…And what it means for the life and annuity sector
by Matt EssickMr. Essick is Chief Marketing Officer for Ensight™, a sales and data acceleration provider specializing in the insurance carrier and national-distributor space. He spent a decade as a marketing strategist for the Zurich Insurance Group, U.K. and participated first-hand in the rise of digital platform distribution models. Visit Ensight here.
The era of the platform economy is here.
Actually, it has been here for a decade or longer.
Think Apple, Google, Airbnb, Microsoft, Uber, Amazon, Square, LinkedIn, Lyft, Facebook, and Tesla.
The majority of the most valuable companies globally are now based on a platform business model, which is defined as: “the creation of digital communities and marketplaces that allow different groups to interact and transact”.
And in the financial services space?
Let’s name just a few – Robinhood, Envestnet, eMoney, Acorns, Oscar, Xero, RightCapital, Personal Capital, Avant, Blend, Chime, Brex, BrainTree, Enfusion, Verifi, Circle, Opploans, Transferwise, Venmo, Gravity Payments, Coinbase, etc etc. The list goes on and on.
Fintech platforms are remaking the financial services industry. Redefining the “experience” of every corner of financial services. And thus, redefining expectations, across the value chain, from manufacturing to distribution to consumers. The broad principles of the Fintech platform era:
- Ecosystems and connectivity are key
- Customers now engage product manufacturers through “platform distribution”
- User experience (UX) is fundamental to acquisition and retention
- At scale, Fintech platforms change industry dynamics
- Winners (and survivors) adapt their business model quickly
And so, what does this mean for the Life and Annuity sector?
Some Predictions for the Life and Annuity Platform Era
Predictions are always a dangerous game. But if one takes the broad dynamics of platform-based economies as largely constant through every sector, we can also look into the near future for the Life and Annuity sector.
Here are three predictions over the next decade:
- Life, Annuity and LTC business origination (new business) will proportionately and dramatically shift towards multi-carrier distribution platforms
- Life and Annuity distribution will consolidate onto 3-5 leading “mega-platforms”, owning over 50% share (*similar to financial planning software landscape)
- Distribution focus will shift from traditional, back-office “agency management platforms” to field technology “sales enablement platforms”
Perhaps the grandest prediction is that digital platforms, independent of proprietary development and ownership by insurance carriers and distributors, will become true power brokers in the industry.
The implication? Perhaps, Geoffrey G. Parker, a Dartmouth College professor and Massachusetts Institute of Technology (MIT) research fellow, said it best:
“The bulk of the power in industries is likely to shift to ecosystems… So, the message is every firm needs to understand platforms and figure out their place in the industry structure that is coming”.
Unstoppable Drivers Towards Platform Distribution
There are several unstoppable forces and accelerants now at play.
Each of these trends, in and of itself, is enough to shift the structure of the sector. However, when one considers all five in the aggregate, the emerging future is a foregone conclusion.
Consolidation in Distribution: Consolidation is at hand in the Life and Annuity distribution landscape and will only accelerate from here. Whether we are talking about LifeMark and Bramco joining together to create LIBRA, or the acquisitions made by the PE-backed national players (e.g., Simplicity, AmeriLife), the future of distribution will look very different. One thing is for sure, technology platforms play a critical role in the integration of firms.
Staggering Investment in Fintech: Global fintech investment reached $44 billion in 2020, an increase of 14% from 2019. The scale of investment in Fintech platforms is staggering – and insurance carriers and distributors will simply not be able to compete with a legacy internal development (“build” vs “buy”)” mindset. If nothing else, $44 billion definitively underscores the fact that we are in the age of fintech and insurtech platforms.
The March to Best Interest (BI): The Life and Annuity sector is on a continued trajectory towards a Best Interest (BI) centric regulatory environment. While this may differ by channel, a rapidly growing number of distributors are choosing to err on the side of a fiduciary model. This means suitability standards, illustrating different product options, and capturing auditability along the way. There is only one way to accomplish this efficiently and cost effectively – a technology platform (*not paper).
New distribution Business Models: The traditional distribution business model within the Life and Annuity sector is changing. There is a growing focus across several fronts: automating back-office processes; shifting time and focus to field-oriented sales enablement; and, extending a digital platform to financial professionals for advisor-centric “self-service”. This is the strength of technology firms.
The weight of market expectations: Every single financial services experience today is digital, visually intuitive, interactive and easy to understand. Every single one – except the life and annuity sales experience. Moreover, every single core stakeholder group in the value chain now expects this modern digital experience, from employees to financial professionals. Let’s remember, millennials now represent the largest workforce in the economy today.
These drivers are irreversible. To borrow a phrase from the noted American journalist Sebastian Junger – this is the “perfect storm”.
3 Recommendations To Win
So how can Life and Annuity insurance carriers and distributors adapt and win? I have three recommendations to start.
Develop a platform-led distribution strategy
Every carrier and distributor should now be thinking about how this emerging context will impact product development, distribution profitability and the market-facing business model.
There are several long-term strategic questions to be debated. Here are just a few:
- Business origination: What will be the impact on new business origination? Will closed, proprietary service channels remain at scale in the future?
- The wholesaling operating model: What is the future model of wholesaling? How will wholesalers engage with the channel?
- Channel strategy: Where will my target customers be, and how will I reach them? Will I need to access those customers on a 3rd party platform, or can I provision a platform to (capture) them?
- Profitability: How will I drive profit and scale in this new era? Which channels will see an erosion of profitability? What new target operating model may be required to maintain ROE?
These are fundamental questions that need to inform distribution strategy over the next decade. Without addressing these critical questions (and others), insurance carriers and distributors will be flying blind into the “perfect storm”.
Expect to see a few casualties.
“Get on” the dominant platforms early
It is simply not possible to compete with $44 billion in fintech platform investment.
The old “build vs. buy” debate is a different question today. If you are an insurance carrier or national distributor, choose wisely what you elect to “build” rather than “buy”.
An emerging dynamic of the platform economy is the ecosystem. It is critical to buy the flexibility to thrive in an ecosystem. The leading fintech and insurtech platforms bring connectivity and pre-built integrations to the table.
There are two other central reasons to adopt the dominant emerging platforms early, and ahead of your competition:
First, you can ride the opportunity of a “network effect”. A network effect refers to a situation in which the value of a product, service, or platform grows based on the number of buyers, sellers, or users who leverage it. Leading distribution platforms will be rapidly growing the number of customers you can reach – through one efficient digital channel. (Of note, it becomes increasingly painful and inefficient to do business outside of a platform network as well.)
Second, it is impossible to understand how these platforms work ‘in practice’, on a day-to-day basis, the subtle nuances – unless you are actually also utilizing the platform itself. For a carrier, this means potentially being one step-removed from understanding how its products are actually sold, why they are selected, and how to win business.
Smart counsel today is to adopt and use best of breed” third party platforms early on.
Play to win and embrace the change
The Life and Annuity sector today falls into two camps: Early adopters (change embracers) and late adopters (change laggards).
Waiting to adopt emerging technology used to be wise counsel. But in the era of Moore’s Law, this is no longer a recipe for winning.
Digital innovation “lead time” or “cycle time” is becoming an increasingly deciding factor in the emerging winners and losers. And the stakes are higher than ever.
One might say that embracing digital platforms has “compounding returns”. Competitive advantage can double, or quadruple based on an organization’s digital fitness.
Understanding the dynamic of new distribution technology platforms – and how to win on these platforms – takes time. Players who adopt first, stand to benefit from those compounding returns and will be well positioned for market-leading growth and profitability in the decade ahead.
1 The Platform Economy, The Innovator, Jennifer Schenker (https://innovator.news/the-platform-economy-3c09439b56)
2 The Platform Economy, The Innovator, Jennifer Schenker (https://innovator.news/the-platform-economy-3c09439b56)
3 The state of FinTech: a recap of 2020 and a glimpse into 2021, FinExtra, 2/8/21 (https://www.finextra.com/blogposting/19849/the-state-of-fintech-a-recap-of-2020-and-a-glimpse-into-2021)