Rainmaking

Sabine VanderLinden

In April 2019, Tesla announced that it will provide insurance for its electric cars to eliminate those complaints related to the hefty price attached to the insurance for its vehicles. Four months later, Tesla’s was able to offer drivers 20 per cent to 30 per cent cheaper insurance than traditional routes. Tesla asserts that premiums for the program would be calculated based on driving data like Metromile and Root, to name but a few. The Tesla driver must agree “not to drive the car in a crazy way” to be accepted in the program.

With high combined ratios, reducing top-line results, uncertain investment returns and challenged profitability, the insurance sector is undergoing a period of somewhat unprecedented change with many CEOs asking the same question: How can Tesla, an electric vehicle and solar panel manufacturer, accurately price insurance policies? Still, this is not the first time that new market entrants decide to challenge the sector and its established ways.

For instance, in Europe, Zego, an online platform targeted at delivery drivers working within the gig economy, facilitates the purchase of on-demand car, van, scooter and bike insurance via a premium credit approach. Users can get their vehicles insured on a per-hour basis or for the time they are delivering the goods. In Germany, well known online peer-to-peerFriendsurance combines social networks to connect individuals wanting to lower their annual insurance premiums. The team had no background in insurance went it launched in 2010. Today, the company work with 175 insurance companies to pioneer new digital insurance and banking services.

It’s as futurist Ray Kurzweil predicted in his 18-year-old essay” we won’t experience 100 years of progress in the 21st century — we’ll experience 20,000 years of progress.” While this may sound dramatic, let’s remember that only 0.4 per cent of the population was online in Dec 1995. Today, a world without the internet is probably seen as unimaginable. North America and Northern Europe rank first with a 95 per cent internet penetration rates. According to McKinsey, the internet accounted for 21 per cent of the GDP growth in mature economies over the past five years. If the internet were a sector, it would have a greater weight in GDP. Not surprisingly, the internet facilitates profound digital change, affecting insurers and others. Connectivity, IoT devices and cognitive analytics are impacting the insurance value chain, helping insurance companies to price dynamically and lower premiums by as much as 25 per cent. 

There is no doubt that the speed of change is the greatest challenge of our time. Just in the UK, there are thousands of fatalities and injuries resulting from motor accidents per year: 90 per cent of these arise from human error. Driverless cars have the potential to remove the human error element of risk and improve road safety. While Forbes estimated that premiums could be reduced by as much as 75 per cent, Accenture considers that the switch to autonomous vehicles will generate $81+ billion in new insurance revenues in the US alone by 2025, moving motor insurance (40 per cent of current premiums) to a more commercial product liability format.

The biggest challenge for insurance companies is how they can keep pace with the rate of digital advancement when lumbered with legacy systems, management teams often born before the explosion of digital and an increasingly fickle customer base. Getting the right product out to the market, while market forces are changing is highly complex.

At the same time, just focusing on producing something fast for the here and now could be a costly mistake. Many organizations can’t recover from both 1) making poor assumptions on the future desires of the market and 2) undermining the transformational impact of innovation initiatives on the internal technology stack. Businesses can’t afford to just centre activities on solving today’s needs; they must be prepared to leverage the newer innovation techniques to address more significant challenges, but also place strategic bets on the future. What used to be seen as relevant five years in the future, must now be deployed in months. 

Innovation isn’t a new idea. We know that. As long as there has been change, there has been innovation. Each original development, product design or digital engagement is ultimately an innovation of some sort. However, just as change is exploding, our ideas and methods on ways to deploy innovative thinking much evolve too. Organizations must continuously adapt the way they shape their growth paths and adapt their innovation techniques as a critical offensive strategy to stay relevant. 

This means:

• elevating innovation into a cross-functional set of initiatives supported by encouraging leaders and well-structured methodologies,
• embedding an entrepreneurial mindset with new sets of transformational skills,
• aligning key innovation metrics and incentives with the initiatives,
• updating processes, structures and governance to drive a forward motion in the adoption and use of innovation, and
• continuously renovating the way your people internally innovate to ensure the future success of your organization.

Innovation initiatives have not always done well within insurance organizations. Many organizations today are pushing the reset button. The immediate reaction to failing initiatives has often been to reduce the amount of time and budget spent on these. Indeed, with current financial results, this is not surprising. Why spend more when the returns do not seem to be there? 

However, in reality, despite how counter-intuitive this may appear, now is the moment you need to double down on your innovation efforts across your business and across time. By embracing fast-moving iterative and validation-driven entrepreneurial techniques, the possibility to make an impact has never been more significant. In today’s complex and fast-paced world, it is critical to understand when the levers of innovation need to be pulled the most. 

Simply put, you can’t afford to apply traditional delivery models and timescales to a world driven by new economics. Steve Blank’s re-evaluation of the three horizons model is key. The current market context requires that organizations focus on building the operational resilience to drive competitive advantage through innovation within a much tighter timescale – starting with short-term incremental impact to be achieved within one year, moving on to medium-term growth opportunities delivered by augmenting internal assets within three years and then driving the long-term sustainable health of the business within a six year-timeframe. Have a guess, the most successful new ventures have been built within a four to a six-year timeframe. 

With fast-changing customer expectations, complex shifts in business dynamics, and relentless technological advancements, there are no surprises why new players would look at entering the insurance sector and reset existing beliefs. In simple words, so why not Tesla.