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Ecosystems have changed the competitive stakes for insurers, raising significant risks for laggards and compelling opportunities for leaders.
In brief
- Through ecosystems, networks of companies can create more value for customers than any could produce individually.
- Existing ecosystems in insurance and other sectors are already demonstrating the potential for exponential growth.
- Thanks to competition from other sectors, insurers must consider where to compete, when to collaborate and whether to orchestrate their own ecosystems.
Product bundling inspired by deregulation in Hong Kong. Auto insurance policies embedded with the purchase of new vehicles. Travel insurance coming standard with holiday cruise packages. Life and health insurers offering premium discounts for policyholders who exercise more often and share lifestyle information. Online health services opening the door to a full suite of insurance products. Mobile banking providers identifying latent insurance needs and rewarding customers for loyalty with long-term discounts.
These increasingly common market developments point to a future industry that is driven – and ultimately dominated – by ecosystems. It’s no longer a question of if ecosystems will become common business models, but rather how and how quickly insurers can respond to a shift that could drive fundamental disruption of competitive dynamics and business models.
This article, the first in a series, will highlight what ecosystems are, how they’ve been gaining traction and why they matter to the future of the industry. Following articles will address the strategic questions raised by ecosystems , common traits of successful ecosystems and six recommendations for execution.
What ecosystems are and why they matter
EY defines financial ecosystems as networks of companies that collaborate to better serve their customers’ needs. In doing so, they collectively create more value for the customer, but also more value for their businesses than they could individually.
Typically, the goal of ecosystems is either to offer a better service around a core product or to serve multiple financial needs from one hub. In the UK, the former model is becoming well-established. In other markets, multi-product ecosystems are shaking up the way customers access and consume financial services, as illustrated by the examples below.
For customers, ecosystems reduce friction across the value chain and offer on-demand access to a wider range of related solutions and services through a single trusted entry point. Ecosystem leaders and orchestrators can deepen customer relationships by offering richer experiences, new products and services, and more compelling value propositions. Ecosystem participants can connect to new customers and markets.
Ecosystems already exist in insurance and other industries. In some instances, insurers participate in ecosystems led by others. Consider how insurance offerings are embedded in the purchase process for various types of goods. Mobile phone insurance is included in many calling plans. Similarly, automotive dealerships now offer insurance within standard purchase or lease agreements. Airlines, tour operators and other travel companies also frequently include insurance policies within holiday packages.
Why insurers should act urgently
While the shift to ecosystems will take time, winners will likely realize exponential growth. The pace of change is a big risk; it may seem as if radical change is still some way off, but once underway, the pace builds dramatically. Laggards that are late to the party will face harsh consequences.
Tectonic shifts in the basis of competition are another big risk. Competition will come not just from other insurers, but from any firm that customers trust with their finances. Successful ecosystems built by shopping sites, payments players or ride-hailing apps may ultimately prove to be competitive threats to insurers. Ecosystem winners will be the firms that know their customers best and can offer propositions that customers trust to deliver superior value.
In highly regulated markets, as many European markets are, it’s easy to think that it will be too hard to scale ecosystems. For example, the UK has seen a number of early ecosystem plays that have mostly remained niche or foundered on the complexities of regulation or the necessary permissions to distribute multiple product lines.
Still, the direction of travel is clear: regulatory thinking on advice and guidance is looking to unlock the benefits of Open Finance. The 2021-22 Business Plan of the Financial Conduct Authority (FCA) took care to remind the industry that these benefits are a long-term priority. Other jurisdictions are aiming for a similar endpoint, but the pace and direction of change is set by the starting point of each market.
Who’s winning with ecosystems and how
Some insurers are already building ecosystems around their core products. Others are looking at how they can build the strategic capabilities to deliver short-term benefits and provide optionality for the future. What’s increasingly clear is that ignoring the global ecosystem trend is risky.
Early adopters have shown how ecosystems can drive innovation and growth. Vitality uses ecosystems to pay off its promise to make people healthier and enhance their lives. The company uses technology and a set of connected partners to address behavioral risk and prompt healthier lifestyles, an approach that pays off for both insurers and insureds.
John Lewis, a leading UK insurer, offers an ecosystem designed around household policies. The central platform includes various InsurTechs that provide key capabilities, including those that give customers greater flexibility to match their coverages to their unique needs.
There’s equal potential for collaboration. In Asian markets, some competitors play on each other’s ecosystems. They have standardized on common digital wallets rather than offering competing ones, often because customers were voting with their feet over that preference.
Because ecosystems concentrate value in the ecosystem itself, insurers must carefully consider when to compete and when to collaborate. We estimate that in established ecosystems as much as 75% of the value is in the customer relationship, with the underlying products priced at wholesale margins. Traditional, manufacturing-focused providers will need to ask themselves some tough questions about whether they can operate at these margins or whether they need a share of the relationship value.
Successful ecosystem players have been able to rapidly improve their products-per-customer, or share-of-wallet, figures. These are strong metrics for assessing the depth and value in customer relationships. Typically, these have moved from an average of 1.3-1.6 products per customer to 2.5-3 products during the last few years. Given how difficult it has historically been for organizations to improve in this realm, these numbers clarify the opportunity. They also suggest the threat of non-participation in ecosystems.
Products-per-customer metrics have stayed so low for so long partly because of the customer preference for relationships with multiple providers. They get current accounts, life insurance, general insurance and investments from different companies. But what if one of those firms could deepen relationships and enhance the value, they offer enough to induce customers to consolidate all existing and new products to just one supplier? And what if that supplier is not you? Those hard questions frame the competitive stakes that senior executives must confront in considering how to move forward.
The immediate-term outlook for ecosystems
We don’t think it’s an exaggeration to say that financial ecosystems have the potential to change the whole basis of competition in the industry, pitting companies in different sub-sectors against each other. The ultimate goal is to become the primary financial relationship holder for customers. Fundamentally, that’s why it’s imperative for insurers to work urgently on their ecosystem strategies, a topic we’ll explore in greater depth in subsequent articles.
Overall, insurers that innovate with ecosystems will be able to increase their revenue and share of wallet with more flexible products. Insurers that fail to act or that move too slowly will be vulnerable to both new and existing competitors. To say ecosystems are a game-changer is both literally true and something of an understatement.
Summary
The age of ecosystems has arrived in insurance, which means senior executives and boards must take immediate-term steps to ensure success in an environment with fundamentally different competitive principles.