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.