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How Insurers Can Break Through with Ecosystems

By Henrik Naujoks, Partner, Bain & Company And Darci Darnell, Partner & Harshveer Singh, Partner, Bain & Company

Henrik Naujoks, Partner, Bain & Company

Insurance is a low-touch business. Most consumers purchase an insurance product only every three to six years. In developed markets, just half of customers have had any contact with their insurers for any reason in the past 12 months. It’s hard for insurers to differentiate themselves under such circumstances.

Because customers don’t discern much difference between insurers, companies end up competing largely on price, and that can lead to a downward spiral of cost-cutting, profit erosion, and customer churn. In a word, commoditization.

But some leading insurers have figured out how to break out of this destructive cycle. In what may look like a paradox, these companies are winning in insurance by offering their customers services beyond insurance. They’re building sites and apps that offer their customers a constellation of non insurance services known as an ecosystem.

With ecosystem services, insurers aim to help their customers live safer, healthier, and more productive lives. These offerings include security sensors for customers’ homes, safe-driving monitors for their cars, and fitness club discounts and doctor locator services for their well-being.

While insurance-led ecosystems are still relatively new, customers are already big fans. In major markets around the world, more than 80percent of insurance customers are interested in, or open to, ecosystem services, according to Bain & Company’s survey of 172,000 property and casualty and life insurance customers in 20 countries (Customer Behavior and Loyalty in Insurance: Global Edition 2017). Among customers interested in ecosystem services, a majority in all markets are open to having their insurers provide those services.

"Ecosystems, when done well, can become a virtuous circle—the very opposite of the downward spiral now besetting much of the insurance industry"

When insurers offer ecosystem services, they increase the frequency of customer interactions. And engaged customers are much more likely to be loyal customers. In the US, for example, home insurance customers whose carriers offer three or more ecosystem services give their companies loyalty scores more than twice as high as customers whose carriers offer no ecosystem services.

Loyalty is good for business. Carriers that win the loyalty of their customers find that they stay longer, buy more products and recommend the company to their friends and colleagues. Higher loyalty means lower churn, and that can help companies reduce costs and expand margins.

Ecosystems are still in their infancy. In most of the countries surveyed, only a minority of customers use at least one or two ecosystem services, and just a tiny fraction use three or more. Still, the results show that insurers that offer ecosystem services not only do better at keeping existing customers, they also have an edge in pulling in new ones.

One indication of how powerful a lure these services can be: In the US, 42 percent of home insurance customers who are interested in ecosystem services are willing to switch insurers if their own carrier doesn’t provide them. They’re willing to switch, and they’re willing to pay. More than one-third of US home insurance customers who use ecosystem services say they’re prepared to pay higher premiums for those services.

In addition to bringing in new revenues, ecosystem services have the potential to improve profit margins. Customers whose homes and autos are protected by sensors and monitors are likely to have fewer accidents. That means fewer claims, which helps the insurer’s bottom line.

Darci Darnell, Partner & Harshveer Singh, Partner, Bain & Company

Insurers considering to build an ecosystem face a series of strategic choices. Carriers that succeed in creating—and leading—an ecosystem make sure they deliver innovative services that are regularly updated and refreshed. They use technology to make it easy for customers to move seamlessly between insurance and noninsurance services. They pick their ecosystem partners with care and drive for scale quickly.

Like so much else in business today, running an ecosystem well means embracing the power of data. Ecosystem winners tap the wealth of information that insurance customers routinely provide about themselves. They use artificial intelligence to personalize interactions with customers and further refine their products. They also deploy the deep insights they gather from the ecosystem to help make their core insurance operations, especially underwriting and claims, more effective and efficient.

Ecosystems, when done well, can become a virtuous circle—the very opposite of the downward spiral now besetting much of the insurance industry. With a carefully crafted ecosystem strategy, insurers can expand their offerings, differentiate themselves in the marketplace, build and sustain loyalty, lift profits, and successfully fend off the threat of commoditization.