Stratechery1 is one of the best blogs I know of when talking about the modern digital economy. Its author Ben Thompson started the blog in 2013 and writes about both the strategy and business side of technology and media. On June 9th, he posted an article called Never-ending Niches2 that is definitely worth the read. (I also recommend subscribing to the Daily Update.)
In the article, Thompson talks about how the Internet has disrupted traditional forms of media such as newspapers and magazines by removing the limitations of time and space. Newspapers were timely but only reached a limited area. Meanwhile, magazines were less timely but were more widely distributed. CNN became the first 24-hour news channel and is both timely and capable of reaching a wide audience (see Figure 1 below).
All of this changed with the Internet. As Thompson states in the article,
“So it was with the Internet and the trade-off between reach and time: suddenly every single media entity on earth, no matter how large or small, and no matter its medium of choice, could reach anyone instantly. To put it another way, reach went to infinity, and time went to zero”
His conclusion is that media sites were left with the choice of partnering with aggregators, such as Google and Facebook, or going direct to consumers, where success would be based on focus and quality (Figure 2 below).
The focus he refers to is the creation of “Never-Ending Niches” – content targeting a specific audience, supported by technology platforms that are low cost and easy to deploy. We can use this thinking to better understand the current disruption of the insurance value chain.
As I have discussed in the past, insurers face a highly competitive market fueled by a surplus of capital and the availability of powerful and cheap technology. These two forces have become the great equalizers, much like the Internet in Thompson’s print media market. The result has been a disruption of the commercial insurance value chain, where the components are now a highly adaptable set of Legos that can be configured per opportunity (Figure 3), as reinsurers, carriers, MGAs, and brokers compete for premium. The area of most intense competition has been the program space, a highly profitable, $40 billion plus segment of the commercial insurance industry.
Programs are the commercial insurance industry’s equivalent of Never-Ending Niches. They target specific business types (“focus”) with highly tailored products (“quality”). They can run anywhere from a few million to hundreds of millions of dollars and are highly profitable. Thompson’s lens suggests this is where the insurance market is trending.
A Value Chain Power Shift
In this world of insurance niches, MGAs are taking the lead (for more information, see our ebook on this). Their specialized knowledge of individual market segments and their associated risks provides a competitive advantage. Coupled with the availability of world class, low-cost solutions for policy administration (such as Instec Policy), MGAs can move a book or spin up a program in 90 days or less. Now they hold both access to the market and the power of the underwriting pen. Carriers no longer hold the market high ground.
Why are carriers falling behind? The issue, as I see it, is that many carriers and suite vendors still view the world via the old model of reach and timeliness. Carriers have struggled with suite mega-projects that span five to seven years and cost millions of dollars. CIOs gladly proclaimed that if you weren’t spending that much on these projects, you weren’t doing it right. The issue wasn’t in the spend, but in the results. In pursuing these projects, carriers sacrificed reach and timeliness in many segments of the industry, including the most cherished of all, programs.
Carriers and Suite Vendors Reorient
Carriers that recognized they were missing the program opportunity, focused on two strategies. One had carriers funding MGA acquisition of policy administration systems via commissions. This gives MGAs the power of the pen and turns carriers into mere paper providers – not good for the long term (carrier shells are plentiful and cheap to acquire). The other had carriers investing in and then buying insuretechs who increasingly are recognizing the power of the MGA approach.
Some suite vendors have also recognized the environment is changing. After pushing on-premises software for many years, many of the market leaders are moving to the cloud. Similarly, they are now adopting development models that promise shortened delivery cycles at a fraction of the multi-million-dollar cost that on-premises solutions provided. The issue there is that their distribution channel lies mainly with system integrators and consultants that feast on the revenues generated by these large projects. Executing two drastically different business models at the same time will be a difficult tightrope to walk.
In the midst of our Darwinian Economy, where intense competition shows no signs of relenting, Never-Ending Niches provide an antidote. Focus and quality are now the lenses through which insurers must view the world. Those that do, will adapt and thrive.
Kevin Mason has worked in many aspects of software development since 1981, including roles as product strategist, software development methodologist, project manager, and technology architect for companies such as Cincinnati Bell Information Systems, SHL Systemhouse (now part of EDS), AGENCY.COM, and GENECA. He joined Instec in 2008 and is responsible for development associated with all products. He holds a BA in Political Science, from the University of Iowa and an AS in Computer Science.