The platform revolution and the insurance industry: a discussion with Dr. Geoff Parker
With the tap of a few buttons on your smartphone, a wide array of goods and services become available from platforms like Amazon, Google, Airbnb, Uber, Alibaba and iTunes.
Amazon disrupted the way goods and service are bought and sold. Airbnb disrupted the hospitality industry. Start-ups are quickly dominating industries and revolutionizing the way that business is done. This is possible because of the platform business model which is changing the world.
In only few short years, the digital platform has conquered the B2C space with the well-known disruptors like Amazon and Facebook revolutionizing the way business is done. While platforms have not had as much of an impact yet in the B2B space, the same model and methodology can be applied to B2B or to existing non-digital industries (outside of tech).
The platform model is huge and growing fast. McKinsey and Company predicts that platform businesses will account for 30 percent of global business revenues by 2020. “Platform businesses are ascendant and will continue to evolve. They’re taking over many markets and transforming the entire economy,” says Dr. Geoffrey Parker.
As a shared platform provider in the insurance industry, I am seeking out leading platform thinkers to learn why they think it is time for insurance to adopt an ecosystem approach. In this article, I share insights from my conversation with Dr. Geoffrey Parker who discussed the disruptive power of platforms and the impact it will have on the incumbent insurance industry.
Dr. Geoffrey Parker is a Professor of Engineering at Dartmouth College and a visiting scholar and Fellow at the MIT Initiative on the Digital Economy. He is the co-author of the book The Platform Revolution: How Networked Markets Are Transforming the Economy - and How to Make Them Work for You along with Marshall Van Alstyne and Sangeet Paul Choudhary.
The pipeline model for insurance is inefficient and unsustainable
Platforms are places where buyers and sellers can come together to do business and where stakeholders can drive massive new efficiencies. While this kind of marketplace has been around for ages, the difference now is that we have digital technology. We can complete transactions quickly, communicate effortlessly, and compare numerous products. The internet has supercharged platforms and they are quite disruptive when they get embedded within an industry.
According to Parker, all information-centric businesses, like the insurance industry, can participate in the platform revolution. Traditional business practices, called pipeline models, no longer match the demands of the modern consumer. However, the incumbent insurance industry is built on this old style of doing business, wherein the carrier designs insurance products which they sell to the consumer/policy owner through distributors and advisors.
“This process of selling a product like life insurance is inefficient and unsustainable, as an incredible amount of surplus and value has to go into the creation and selling of the product,” says Parker. The old-school linear process is no longer optimal because consumer expectations are so high due to innovation and automation in other industries. The platform approach creates an opportunity for a cooperative model where roles and responsibilities are blurred and shared.
For the consumer, the process of getting insurance can be complex and exhausting, from application, to evidence collection to underwriting and policy issuance. There is no transparency into the linear model which has caused mistrust and dissatisfaction for consumers. Finally, the insurance industry is recognizing the fact that the consumer desires a trustworthy and easier process, but they must respond quickly to protect their turf.
“The current selling processes aren’t transparent and insurance distribution and sales is fragmented with a lot of information asymmetry – meaning the sellers know a whole lot more than the buyers do,” says Parker. This is the classic kind of market platforms do well in because they can aggregate supply and provide transparency so that consumers have the ability to make reasonable comparisons and more informed decisions on the consumption side. The platform gives the consumer a nearly frictionless experience which they have come to expect and enables carriers, distributors and advisors with a low-cost solution to support the experience.
On the producer side, it is difficult for carriers, distributors and advisors to share and analyze data. With the use of a platform, the insurance distribution network gets “a place to capture, analyze and exchange huge amounts of data that increases the value to all,” says Parker. With access to a greater data share, all parties can focus on their strengths and capitalize on potential sales and service opportunities in ways they historically have not been able to.
The platform is the most efficient value creator
With the pipeline model, supply used to determine how large a business gets. The more insurance policies a firm sells, for example, the greater the profit. However, with a platform model, as more individuals join the network, more connections are available and the value is increased for all. In fact, there are numerous “network effects” (this article details 13 separate network effects) that collectively increase value for participants and contribute to growth.
In many cases, platforms do not own the business resources that use them (e.g., Uber owns no cars, AirBnB owns no property), which allows them to be nimble and respond to the demands of the market in ways the traditional businesses can’t. “Platform businesses are the most efficient value creators, compared to other types of businesses, because they harness the power of distributed supply and network effects,” says Parker.
Due to the nonlinear growth that network effects bring, many platforms have crushed pipeline businesses. For example, Amazon has taken over some of the retail space. It has enabled many companies to not have to pay to display their product, and allowed them to sell a wide-range of product types to a massive global audience.
Platforms provide the infrastructure, communication channels and ability to make quick transactions. This seamless process, Dr. Parker anticipates, should be the same for the insurance industry, which gives the benefit of being able to dramatically reduce costs as it did for the online retail industry.
There is also increased opportunity for revenue as new forms of supply can be established easier, and it is simple for carriers to get their products into the value-chain. Insurance is a complex product that requires trust and sharing of significant information related to personal health status and product features. For a platform to be successful, insurers need to first establish trusted relationships which will open the door for new sales by providing access to data that opens new opportunities.
Insurance needs to keep up with new market demands
The reality is, as affirmed by my conversation with Dr. Parker, the traditional way of producing, selling and consuming insurance is no longer sustainable. The platform approach beats the old-fashioned pipeline model by building new growth opportunities and innovating the insurance community beyond the boundaries of their current hubs.
“It is not a matter of if, but when the insurance industry will have to adopt an ecosystem approach. The industry is not immune to the changing demands of the market,” said Parker.
I predict the next big wave of change will be platforms that create ecosystems within existing industries where well-established players can embrace these new models. This is the mission of Insured Connect in the insurance industry.