I have curious grandchildren, a trait they definitely inherited from me. Whenever they get a cool new toy or technology product (yes even the 1 ½ year old loves these!) And have been putting it through for a while, their attention will inevitably try to figure out how the thing really works. This can result in the "creative destruction" of the object to get a glimpse of its "guts" to see how the parts work together to create the engaging experience they just had.
They are the perfect audience for the book series. How Things Work by David Macaulay. The simple text and detailed, colorful drawings in these books "pull apart" articles "from levers to lasers, from cameras to computers" to show curious children (and their parents) the inventive thinking and innovation that goes into the things that makes life easier, interesting, engaging and fun.
If there was an illustration in this book about traditional insurance distribution, what do you think it would look like? Maybe something like a Rube Goldberg construction? For those who do not know who he is, he was a cartoonist and inventor who drew over 50,000 cartoons during his lifetime and was widely known for the profiles Butts famous constructions called Rube Goldberg Machines which solved a simple task most overcomplicated, inefficient and fun way possible. Most people who study the chart, especially clients, agree that the process is complicated, confusing and inefficient ̵
In last week's blog, I emphasized the growing use of ecosystems and partnerships to expand beyond the traditional agent / broker distribution channel. This creates a win-win-win for insurers, their ecosystem partners and, above all, their customers. Insurers and their partners who take this approach can quickly enter new markets; and both potential and current customers benefit from more purchasing and service options.
There is also another great benefit for customers. As I noted last week, they find the traditional insurance process difficult, lacking in transparency, complex and time consuming. Distribution ecosystems help solve this by meeting customers where and when they want to buy, creating frictionless experiences and developing insurance from something that needs to be sold to something people want to buy.
These ecosystems create a satisfying new experience, just like the cool new toy that your children and grandchildren spend time with.
Embedded insurance: Create innovative and interesting new partnerships
Distribution options fall across a range of channels, including direct to customer, agent / broker, other insurance companies, marketplace switching or platform and embedded. Embedded insurance is among the latest options, and many interesting examples of partnerships between insurance companies and other industries are emerging at this end of the spectrum, including GM, Ford, Tesla, SoFi, Petco, Airbnb, Uber, Intuit and more. Insurance can be "soft" embedded, offered as an opt-in option when purchasing another item; "Hard" embedded, included as an opt-out option when purchasing another item; or "invisible", included in the purchase of another product without the possibility of removing it (eg bumper-to-bumper warranty with a new car).
I'm a big fan of distribution ecosystems because they can create a much better customer experience that leads to higher growth opportunities for insurance companies and their ecosystem partners by reaching customers whenever and wherever they want … on their terms. I am convinced that they will play a major role in the future of the industry. But just like my grandchildren, I'm also fascinated by why and how they work to create a better customer experience … especially the embedded alternatives. Until the next The Way Things Work book adds a chapter on them, we can do our own research on how the "guts" of embedded insurance can provide a better outcome for all stakeholders – customers, insurance companies and ecosystem partners  The customer is the critical core component
Majesco has long marketed / used a framework with three macro trends to explain the forces driving change in the industry: People, technology and market boundaries. Several and Digi-channel ecosystems / partnership strategies embody all of these categories. No innovation in insurance would be possible without all three, but people are the most important. The largest, most innovative technology or business model will only exist if people (individuals and entrepreneurs) see the value in it. So why do people see value in ecosystems / partnerships and embedded distribution models? Some clues can be found by looking at three different models of how people think and make decisions – especially about insurance.
Jobs to Be
The famous business professor Theodore Levitt is often quoted as a pioneer in Jobs to Be. Made (JTBD) concept with its quote, "People do not want a quarter inch drill, they want a quarter inch hole." The idea is that customers do not necessarily think about the products that the companies selling them do. For customers, they are an input for performing a larger task, while the business is narrowly focused on making sales. In his book, The Jobs to Be Done Playbook author Jim Kalbach states: “JTBD is not about your product, service, or brand. Instead of focusing on your own solution, you must first understand what people want and why it is important to them. Consequently, JTBD deliberately avoids mentioning specific solutions to first understand the process that people go through to solve a problem. [i]
In traditional insurance distribution, the insurer takes a narrow, inside and out view where the purchase policy is considered the beginning and end of the "job". This creates a mismatch in expectations, let alone goals between them and the customer. While the customer wants to complete the purchase, it is only one task in a series they need to do to complete their "job", which can range from being able to drive a car or buy a home to setting up their financial health plan, and more.
With embedded distribution, the insurer recognizes that insurance is only a task in the customer's job and makes it easier for them to complete the task by stringing it together with one or more other tasks in the job. This allows the customer to save time and effort by completing multiple tasks simultaneously instead of handling them separately.
System 1 and System 2 Thinking
In his book, Thinking, Fast and Slow Nobel Prize-winning behavioral economist Daniel Kahneman described human decision-making and thinking as a two-part system. System 1 thinking produces rapid (i.e., instantaneous and subconscious) reflexive, automatic decisions based on instinct and past lessons … the familiar "gut reaction." System 2 is slow, conscious, reason-based and requires cognitive effort. [ii]
Good decisions on complex issues such as insurance should be based on System 2 thinking. The problem with System 2 is that it is difficult! It requires effort, and our natural preference / instinct as humans is to minimize effort. During the traditional research and buying processes, the effort required can lead to many customers seeking shortcuts to in-depth research and analysis or delaying a decision altogether (delay and inertia). Embedded distribution can facilitate some of the System 2 efforts because the insurance offer is seen in the context of the "job" that the customer is currently doing, which makes it easier to understand how it will be used and what it does (and does not)
Fogg Behavior Model
Another very useful framework for understanding human decisions and behaviors is the Fogg Behavior Model, [iii] developed by BJ Fogg, head of the Stanford Behavior Design Lab at Stanford University, which we highlighted in our customer survey and which a number of InsurTech startups have used to design their business model. It translates behavior into a simple "formula" that consists of only three components: urges, motivation, and ability, all of which must occur at the same moment for a behavior to occur.
This model highlights an inverse relationship between motivation and ability. If someone has low ability for a behavior (that is, it is difficult to do), a high level of motivation (plus an exhortation) is needed to make it happen. Similarly, if someone has low motivation for a behavior, the one who wants them to do so must make it extremely simple (and give the right prompt). By using this model as a lens for how people make insurance decisions, it reveals the weaknesses in traditional insurance distribution that ecosystems and embedded insurance can exploit. Let's take a look at the three components.
What Makes People Think About Buying Insurance?
There are two basic categories of inciting events that are conveniently consistent with compulsory and discretionary insurance. Simple examples of mandatory calls are car and homeowners insurance in personal lines or compensation for workers for commercial purposes – the customer must buy these to own the car or home or to run a company that has employees. life events that make people think about the protection of the things that are important to them. In fact, in our 2020 consumer survey on life insurance, we found that life events had a stronger impact on younger generations when it comes to considering life insurance purchases, as shown in Figure 1, which shows the gaps in ratings between Gen Z / Millennials and Gen X / Boomers.
Figure 1: Gaps between generations affecting life events on L&A insurance purchases
In the traditional distribution model, insurance companies have to fight for share so that people think of them when one of these calls occurs. Large personal insurance companies such as GEICO, Progressive and State Farm are known for spending millions of dollars on advertising – not to make people lose what they do and start buying the process, but to pay attention to the times when important events make people think on the need to purchase or update their insurance policies.
In the embedded approach, the insurer is currently aware that the offer is placed directly in the way of the purchase of another product or service. … at the right time and in the right place. This is a good strategy for well-known brands and new startups. A start-up insurance company does not have the same brand capital as one of the largest advertisers, but it may receive some "rub-off" capital as an alternative from a trusted ecosystem partner from whom the customer buys the product or service, or it may be whitewashed with the partner's brand. Motivation
Motivation, with respect to insurance purchase decisions, is closely related to prompts and has two types that I would like to call "forced" and "fuzzy" that correspond to mandatory and discretionary quick categories. Mandatory coverages such as those mentioned above can be very motivating, but for some people they may carry a negative feeling of being "forced" to buy insurance (of course, most people probably think it is important enough that they buy these coverages even if not mandatory). "Fuzzy" motivation is a more emotional feeling about the value and importance of insurance … and it is very important for the purchase of discretionary products such as life insurance. Fortunately, Gen Z / Millennials attach great importance to life insurance, even more than their older counterparts, as we found in our 2020 consumer survey.
Figure 2: The importance of life insurance
In traditional insurance distribution, insurers rely on these two types of motivation to Drive customers to their websites, agents or call centers. It is a strategy based on hope. In embedded insurance, the insurer piggybacks on the motivation that has driven the customer to buy a product or service. This is a strategy based on intimate knowledge of your current and potential customers.
Most customers do not think of insurance as "easy to do business with." In some of our early consumer surveys, we found that insurance was ranked at or near the bottom when it came to being "easy" to research, buy and service compared to other companies that customers interact with. In particular, the life and annuity industries were ranked worse than property and accidents. Cable and mobile phone companies were also ranked higher in many categories, two industries with traditionally poor customer service.
Since then, many insurance companies have made great strides in simplifying processes and products with new data sources, digital technology and cloud-based platforms. However, JD Power's latest study on customers' digital experience of non-life insurance reveals that insurers are having a hard time keeping up with ever-increasing expectations of digital capacity, saying they are "stuck in providing just" good enough "digital user experience." [iv]
In the traditional distribution model, insurers rely on motivated prospects who have been prompted by an important event to reach out to them to research and purchase insurance. If the insurer's processes and products are too complicated and exceed the prospects (and patience), they lose the deal. In the embedded model, motivated customers can add insurance to a product or service during the purchasing process, usually with just a few clicks. Easy peasy!
Make Multi- and Digi-Channel distribution your strategy
Traditional distribution channels have served the insurance industry well for hundreds of years. They still work and are very important. But the boundaries of people, technology and markets have changed dramatically in recent years, and insurance distribution must also change to keep pace. The new and growing spectrum of now available channel options, especially the exciting opportunities for embedded insurance, will provide innovative insurance companies and their partners with huge opportunities for growth, with new markets, new offers, satisfied and loyal customers … and growing business books.  What makes you adopt a distribution strategy for multiple and digi channels? Are you motivated to take action? Do you have the ability? These are the components that drive decisions and actions … and innovative insurance companies decide to act!
[i] Kalbach, James. The jobs to be done Playbook: Adjust your markets, organizations and strategy around customer needs. New York, NY: Two Waves Books, 2020.
[ii] Holt, Jim, “Two Brains Running,” The New York Times November 25, 2011, http://www.nytimes.com / 2011/11/27 / books / review / thinking-fast- and-slow-by-daniel-kahneman-book-review.html
[iii] http://www.behaviormodel.org/  [iv] “ Insurance companies and accident insurance insist on providing only “Good enough” Digital user experience, JD Power Finds, ”JD Power press release May 25, 2021, https://www.jdpower.com/business/press-releases/2021-us-insurance-digital -experience-study