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Economy

Disruption or evolution?

The insurance industry is transforming. Joachim Wenning, Munich Re’s CEO, talks to Andy Rear, Chief Executive of Digital Partners (DP) and John-Paul Pieper, CEO of nexible, who both drive innovation from two different angles – DP as a partner for disruptors, and nexible as the first truly digital insurer in Germany. They discuss the role of start-ups – and the opportunities for both start-ups and incumbent insurers – when they join forces in order to innovate insurance.

13.10.2017

Wenning 
There is no doubt that this is a time of change, or even disruption, in the insurance industry. Where will we be a few years from now? Will InsurTechs prevail?

Pieper
I think the most important thing for any business today is the ability to adapt. The world around us is changing considerably faster than it did ten, twenty or thirty years ago. If you can’t recognise that there might be a better way of doing something, you’re going to be stuck, for good.

Rear
I see the insurance industry as evolving rather than being fundamentally disrupted. We are not going to see an insurance version of Google suddenly appear and destroy everything in its path.

Wenning
I’m more and more convinced that the change in the insurance industry will be brought about by the industry itself. It will build in technology and data, and exploit all of the digital possibilities to create solutions for clients. Companies who succeed in doing this will be among the winners, and they will be better off than the start-ups.

Start-ups do have some big advantages. They have no other business and hence only one thing to worry about. They have a single dedicated team and nothing to lose. However, a major disadvantage is that they don’t have a brand, or a balance sheet, and at first they don’t even have any customers. So they have nothing that makes people trust them.

© Munich Re
I see the insurance industry as evolving rather than being fundamentally disrupted. We are not going to see an insurance version of Google suddenly appear and destroy everything in its path.
Andy Rear
Chief Executive of Digital
Partners (DP)

Rear
There are two things about brand. Firstly, very few insurers have a strong consumer brand, and secondly, brand is often beaten by price. If you look at a comparison website for motor insurance in the UK, most of the brands are actually not insurance brands at all, but bank brands, supermarket brands or some other retail brand. In many cases, the same insurer is even behind all of the top three prices. But the insurers are not using their own brands because they are not strong enough. I also believe that, in addition to price, customer experience matters. I assume that a lot of the new guys who are building really good customer experiences will find themselves being acquired by one of the incumbents who has tried and failed, because that will work for both sides.

Pieper 
But this long-term character again has a knock-on effect on brand. Even if insurance brands are not very strong or fancy, there is kind of a brand recognition with regard to who is expected to keep promises. With life insurance for example, people actually need to be sure that the promise will be kept. That should go without saying, but not every brand is transporting this message.

Rear 
So far, the vast majority of InsurTechs follow the so-called MGA model, where they don’t run their own capital. So they can rely on their carrier’s experience with the long-term business. A business is much more complicated if you’re also trying to capitalise a carrier and expand a balance sheet.

© Munich Re
Compared to other start-up companies, nexible is going purely digital into the market, which means no phones are being used in the sales process, not even in the claims process for our own customers. In order to do that, you need to embrace simplicity online – and digital customers are looking for exactly that.
John-Paul Pieper
CEO of nexible

Pieper
And it’s quite alienating for some of the biggest investors outside the insurance industry. They really have to understand that it’s actually a long-term game. And that is quite different from a typical Silicon Valley company.

Wenning
I have the impression that start-ups are very bullish about how successful they’re going to be, how many clients they’re going to acquire, how many lines of business and products they’re going to have and how much cross-selling they can generate. Do you agree?

Rear 
Yes, and I think this partly comes from the nature of venture capital. If you’re a venture capital investor, you genuinely believe in experimentation and you accept that a certain percentage of your investments is inevitably going to fail. That’s the nature of the business. What start-ups pitch to potential investors is always based on the assumption that everything will work out. So they can be bullish – they only present the upside. That’s the game everybody is playing.

Pieper 
They need to be over-confident in order to organise capital. We shouldn’t forget though: a leading strategy in the investment world, especially in Silicon Valley, is still “hit and hope”. The best investors don’t really believe. They spread their money in the hope of hitting a single unicorn, a single new Facebook that will pay for all the bets that have been made.

Are there opportunities for both start-ups and incumbent insurers – when they join forces in order to innovate insurance?

Wenning
John-Paul, with regard to your business case. Strategically, nexible is a hedge against the non-digital ERGO strategy, in the sense that there are digital and non-digital customers. I expect you to capture the customers that ERGO traditionally cannot capture.

Pieper 
Compared to other start-up companies, nexible is going purely digital into the market, which means no phones are being used in the sales process, not even in the claims process for our own customers. In order to do that, you need to embrace simplicity online – and digital customers are looking for exactly that. nexible is all about pushing the boundaries of digitalisation in insurance – finding out what works in order to serve digital customers best. However, still today over 80% of the sales are made through traditional sales channels.

© Munich Re
I’m more and more convinced that the change in the insurance industry will be brought about by the industry itself. It will build in technology and data, and exploit all of the digital possibilities to create solutions for clients.
Joachim Wenning
CEO Munich Re

Wenning
And those are then covered by ERGO traditional. In Germany, nexible is the first true digital insurer, right? So it is leading the market, and I don’t expect you to give up market leadership or to be overtaken by any competitor in that field. And I would expect the business case to be profitable. And finally, nexible’s business model has to provide for growth.

Pieper 
We are. So far, new companies have made compromises, like using call centres or brokers. We decided to try it and learn as we go. On top of that, our whole operation is built on a continuous journey towards automation and capabilities to scale. We’re a spin-off, and we’re already part of an international group. Over 30 countries are covered by ERGO, and even more including the whole of Munich Re (Group). So there is infrastructure we can use. And the operating model we’ve given ourselves enables us to use either existing risk carriers in different countries, or our own risk carrier as we enter new markets. I’m pretty sure there is still more potential in our cooperation with ERGO and Munich Re.

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