Ecosystems in insurance: what winners do differently

Given the growth of ecosystems, more senior insurers leaders are trying to define best approach for their organizations. The right answer depends on a range of factors, from overall business strategy and operational footprint, to existing product portfolios and customer segments, to innovation capabilities and technological sophistication. Finding the right path forward won’t be easy but it’s looks essential to defining and executing a credible ecosystem strategy.

The positive news is that the journey can be taken in stages. As insurers begin to develop their own ecosystems or participate in those led by others, they are finding that many of the components create value in their own right, even as they preserve future flexibility. That’s important because ecosystem business models will evolve over time.

The following are four critical considerations for boards and executives to consider as they shape their ecosystem plans:

Orchestrating your own ecosystem versus providing products to those orchestrated by others

The question of choosing the right ecosystem business model may be the one most frequently asked about ecosystems – and it’s easily the most important one. Typically, ecosystems are convened by a single leader or orchestrator who provides a platform, core capabilities and products, with other participants offering complementary products, services and add-on features.

The mix can vary. Some large players can provide a full range of products themselves and use third parties only for add-ons. Others invite partners that can provide solutions they don’t offer themselves. But one thing is clear: the orchestrators of ecosystems call the shots and control the lion’s share of the revenue. Indeed, EY teams’ experience suggests that as much as 75% of the value from established ecosystems is in the customer relationship, with the underlying products typically priced at wholesale margins. In other words, the upside is greatest for the firms that are bold enough to lead.

The “ecosystem orchestrator” and “product provider” business models are not mutually exclusive, and we expect most insurers will end up operating a mix of both. But there will be some hard choices along the way. Pressure on product margins will make it harder than ever to sustain uncompetitive products or inefficient operations. And players reliant on third-party distribution today will need to decide how best to reach customers in the future. However, there’s also little point being an orchestrator unless you can access and attract a large enough pool of customers to make the ecosystem sustainable.

Identifying and reaching customers

The first task for insurers considering their response to ecosystems is to take a hard, honest look at who their customers are and how they can reach them. That means asking:

• Is there a large enough pool of customers to respond to and engage with an ecosystem?
  
• Are they our customers, or do they have a closer relationship with the distributor or advisor who brought them to us?
  
• Do we have the right permissions in place to contact them?
  

Assessing and managing the impact on distribution networks

The customer questions are further complicated for insurers that use third-party distribution. Launching an ecosystem is an act of channel shifting and runs a high risk of being seen by third-party distributors as a unilateral declaration of hostilities. Making a move into ecosystems at the wrong time or sending the wrong signals risks being blacklisted by distributors who are key to the current business model.

Of course, those same distributors may well be planning ecosystem moves of their own that will turn them from valued partners into competitors. Insurers will need to examine which relationships can be sustained, which might assume new forms of “co-opetition” (i.e., competing and collaborating at the same time), and which will ultimately be lost. Insurers must also consider the right moment to trigger those shifts. Timing is everything.

Getting started

Faced with these tough choices, some insurers might make their initial move by participating in ecosystems led by other organizations. Niche insurers or those with less brand recognition can certainly benefit from engaging with higher profile ecosystems, whether in insurance or outside the industry. And other players’ ecosystems can offer cost-efficient access to new customer segments or new markets.

This is a valid strategy, especially for firms that can defend their margins through superior products, low-cost operations or a distinctive proposition that commands premium pricing. And playing on an existing ecosystem is not mutually exclusive with developing and operating your own; several Southeast Asian insurers do both.

Devising and executing the strategy for success

Because much more value is accessible to ecosystem orchestrators, we expect most large carriers to aim to play that role. For those with limited access to customers today, ecosystem strategies will need to improve that access, and manage around the resulting implications. For example, some players might conclude that succeeding with ecosystems means taking a bigger position in distribution or advice, triggering a wholesale rethink of their risk appetite and business model.

Whichever ecosystem strategy insurers adopt, ecosystems can help them navigate through a number of critical trends, including rising customer expectations, deep technology disruption and widening talent gaps. As these forces continue reshaping the industry, ecosystems will only become more important.