The Road to Success in the Insurance Industry
Another technology, Automated Programming Interfaces–APIs for short–is just beginning to enter the mainstream in insurance. The underlying concept is straightforward: tools to enable various pieces of software to interact with each other. API’s aren’t new. For decades they have been deployed across multiple industries. They’ve even been the subject of multi-billion dollar lawsuits among titans of tech. While “Insurtech” has become a thing in the past three years, API’s are only now beginning to make inroads in insurance.
Colleagues have asked me, If the CEO of an insurance company could rally the organization around just one technology, which should it be? I answer without hesitation: the CEO should rally the troops around API-ificiation of insurance.
Note the reference to CEO rather than CIO or CTO or any other leader in the organization. This is intentional, not a typo or oversight. On first read this might seem odd since APIs are a technology, and the CIO or CTO should lead the technology strategy. Let’s be clear:
APIs are a business strategy masquerading as a technology strategy.
I have to cite Amazon to explain, and specifically the Bezos Mandate. Bezos declared, circa 2002, that every capability being built, across every part of Amazon, needed to connect through APIs. Furthermore, those APIs had to be structured so management could choose to make them available outside of Amazon—for a fee of course.
This is profound. It challenges us to question the way we have historically considered the nature of companies. The Theory of the Firm will never be the same again. API-ification of the technology stack strips out transaction costs. It unbundles the various capabilities of a company, and exposes each component to market forces. In the case of Amazon that means the economics of retail stand on their own merits, as do the economics of warehouse fulfillment, as do the economics of AWS.
Now apply this framework to insurance. To succeed today, carriers must be competent across many parts of the value chain: branding, distribution, customer experience, underwriting, billing, claims, and syndication of risk, to name a few. The salient term here is competent. An insurer needs to be excellent at somethings–their core competencies. Beyond that, they need to be minimally competent at everything else. Few, if any, actually excel across the board.
To succeed today, carriers must be competent across many parts of the value chain: branding, distribution, customer experience, underwriting, billing, claims, and syndication of risk, to name a few
Worse still, many insurers describe their existing technology as an end-to-end solution, making it all but impossible to unbundle any one capability from the rest. Historically a company must trade-off the benefits of an end-to-end system vs. best-in-class point solutions.
APIs enable an insurer to use the best-in-class point solutions.
Fast forward to a time where the insurance stack has been API-ified. Insurance companies are still orchestrating the value chain from distribution to risk and everything in between. They can and should continue to build on their particular areas of excellence. But now, in areas where they are merely competent, they can choose to call on other companies’ core competencies through APIs. The industry has already begun to see this emerge around topics as diverse as machine learning, quoting, and claims processing.
APIs enable an insurer to offer their capabilities to the entire industry
–if they are truly best in class
In a traditional organization, the areas of excellence subsidize the rest. One carrier might have an exceptional network of agents, thus allowing it to be mediocre at underwriting. Another carrier might have exceptional data science and underwriting capabilities, allowing it to be mediocre at processing claims. A third might have exceptional operational discipline, permitting it to tolerate somewhat higher marketing costs.
Each of these insurers should look to leverage best-in-class point solutions that become available as APIs gain traction. This is a really good technology strategy.
It rises to the level of great business strategy when the leadership of an insurance company exposes their own APIs to the market. A carrier can make their exceptional distribution channels available for other companies’ products via API, much as Amazon does with Amazon.com. A carrier with exceptional data science can make that available as a service via API, much as Amazon does with warehouse fulfillment. And a carrier with low cost operations can open that to third parties, including other carriers.
You cannot hold back the tide.
There are crucial “second order effects” at play. When a company exposes their areas of excellence to competition, the company actually learns and benefits. It might learn additional uses cases for that capability. It might gain scale as a result of serving customers outside the firm, and in turn, enter a virtuous cycle of further distancing itself from the competition. A company may instead be shocked to discover their supposed core competency is not so differentiated after all–a painful but important lesson in such cases.
API-ificiation of the insurance stack is inevitable. Even as a pure technology strategy, the value and efficiency it will create are enormous. But don’t be narrow-sighted: the opportunity to organize around APIs as a business strategy is even greater.