The Allure and Challenges of Online Insurance Distribution

By Frank Gehrig | December 3, 2018

Insurance presents some big barriers to entry especially for newcomers who often lack the experience and knowledge in areas such as regulation, risk and distribution. Meanwhile, the industry’s legislative and regulatory environments are becoming more complex. Many will point to Google’s failed experiment to sell auto insurance online via Google Compare as testimony to how hard it can be to gain a foothold in the industry.

However, investments in insurance startups have exploded in recent years. According to a CBInsights report, U.S. insurance tech startups have raised $4.75 billion across close to 350 deals since 2013. CNBC also reported recently that online giant Amazon is in discussion to offer home insurance in conjunction with its connected home devices. As an established go-to brand for buying just about anything, Amazon won’t have to stretch too much to enter the market as an aggregator.

We must also recognize the significant benefits digital channels offer in terms of new distribution networks, innovative niche products, user-friendly processes and innovative interfaces to expand the market and grow revenues.

New Distribution Networks and Ecosystems

Insurers, especially new players, are capitalizing on cooperation arrangements with platforms like Amazon to expand distribution networks and establish new touch points with customers. This is especially pertinent for transactional, low-advisory products like home insurance or warranties. For example, two years ago, insurance company Liberty Mutual launched the first instant, voice-activated system to let users interact with Alexa, Amazon’s voice-activated virtual assistant, to obtain auto insurance estimates and navigate the insurance quoting process. Similarly, in 2016, The Warranty Group collaborated with Amazon.co.uk to offer an Amazon-branded insurance product to protect against damage and theft. Marketed as Amazon Protect, the insurance product allows customers to safeguard their Amazon purchases including washing machines, mobile phones, tablets, television, kitchen appliances and many more, against accidental damage, breakdown and theft.

Tailored, Niche Products

Online distribution has unlocked a new market for niche insurance offerings that address special requirements and cater to specific customer groups. By leveraging its mobile app, Trōv is able to make the process of buying on-demand accidental damage, loss and theft insurance for electronics and valuables including laptops, smart phones and cameras, simple and easy. Users can turn protection on and off at any time from their smartphones. As of this summer, Trov’s on-demand insurance policy has been approved in 44 states and is available in Arizona. Online distribution has also enabled the sale of niche products like return-shipping coverage for sellers. For example, Chinese company Zhongan sells return-shipping insurance online to cover shipping costs incurred when customers return unwanted goods. Although the individual price to buy these niche products may be small, they quickly add up. The Financial Times reports that during peak shopping seasons, Zhongan sells as many as 100 million return-shipping policies in a single day.

Online distribution has unlocked a new market for niche insurance offerings that address special requirements and cater to specific customer groups.

The quick, simple online or mobile purchasing process coupled with its low prices, make these niche insurance offerings attractive for customers.

Deeper Customer Insights for Cross Selling

Digital distribution also unlocks new customer insights, giving providers an important tool to drive new sales and customize offerings. For example, online lender SoFi offers life insurance to its borrowers through a partnership with Ladder, a California-based life insurance startup. SoFi customers who sign up for the service are eligible for fully underwritten term life coverage worth up to $8 million. Using existing data on users’ financial situations, SoFi is able to automate the needs assessment process to generate coverage recommendation. SoFi, with its knowledge of customers’ overall finances, is also well positioned to recommend adjustments to increase or decrease coverage over time as customers’ needs change.

Growth Potential

Certainly, we don’t expect online insurance to supplant traditional channels anytime in the foreseeable future. Large insurance policies are still sold via agents, and sales through banks continue to be an important distribution channel.

However, we cannot ignore the profit and growth benefits offered by online distribution.

Traditional firms are far away from being able to create and offer a seamless digital buying experience, as they face hurdles and challenges themselves. There is the danger of cannibalization if incumbent companies use existing traditional channels to distribute smaller, niche products. Incumbents would therefore have to develop different distribution channels if they want to offer these new smaller, innovative insurance products. One way to do this might be to build or join a new ecosystem. They can also work with partner companies.

To effectively leverage new ecosystems and partnerships, incumbent players will have to develop an understanding of the customer segments there. These customers’ insurance coverage needs, priorities and desires will be different from those of the traditional customer base. It is also likely that a new approach to pricing will be required. With smaller, innovative insurance products, there is an opportunity to employ the more profitable willingness-to-pay pricing approach instead of the industry’s traditional cost-based pricing strategy.

To fully leverage the benefits of online distribution, incumbents will also have to exercise discipline to ensure new product offerings are easy to understand, sales processes are straightforward, and to avoid requiring customers to fill out overly complicated, long questionnaires. A high degree of transparency and cognitive ease are important factors influencing customers’ confidence when making online purchasing decisions.

Incumbents might even benefit from an element of surprise that can translate to higher sales conversion and margin. Customers used to large insurance products providing wide coverage at a high price might appreciate the value and lower price points offered by the niche products and be more willing to buy.

About Frank Gehrig

Gehrig is a partner in the global insurance practice of pricing, marketing and sales consultancy at Simon-Kucher & Partners.

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