Distribution in the Digital World

What is “distribution” in the digital context? Is it buying and selling things via the internet?  Connecting providers and consumers of goods and services remotely?  Comparing options?  It is all of these, of course, and much more, particularly when it comes to insurance.

In insurance, the term distribution can be a bit of a misnomer, as the products themselves are virtual – how do you “distribute” indemnity against risk?  But this virtuality also makes insurance a perfect fit for digital – and thus virtual – distribution.

However, this runs against traditional and deep-seated insurance assumptions. Insurance is “sold and not bought,” right?  And so we need agents or brokers, right?  Not anymore. As noted in our thought leadership report, Succeeding in a Multi-Channel World: Channel Efficiency, Optimization and Speed to Value, the ever-changing business landscape requires insurers to rethink distribution-related strategy and execution; namely to one that requires a digital, multi-channel focus—from back to front office.

So, in this post I will explore some of the challenges and opportunities that the digital age has brought to the insurance industry, as well as some strategies you can employ to navigate the shifting tides of customer demand, technology advancements, market pressures and regulatory requirements.

The Five Forces at Play

In considering how to break down the effect of the digital age on the insurance industry from a distribution standpoint, Michael Porter’s famous “Five Forces” model provides an interesting framework for assessment.

• Buyer Power has increased with the advent of digital distribution. Options and differences between insurers – from pricing to product – are easily viewed on alternative distribution channels such as comparison sites, aggregators and new marketplace sites like Ask Kodiak or InsuranceMenu. The effort and cost of switching from one from insurer to another continue to drop, a phenomenon that started with personal lines P&C, then L&A, and continuing to small-medium business for commercial and group / employee benefits. Buyers have the power to demand innovative digital engagement that enables ease-of-use, something they are used to in industries outside insurance – key findings from our consumer and SMB research. Due to the relative complexities, individualized requirements and the need for guidance within variable life and large commercial and specialty coverage, these lines of business have been less impacted to date.  But even within these groups, insureds, from large companies to mom-and-pop stores, have seen their power increase vis-à-vis that of insurers.
• Supplier Power has naturally decreased with the growth of buyers’ power. However, innovative traditional insurers (“innovative traditional” in the sense that they are not startups but are investing in digital technology and experimenting with new distribution capabilities) and InsurTech startups are finding that in today’s digital world of changing demographics, expectations and needs can be exploited. Innovators will utilize a multi-channel environment that expands the reach and capabilities of traditional agents and brokers and website portals, to an array of alternative channels such as comparison sites, aggregators, marketplaces and new partners like Walmart, Costco, Ikea and others.
• Digital distribution has torn down barriers to entry, allowing a flood of new entrants to enter the fray and dampening any agent distribution advantage gained by consolidation or regional domination. The greatest influx of capital and new startups for InsurTech is for distribution, highlighting the intense focus on enabling a multi-channel world. As a result of this digital age shift and InsurTech growth, the insurance market is transforming from a limited market with restricted growth, to one where opportunities for agile, digital insurers are manifold (and thus attracting yet more new entrants).
• The digital age has made it possible to imagine substitutes for traditional insurance, such as products and services that can prevent or mitigate risks, turning the age-old concept of insurance as an indemnification product on its head. The digital age has also made it very easy to substitute one carrier for another – allowing the buyer to easily leverage digital technology to research, buy and service their policies online, which most generations increasingly prefer.
• All of this means that the old days of congenial coopetition among insurers are over. Competitive rivalry is hot and getting hotter. A multi-channel, digital distribution world has increased buyer power and opened the door for new entrants.  This in turn increases choice, options and ease of buying and switching carriers. Ironically, digital distribution is also the means by which insurers can improve the effectiveness and efficiency of their customer engagement. Not surprisingly, multi-channel distribution is now a top priority for insurers.

Agents and Brokers Under Pressure

At first glance, this is the channel that would be most adversely affected by digital disruption in distribution. In the past, insurers could only grow their business by growing their agent networks, but that began to change with the advent of phone-based direct insurers like GEICO.  But even those direct insurers, while they didn’t need brick-and-mortar agencies, were still constrained by call center size.  Digital has enabled insurers to grow beyond the agent and call center channel options, and many InsurTech startup insurers, like Lemonade, are showing how they can rapidly grow in a pure digital channel.

And, with fewer people choosing careers as agents or brokers, particularly in the mature markets, insurers need to look at alternative channels to maintain their growth strategies and support customer retention and loyalty.

Digital disruption has caused or accelerated this pressure on traditional distribution channels.  But, if leveraged correctly, can also be a boon to them. Technologies that enable insureds to research, buy and service their policies online can also be used to boost producers’ productivity and effectiveness.  Artificial intelligence bots can harvest institutional knowledge to bring even the most junior agent up to speed quickly. Advanced analytics can give agents the ability to model many different coverage options and illustrate them graphically in real time while sitting with a prospect. Denim, an InsurTech startup, is reimagining insurance marketing and distribution through an innovative app that links social media ad responses to local agents, digitally empowering both the customer and the agent.

The possibilities are nearly limitless. But to realize them, the insurer first needs to thoroughly document its business needs through journey mapping (of both customers and the agents that serve them), rather than just jumping blindly at cool new tech.

Direct to the Point

Naturally, digital distribution fits nicely with a direct model which the Millennial and Gen Z generations and small-medium companies prefer, according to our consumer and SMB research.

InsurTech disruptors such as Trov, Slice, Lemonade and Oscar have intensified the move to direct channels, leveraging digital technologies.  AI-powered Chatbots are their method of choice, and they are seeing strong uptake among buyers of all ages. Attune is applying the same digital-first methodology to the small commercial space.  Direct distribution is seeing a strong focus in life insurance – once the heart of that “sold not bought” mentality: Haven Life can underwrite and issue a policy immediately up to $1 million and Sagicor sells term and whole life insurance online, asking applicants just 5 questions to get them covered in minutes.

A New Digital Era Demands a New Way of Thinking

Regardless of the channel, mapping customer journeys to understand your buyers’ needs is essential.  Just creating an electronic version of your current application forms is not enough – you have to think differently about digital distribution. Mapping customer journeys helps you avoid “shiny object syndrome” – when you invest in a technology because it is cool rather than because it will help you achieve a defined business goal.

Traditional insurers must think hard about their distribution models in the digital era. While agents are not going away any time soon, the channel is in the midst of disruption and insurers must be prepared to reach customers in the manner they want, which is increasingly digital and multi-channel.  Many insurers have espoused a “fast follower” approach: see what works well and then replicate it.  But with the pace of change and combination of new technologies, changing demographics and shifting market boundaries, the gap is growing so fast that fast followers will struggle to close the gap, let alone keep up, as we noted in our Strategic Priorities 2017 – Knowing vs. Doing report.

We are now in a digital age that demands a multi-channel model. In this world, you need to support your existing customers, many of whom may be oriented to agents and brokers, but also offer full digital distribution capabilities to the newer generations of customers. In both cases, you need to optimize your existing channels as well as invest in technology and capabilities that provide them with the experience and engagement methods they want.

Regardless of your focus, don’t wait to be a fast follower by waiting for the dust settle before you decide and execute. More dust is getting kicked up every day, creating a storm of change and disruption.