Evidence of how rapidly and dramatically the insurance industry is changing is all around us.

Every day, news comes of a new development, whether from new entrants to insurance, or established industry players. Although many of these attempts to change the status quo will fail, some are bound to survive and possibly thrive.

One thing that most of these efforts have in common is that each of them believe that their efforts will revolutionize the business and they will become the next unicorn.

In the past, we’ve discussed why our industry repels most invaders.

There is also much discussion here on Agency Nation on why it may be different this time.

Often much is learned by studying how trends unfold in other industries and applying the general lessons to the specific.

Disruption Defined

What exactly is disruption?

The prevailing view of disruption is that new entrants leverage super tech and increased customer intimacy to wreak havoc in an industry. Well known examples include:

  • Ebay and Craigslist devastating newspaper classified advertising,
  • Netflix forcing Blockbuster into receivership,
  • Uber overturning taxi operations worldwide,
  • Digital photography displacing film

In some instances, industry incumbents use their dominance to identify new niches or technologies and implement them to increase their lead over the field.

Unfortunately, the deck is stacked against incumbents, and rarely does disruption come from market leaders. Their perceived advantages lull them into a sense of complacency. Sound familiar?

Much can be learned by studying how trends unfold in other industries and applying the general lessons to the specific.

Harvard Business School professor Clayton Christensen has been writing on disruption since 1995. In fact, he is the author of multiple books on the subject. While controversial, his views are well respected and form the foundations for most scholarly review of disruption.

He defines disruption as “a process whereby a smaller company with fewer resources can successfully challenge established incumbent businesses.”

Often, disruption is understood to happen all at once. but there is another way that disruption can take place. What if it is a slow inexorable grinding away, like a glacier forming a valley over centuries?

Under Pressure

Accenture has been studying disruption in order to be able to assist their clients, who for the most part are the incumbent companies who often bear the brunt of the impact.

In a research report released last year titled Leading in the NewAccenture identifies two ways that disruption takes place. Either  dramatically all at once (aka explosive), or more slowly. They describe the slow (but still happening faster than in the past) method as compressive disruption.

Compressive disruption takes place when additional competition from new entrants to markets puts pressure on profits. These pressures often lead to a death spiral, as firms cling to their ‘best’ and most profitable customers, and the reduced profitability leads to reductions in innovation.

This ultimately is self-reinforcing because the competitors are getting better and taking more and more customers.

In Christensen’s view, as markets mature, products grow in capability and customers segment themselves into low, middle market and high end. Low end segments are the least profitable, and high end customers are the most profitable because they will pay more for incremental improvements.

Over time, incumbents move their products upmarket to capture the more profitable customers. This leads to low end customers being underserved, and possibly some potential customers who aren’t able to purchase.

Christensen believes that disruption starts with the new businesses targeting these underserved customers, often with products that are less capable to what is available in the market. Incumbents don’t react, because the customers they are losing are their least profitable customers, or consumers who don’t purchase so are of no concern.

They also don’t consider the new entrants as a threat because their product offering is so obviously inferior.

The disruption takes place when the new entrants improve their offerings, leverage what they have learned with the low end segments to move upstream. They then start taking more profitable customers from incumbents.

A perfect example of compressive disruption is how the success of smart phones has impacted the sales of personal computers.

Since the Blackberry released in 2003, smart phones have spread far and wide. Initially, a smart phone was no threat to the PC makers. But as their capabilities have grown, sales of both desktops and laptops have stalled. Sales levels of PCs today are about the same as in 2005.

Although the PC manufactures are still in business, available profits are much smaller than if the growth rate of the early 2000s had been sustained.

Uber isn’t a disruptor?

So every new small business that gains success is disruptive right? No. Some businesses are just successful, and aren’t considered disruptive.

As a matter of fact, Harvard prof Christensen says that Uber isn’t a disrupter. WTF???

Uber started in San Francisco, and their initial marketplace was riders who were already fully served. They actually offered better product (clean cars, trouble free hailing) than the incumbent taxi and limo companies.

They didn’t follow the standard model by penetrating underserved consumers with a marginal product thus in Christensen’s view they are not disrupters. Tell that to the taxi companies!

My opinion is that every theory has outliers and while Uber might not have followed the doctrinal definition of how Christensen’s model of disruption works, the end result was that the traditional Taxi market has indeed been disrupted, big bang style.

Big Bang Theory

Traditional business wisdom says that there are three primary strategic directions for a company, and if you try to do more than one your business will suffer. Those strategies are:

  • Premium products and/or services
  • Low cost
  • Improved customer intimacy

Strategies that focus on premium products or services are designed to attract those customers who are willing to pay a bit more in order to get a full featured product or service.

Businesses pursue low cost strategies by leveraging efficiencies in their business models and passing those savings along to their customers.

Business strategies that focus on customer intimacy often are niche related. By better understanding your customer, you can provide tailored solutions that are better than the mass produced versions.

The explosive theory of disruption, also called the big bang theory says that that traditional wisdom has been rendered obsolete by new trends. In this model, change comes fast and revolutionizes an industry overnight.

In fact, in big bang disruption (also presented in the Accenture report linked above), a company may deliver an improved product that is less expensive and delivers better customer experience.

The Uber example appears to be this type of explosive disruption.

Four Trends Increasing Speed of Adoption

In the past we’ve explored how the changes in consumer behavior and the customer buying cycle are creating new opportunities for how the industry finds and sells insurance consumers. In addition, there are four mega trends that are combining to create an environment conducive to big bang disruption.

  1. Price Deflation: Costs for most products are regularly falling. Think computing power, electronics, consumer goods. The real price (adjusted for inflation) of cars has been falling for years even though capabilities continue to improve.
  2. Platform Exploitation: Excess capacity on existing devices can be used for other tasks. Examples include SETI@home or Amazon Web Services.
  3. Cross-Subsidization: Income from other channels helps subsidize the core business such as how  advertising supports news oriented websites.
  4. Marginal Cost Elimination: Digital services can be replicated across a universe of devices at virtually no additional cost. An app developer designs a widget to help homeowners with temperature control, and it can be deployed on phones, tablets and PCs.

Each of these trends builds upon the others to provide the potential for rapid adoption by a majority of the marketplace.

Rather than a slow erosion of a market, these changes allow competitors to create new products and services that focus on all three basic business strategies: customer intimacy, low cost and premium offerings.

The stand-alone GPS market is a great case study. In 2008, the sales of for Tom Tom and Garmin GPS devices totaled about $ 4.1 Billion.

In late 2007, the iPhone was released with integrated GPS via Google maps. By the end of 2009, Tom Tom revenues were down by 15%, and Garmin’s were down by 20%.

The costs for GPS enabled chips was driven down to the point that they could be included in mobile phones. As the iPhone took off, mapping and direction finding were seen as essential, and could run in the background as you used your phone for routine communications.

Real time map updates from Google, and even users (traffic delays etc) made the product more and more valuable.

Big bang indeed.

Long Story Short

Disruption is industry agnostic. Although the insurance industry has avoided major upheaval to this point, there are plenty of firms that are willing to test the waters.

It’s easy to look at the convoluted way that this industry does business and assume that the only thing that stands between a company and untold riches is a different idea. Unfortunately, much of what outsiders see as unnecessary complexity has been proven over time to be a necessary component of the insurance process.

That said, there are certainly opportunities to use new capabilities, technologies and processes to improve the experience of the customer.

Whether a company enters the market by offering coverages to an unserved or under-served, or can provide a product that will revolutionize one or more lines of business in one fell swoop remains to be seen.

In a future post, we will examine what these trends might mean for the insurance industry in general.

If you’d like to explore how the latest technologies are impacting the insurance industry and the strategies your organization can deploy to ensure you continue to thrive, please contact me directly.


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