Amazon will not nuke insurance if insurers play they cards properly

Dedicated to Marta del Val and Luis Pe?a.

Readers of mine know that I usually write on a twofold basis: Either I blurt out something that I have maturated during a long period of time or I write on a subject that someone has asked for my input and it's usually something complex enough for me to answer properly on a quick reply or a couple of sentences.

This is a clear case of the second option being prevalent. This time is Marta del Val asking me on my opinion regarding this article implying that Amazon is preparing their assault on the insurance business. Let's get in for the kill.

De profundis clamavi ad te

Marta also asks herself some interesting questions which, in fact, are not insurance related, but part of a bigger picture involving personetics related issues. I won't cover them in detail because it's not the purpose of this article and I think I have covered them already on some of my other articles. I'll try to skimp over them in a light fashion in order not to leave Marta out in the cold, but if you would like a deeper answer, I could point you to some other of my posts, or write a new piece on the matter.

My personal data are common for all companies ... why can’t I get money from them?

Because the deal is broken. As it is, you are not the owner of your own data. We have created a monster, which involves a sick narrative that states that the platform is the owner of your data. Not only that, but the locus of control is also displaced from the user, so Facebook or Twitter or whoever knows what you really want to read and decide for you. It's the claim of illustrated despotism "Everything for the people, but without the people" I truly hope GDPR will help to put things in perspective, but I think our future descendants will look in awe how the hell we tolerated this crap, as we wonder how women in 18th century could go through the crap they went.

The situation is so dire that even an incumbent like Telefonica is trying to solve this through Aura, in a half-cooked approach full of pitfalls, as I develop here and here.

Why can’t Amazon or google help us? Until now, I haven’t received any benefit ...

I am not sure if Marta is asking this as a customer or as an insurer. Let's split the answer.

• As a customer: Because you're a cow, and butchers do not make partnerships with their cows.
• As an insurer: Question is, why should them?? They are trying to steal your lunchbox, after all.

Once the questions are out of the table, let's dwell on the core of the issue.

Why does Amazon feel that they can push it?

Well, the article itself mentions it succinctly, in several different paragraphs, quoted here verbatim.

Amazon has a positive reputation for putting customers’ needs at the heart of its propositions

Which is something I'm afraid that insurers can't do properly. Yes, they blubber and chat endlessly about being customer oriented. Sorry, you are not. You are product/service oriented. You are claims oriented. You are risk-oriented. You are statistics oriented. Your customers are freaking numbers and a certain attached risk, that's what they are. If things go merry, you feel like taking a bigger risk. If things go south, you drop your nonprofitable customers at the flick of a switch. At the core of the classic insurance model, there is no customer centricity to be found at all.

If insurers are not careful, they may be pushed out of having a direct relationship with customers and be relegated to the role of a price-driven risk carrier at the back end

Beg your pardon? Insurers are already pushed out of having a direct relationship. You only connect with your user when you sign the policy and when you have a claim. In fact, your ideal relationship involves not contacting your customer at all except for renewal.

Let's introduce you to an interesting concept: Customer narratives. A customer narrative provides you with a narrative, or a discourse, that you introduce to rationalize a specific customer behavior you want to enforce. The narrative can be real or fake, that's not important. The only important thing is to "sound legit" and that you can capitalize it by being used to rationalize a desired behavior. And something very important: Just people who have a direct relationship with customers can introduce customer narratives. If you rely on a distribution channel, you cannot introduce any customer narrative. In the other hand, if you are a distribution channel, you can introduce a customer narrative even if it goes against the main product provider.

Take for example Mercadona, a popular chain of Spanish supermarkets. They have sold this narrative to their customers "Hey, you can substitute 50% of your shopping bag with our own products with no quality downgrade and saving money". They can do it because they have the direct relationship. On the process, they destroy countless value for established brands which have expended huge amounts of marketing money to get exposition. Such exposition is being wiped out and substituted by Mercadona's own customer narrative. This is, for example, the reason why so much FMCG companies are now dying to construct some kind of direct contact with the end customer because, without it, you are exposed to someone else's customer narrative.

Insurers kept their insurance agents network as a key asset for a while. Companies like Mapfre or Pelayo grew on the back of strong owned networks of insurance brokers. When people shifted to the internet, they not only suffered by the bleeding produced by the weakening of an established channel but for the inability to construct customer narratives from that point on. Moving into online-only offers wouldn't close this wound. When the physical networks of insurance brokers went out of fashion as main insurance buying vehicles, traditional insurers took a double whammy,

Amazon sees many of its technology products, such as voice-activated digital assistants like the Amazon Echo and Dot, as entry points to providing for customers’ insurance needs

So, of course, Amazon feels entitled to assault any business model that feels outdated regarding customer centricity and general technical prowess.

And besides that, they already have seen the Telcos being reduced to infrastructure providers and plumbers for The Internet despite their efforts to move out of the position, so Amazon maybe feel confident they can pull a similar stunt.

But, on the contrary of Telcos, which are willing to rent and monetize its infrastructure, insurers are not so hungry to take unknown risks, especially if actuaries are at the helm as we will discuss further ahead.

Insurers are to blame

Of course, Amazon could prey on the insurance industry because traditional insurers did everything they could in order to be exposed to its bite:

• Insurance has become a commodity
• Insurance industry has been accomplice of this commoditization by entering into Aggregator business and price wars - The ultimate commoditization machine
• They confound being serious about the business with being boring as hell
• They rely on actuarial science, who has worked fine for 300 years, thank you, and basically prevents them from moving into more sophisticated schemas of risk evaluation

So basically Amazon is welcome from some customers as a potential solution to all this drudgery. The main invokers of Amazon to the stage have been Insurers themselves.

Is Amazon/Google/Facebook... going to take over insurance industry??

I don't think so. Not really. That does not mean that they are not free of danger, but the enemies are different from them. I'll try to explain.

Why do I think insurers have a chance? First and foremost, I just wrote in 2015 a lengthy article debunking all this crap regarding the claim that IoT, or Google, or whoever from the tech front, would revolutionize the industry. In order not to repeat messages, I strongly suggest you read it in detail.

And adding to all that mentioned, because the entry barriers are higher than in fintech or retail, for example. To start with, you need to obtain capacity from the industry, which in my experience is harder than getting funding. Capacity is determined by financial strength and is also used to refer to the additional amount of business (premium volume) that a company or the total market could write based on excess (unused) capital. That fact alone leaves most insurtech startups out in the cold and depending on traditional insurance companies to being able to operate. And that is not mere plumbing as Telcos provide to tech startups. It's about almost all the value proposal, from pricing to claims handling.

Well, you can do, if you are swimming in VC capital, as Metromile did, buying an insurance company to get capacity, but I can see people from own Metromile's insurance company denying the risk to them on the basis that they do not have three years data to make their risks statistically relevant. *Smirk*. But on the other hand, you can be Amazon and have no problem with losing money in the learning process... That would not be a problem with enough money on the table. But that won't come from a startup, again... anyway, my point is that it's not so easy to enter as in fintech or retailing.

But that does not mean that insurance is not facing a very important issue, lying like a snake's egg in the grass...

The root of all evil

Wherever and whenever we sit with traditional Insurers (Mostly in my role as Drive and win CMO) we always find three kinds of people

• People who are eager to hear from us, regarding innovation in insurtech and demand generation strategies. They have read the business and know that their traditional business is mature and want to dwell on what we are doing, either piqued by curiosity or desperately looking for solutions.
• People who are neutral, and just want to get the job done and end the meeting
• People which are uneasy about their power position being thwarted. Usually actuaries, but not necessarily always. Old school insurance people, widely speaking, ranging from brokers to salesmen or marketing folks.

The latter bunch is the real danger most insurance companies face at the moment. Current status quo holders which feel cheated by the fact that once they have reached a position of power, someone has moved the goalposts. They perceive the change of landscape as a menace. Most of the new menace the old, that's the way the cookie crumbles. And holders of status quo are not going to receive any change of the guard with a smile. They are not going to face us directly, especially since that last CEO memo they received telling them that things are going to change in a hard way. So they usually take a passive-aggressive approach which ranges from "We are already doing that" to " We have to sit and evaluate carefully everything you are telling us and see if it's poppycock" or just snubbing anything we can say. They are impervious to data or even rational argumentation because it's an emotional stand.

What to do??

First of all, assume the fact: You are fighting with your own successful history, so temptations to prevent real innovation are going to be strong. You need to make bold movements to try to make your advantage position last.

• Provide an innovation structure outside of the core company. You are fighting against your own devices, so keep your future solutions as far from the poison gas as possible.
• Create spin-offs who have to sustain themselves. Do not pay their bills if they fail year after year to meet their Business Plan, especially to repeat the strategy that made them not reaching the numbers in the first place.
• Bring new people to the table. People from outside the Insurance Business. Innovators in every front. Demand generation, Technology, Sociology, Anthropology. Orchestrate them or have them professionally orchestrated.
• Manage the culture clash. It's going to be ugly.

Conclusions

I really think the Insurance industry is not going to be disrupted by all the current Tech Giants because there are a lot of natural barriers preventing that from happening, ranging from capacity management to the real chance of those giants of diversifying in a realistic manner without spreading too thin. I truly think that traditional insurance companies have a real chance to deflect their attacks and keep their advantageous positions if they take the correct bold decisions and are not fear paralyzed or decide to play soft. And those decisions usually imply start generating spin-offs with no strings attached (If you pay all their bills you will eventually want to make the calls and your experiment will be a failure) that could face in a freshly way lot of different issues they are not comfortable managing nowadays.