jörg: “Of course, other players are not standing still. As boundaries between industries continue to blur, insurers must compete against companies and industries they never previously viewed as competitors. This new environment comes with new rules and will require different capabilities. Insurance has traditionally been a more “low involvement” industry with a less active role in its customers’ daily lives. Insurers are therefore facing the challenge of critically rethinking their business models to strengthen their relationships and interaction frequency with their customers and to offer new, digital experiences as well as customized products and services.
In our view, insurers can build on quite a few strengths in order to master these challenges successfully. Data is at the heart of the insurance industry – with its deep, actuarial understanding of all types of risks across customer life stages and also across all different types of industries – and data is also at the heart of ecosystems. In addition, insurers enjoy a high level of trust from the customer based on their long-standing history and their financial strength. They can leverage their strong brands to take on broader roles in emerging ecosystems – for example, by certifying other partners based on their expertise or by leveraging their financial and operating assets. Finally, they typically have access to large, multi-million customer groups. As ecosystems spread, the key factors for success for insurers will be the ability to leverage their customer access in combination with the strengths of the given brand and expertise in data analysis.”
How important are insurtechs in the development of platforms and ecosystems?
Simon: “In recent years, insurtechs have targeted all parts of the insurance value chain, ranging from product development and marketing, to pricing, claims, and distribution. However, their main focus so far has been on distribution in property and casualty insurance. For incumbents, it is beneficial to stay close to insurtechs to keep track of the latest trends and, when needed, react quickly. Furthermore, instead of seeing insurtechs purely as competitors, insurance companies may also view insurtechs as potential partners who can help them grow the insurance value chain and enter into ecosystems.”
Yes, we absolutely agree. The DIA database includes more than 2,500 insurtechs from all across the globe. Around 10-20% are challengers; 80-90% are all about enabling insurers to improve operational excellence and accelerate innovation.
What role should insurance carriers play in a platform or ecosystem? Opinions vary from ‘being in control’ to ‘just being one of the nodes’ to ‘staying away from ecosystems’.
Jörg: “Insurers can essentially play two roles in ecosystems: delivering services as participant producers, or managing the customer interface as the ecosystem orchestrator. Both roles can be played across different contexts, and both can be played successfully.
Participation essentially means providing insurance services by integrating seamlessly with existing platforms – for example, platforms belonging to large technology players, intermediaries, such as insurance brokers, or players from specific industries, for example, automotive companies. By participating in B2C ecosystems, insurers can tap into new distribution channels. One example here is that insurers are now integrating into the Google Nest platform to enter customers’ homes and everyday lives. In the US, for example, Liberty Mutual is offering a subsidized ‘Nest Protect’ fire detector and a discount on homeowners’ insurance.
Orchestration means bringing together multiple participants on a platform to fulfill customer needs end-to-end. This includes bundling the insurer’s own products and services as well as enhancing and complementing its services by bringing in outside partners. This may generate more benefits, but it is also more difficult. Insurers need to focus on high-quality digital services, while at the same time finding suitable partners, securing digital talent, and paying close attention to competitors such as Google or Amazon.”
So is about really making a choice in every single context: participation or orchestration. How should insurers define their role?
Simon: “Insurers need to re-evaluate their traditional business models and adopt an ecosystem mindset. This includes shifting their role from focusing on risk mitigation with rather low customer involvement to actively shaping the opportunities in the emerging ecosystems.
They need to develop an overarching vision of their strategic target picture. Depending on where they’re starting from, they need to think through a couple different questions – Which ecosystems do we want to play in? How do we want to play: orchestration vs. participation? What kind of partnerships do we have, or could we readily activate or initiate? Such partnerships, if judged beneficial, typically include firms within and outside the insurance industry, for example, with tech companies, strategic investments in start-ups, etcetera.”
What are the critical success factors with regard to developing own platforms and ecosystems?
Simon: “For a successful ecosystem play as an orchestrator, a company has to own the customer interface and secure ownership of the customer relationship. This allows the company to control customer data and the corresponding customer experience. Regular customer interactions help to keep customer data up to date. However, historically, insurers have rarely interacted as often with their customers as, say, retailers do, so this may be the biggest hurdle.
Another success factor will be how insurers make use of their analytics capability and risk management skills. As businesses generate growing volumes of data, risk management will continue to demand data modeling and advanced analytics capabilities. Here, insurers can play a substantial role in evaluating this data to generate information that is useful for decisions on their own offerings as well as for others.”
Jörg: “A third success factor for insurers will be the ability to foresee new risks and the flexibility to adapt services and products accordingly. Connected cars, for example, have fewer accidents, and predictive maintenance allows you to plan the maintenance work before the actual failure occurs across many different areas – from traditional machinery to real estate. As a result, the pressure on premiums may increase for some products. However, on the other side, there is a huge playing field for innovative insurers to benefit from the new developments and opportunities out there. As for the mobility ecosystem, insurers may expand their offering into areas such as vehicle purchase, maintenance management, or vehicle connectivity and thus tap new revenue streams.
It’s common sense, but worth emphasizing all the same: devising – and implementing – an ecosystems strategy will require dedication and commitment at the top level. Insurers must identify and prioritize the ecosystems in which they can play and win, and that means identifying and, often, closing gaps in the critical capabilities that will act as differentiating factors. Also, they need to be able to build platforms and open up to partners. Ultimately, it will be the players who can find ways to adapt their products and services at the core who will be best able to use ecosystems to their advantage.”
By Roger Peverelli and Reggy de Feniks – Founders of The DIA Community DIA Munich (17-18 October) is the must-see event for insurtech and innovation in insurance. At the recent Spring edition we welcomed 1,200 insurance executives and insurtech leaders representing 50 countries and all 6 continents; of which 60% was C-level and C-1. Check the DIA-Website for tickets and more information: http://www.digitalinsuranceagenda.com/