Changing customer expectations driven by our digital-first world are transforming economic opportunities across Southeast Asia. This expanding digital engagement is unlocking an emerging partnership opportunity between digital companies and insurance companies for insurance distribution.
Navigating these partnership arrangements is not without its challenges. Traditional insurance companies must address legacy operations and mindsets while overcoming a significant technical burden. Digital-first ecosystem players must evolve their understanding of often complex financial markets and regulatory expectations. If these differences are overcome, pioneering operators could scoop up a lucrative share of an expanding US$10 billion ($13.53 billion) market opportunity of new insurance premiums.
An evolving landscape of opportunity
Southeast Asia is now home to over 400 million internet users, with digital penetration across 63% of the regional population. Growing affluence and expanding economic opportunity could see Southeast Asia’s US$370 billion digital economy expanding at 16% CAGR over the coming decade.
The region’s insurance industry faces its own transition in this evolving landscape. Total insurance premiums in the six largest Southeast Asian markets are already worth an estimated US$106 billion.
The traditional insurance distribution model is evolving, as insurance companies explore opportunities to leverage this substantial growing digital market, while digital ecosystem players take their own tentative steps into realising potential value of insurance products.
There are already emerging signs of steps towards partnership, with the likes of Grab and Chubb, Traveloka and FWD Life, and Gojek and Allianz amongst those making moves into this partnership space.
So far, most insurance products distributed through digital ecosystem partnership are general insurance and health insurance, covering small ticket areas such as flight and event cancellation, personal accident, critical illness, and Covid protection.
With total insurance premiums for general insurance and life insurance in Southeast Asia expected to grow to US$140 billion and US$60 billion respectively by 2030, building an effective and successful model offers an attractive strategic opportunity.
Shaping a successful partnership
The right partnership agreement is essential if these relationships are to flourish. This requires careful consideration around partnership architecture, structures, commercial arrangements, key performance indicators, as well as operational responsibilities.
Insurers traditionally operate on long-term distribution arrangements that are diametrically different to the fast-paced timetables of digital ecosystem players. Creating a positive synergy of insurers’ product and industry expertise with the flexible architecture and digital prowess of ecosystem players is an important hurdle.
Finding the right structure for partnership is another key foundation. That could be through a standard distribution arrangement with insurers’ products sold through digital ecosystem distribution channels. A more collaborative approach might see ecosystem partners taking a more active role in research and design of customer-focused products. In some cases, insurers and ecosystem partners may even establish a joint venture, as was done by Ping An Insurance, Alibaba, and Tencent in the successful set-up of ZhongAn Online P&C Insurance — now the largest online insurer in the world.
Mutually agreeable commercial models are also fundamental to success. The most common model is a commission-based approach where insurance companies pay a pre-arranged share of the premium to their ecosystem partner, although fixed fee models are also being explored. A net price model also offers potential, with the ecosystem partner bundling with customer propositions, potentially offering more control over targeting and pricing. Negotiation of upfront pre-launch investment will also be key. We are certain to see more dynamic commercial models emerge as digital distribution partnerships evolve.
Agreeing the metrics of success is another major alignment hurdle. Insurers have traditionally relied on key performance indicators (KPIs) based around volume, including number of customers and gross premium, with separate metrics used to track profitability. Digital ecosystem players on the other hand tend to focus on KPIs such as cost of acquisition per customer, and customer retention, echoing their customer-focused business models. Aligning KPIs across the partnership will be vital.
Defining the operating framework is the final step. This should leverage the relative experience of the respective parties, with digital ecosystem players likely focusing on user experience, interface, and marketing, and insurers providing their deep industry knowledge. As experience grows, it is likely we will see a blurring of these lines as insurers and digital players become more confident and competent in overlapping areas.
Partnership in action
It is clear that the DNA of traditional insurers and innovative digital ecosystem players is different. That means that aligning on the operational nature of these partnerships requires careful consideration for potential players.
- Strategic alignment: Aligning on the strategic outlook of a partnership from the outset is key. This must weave together the customer-centric nature of digital ecosystem operators and the financial strategies of insurance companies. Mutually-agreed strategic focus is the fundamental driver of success.
- Product-channel strategies and user experience: Insurance products sold through digital partnerships today tend to be general insurance and health insurance that best fit digital-first customer journeys. As this partnership ecosystem matures, we can expect data-driven product innovation that better serves customers and tackles identified pain points, with digital options backed by traditional offline channels.
- Product development and pricing: Marrying the rapid agile innovation approach of digital players with the long, multiple-approval sign-off process for product development in insurers is a complex issue. Insurers will need to embrace agile attitudes around elements such as minimal viable products, and fast iteration approaches to product design and release. • Technology and data: This is the backbone of a successful digital partnership, and often one that is most burdensome for insurers to embrace. Legacy IT systems are often clunky and siloed, creating significant hurdles to overcome. Investing in modern IT architecture including cloud-based and open API approaches will unlock a data-enabled strategy which is vital to succeeding in a digital partnership.
- Regulatory and compliance: Despite the exciting and innovative approach of digital distribution partnerships, the strictly regulated nature of the insurance industry cannot be overlooked. Countries across Southeast Asia operate on different regulatory arrangements, meaning leveraging local experience will be key to a truly regional offer. This complexity cannot be avoided, but with the growing promotion of digital opportunities to expand financial system engagement it’s likely that policy measures will evolve in future.
There is a saying that if you want to go fast, go alone, but if you want to go far, go together. With the right partnership models, and the key enablers in place, digital partnerships could well offer a lucrative new frontier in insurance distribution that could represent a US$10 billion market opportunity.
Steven Chen is a partner with Boston Consulting Group