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For the fourth episode of our Innovation talks series, Supernovae Labs met Jean-Marc Pailhol, Head of Global Strategic Partnerships of Allianz and Qorus Chairman.

Our Senior Advisor, Riccardo Pasotti interviewed him on the impact of the ongoing digital transformation on insurances and banks.

Riccardo: Good morning Jean-Marc. Let’s start by asking you for an analysis of the insurance market from your vantage point as a key figure within Qorus (formerly Efma) and Allianz: how do you think the advent of digital has impacted the behaviour of consumers and insurance customers?

Jean-Marc: I would start by saying that the World, not just the financial industry, is facing a revolution, comparable to the mid-19th century Industrial Revolution. We are currently living in the Digital Revolution. Just as the industrial revolution turned people into standardised consumers and human resources, now the digital revolution is turning standardised consumers into individuals and human resources into persons, which represents a huge and drastic change in society and our day-to-day life.

If until a few years ago, the difference in terms of competitive advantage between one financial institution and another was strongly linked to the size of the communication and advertising budgets, today we live in a digital reality in which people can get informed very easily online: comparing the characteristics of different solutions and their price, finding reviews and comments of other consumers, selecting those of people more similar to them. The final purchasing decision is less and less influenced by marketing investments, and no longer depends solely on the features or cost of the product or service; customers choose according to their personal taste and, more often, reward companies on the basis of their reputation, the values they convey and their respect for ESG issues.

Riccardo: How are these vast changes reflected in the banking and insurance market?

Jean-Marc: Compared to banks, which with online banking have been catalysers, facilitators and, to some extent, accelerators of those major market trends, insurance companies are lagging, mainly due to the different nature of their business. Whereas banking services are essentially dependent on the customer’s financial means and objectives, insurance is highly dependent on the type of product to be insured and on the degree of market maturity for such product.

Let’s take a concrete example. Today, there is still no autonomous vehicle in circulation, not because of technological limitations but because of a lack of regulation. Who is responsible? The OEM, the IT provider or the car owner? From a technical point of view, autonomous vehicles work flawlessly, but it is still impossible to insure them since, normatively, there is still no solution to identify who bears the risks of this new technology. The risks involved in insuring such car, in this context, are impossible to measure. For this reason, no autonomous vehicles are on the road yet. Let’s say that the banking sector is based on the customer’s needs, while the insurance sector is based on the risk to cover.

Riccardo: There is still a lot to talk about bankassurance. Given the current environment, do banks find more potential in traditional insurance partners or in insurtechs?

Jean-Marc: Surprisingly, after a “multi-equipment” due to the new freedom offered to the customer by the WEB, people have less desire to buy different products and services from a multitude of providers. They increasingly want a “one-stop-shop” experience through solutions and services platforms and bundled solutions. Let’s take the example of cars. When a consumer buys a car, he needs to finance it and insure it to be able to drive it. He also needs warranty and roadside assistance. Now, the new digital customer when buying a car online wants to pay for the insurance, the warranty and the assistance at the same time.  The growth of this consumer need has enabled the mega trend of embedded finance. Embedded insurance is a reality now, not a trend anymore. This new approach will totally change the motor insurance market, at least in Europe, going from B2C to B2B2C and offers new opportunities for collaboration between financing and insurance companies.

Certainly Insurtechs, being digital by default more so than traditional insurance companies (but the same applies to challenger banks as to incumbents), are better equipped to embed the insurance and assistance offer in the digital customer experience, directly or through the mobility Partner shopping sites. Decades of layering and legacy core systems make traditional IT very complex to offer a simple, fast, transparent, lean and user-friendly experience to the final client. To exploit this mega trend, traditional financial institutions will have to reshape their IT system or use as a Front-end digital layer Newco with an IT based on open systems, APIs.

Although the topic of embedded finance is at the centre of financial institutions’ attention and promises to generate new sources of revenue in the short to medium term, banks and insurance companies, in a rapidly evolving market, cannot fail to look beyond the hurdle if they want to compete and survive in the medium to long term. The other mega-trend that is emerging is in fact the rapid rise of big-techs, with their own ecosystems of proprietary companies and business partners, providing integrated solutions based on data management and AI on a global scale in all sectors: consumer products, electronics, travel, real estate, health and so on.

To return to the insurance market, another main mega trend will impact drastically the industry. If over the last 100 years, the market stayed stable with profits mainly generated in the Property & Casualty segment by the retail motor and home insurance distributed through traditional Agents and Brokers networks, the future will be completely different with the emergence of the “new and micro-mobility” market. From “ownership to usage” perfectly summarizes this megatrend. Cars were synonym of freedom for the previous generation, they are now considered as a constraint to avoid when possible. Instead of buying a vehicle you have now a lot of other opportunities. Car, eScooters, Bikes and mopeds sharings are more and more successful. Subscription becomes a new normal. This evolution needs a complete reinvention of the insurance offer. The same risk needs to be approached in a totally different way, without having a traditional historical vision of the risks. Access to data becomes the key and the pricing has to be based on a pure test and learn process far from the traditional actuary approach. Minute, trip, mile based pricing is the rule, Usage Based Insurance becomes central, and last but not least, the risk carrier can become the mobility company provider itself. The risk for the insurance companies is that in this case the competitors are not the Insurtechs but the Original Equipment Manufacturers or the mobility companies. Tesla for example, which as a manufacturer, has already evolved towards the concept of shared mobility with its ‘Tesla Network’, thus setting up its own insurance company.

Riccardo: This seems to be the result of a very precise strategy and a phenomenon destined to disrupt the financial and insurance services market…

Jean-Marc: Once you have acquired the customers and have their data, when you are the owner of the interconnected vehicles fleet and receive the usage data of your customers on your vehicles, you already are in power to build the best possible insurance solution, 100% customised to the individual customer, with the lowest costs and best profitability.

When the purchase or usage of a vehicle is managed directly by big-tech companies on their digital platforms, with one-stop-shop financing and insurance solutions, and all-inclusive pricing, it is clear that if they don’t lead and accompany this transformation, traditional banks and insurers will be out of the game.  B2B and B2B2C fintechs and insurtechs, digital-native, mobile-only, customer-first and designed to be globally scalable, have the IT infrastructure, resources, and skills to serve this new market in partnership with the global big-techs.

It is therefore clear that, in this new competitive scenario in which the main market players on the mobility, health, entertainment, e-commerce, travel side are the big-techs; collaboration and synergy between traditional banks and insurers becomes crucial. Just as it is a necessity for both to be able to adapt and rapidly transform their business and operational models into digital logic, so it is for them to truly benefit from the collaboration with fintech and insurtech and regain their competitive advantage. Being the first to move in the Digital Revolution for traditional banks and insurance companies, using their financial strength and their global footprint, means winning the race. Leading this transformation means becoming the aggregator of the ecosystem, enabling the setup of new solutions and acquiring and securing future market shares.

Riccardo: From your privileged point of view, how soon will the complete transformation of the market into full-embedded logic take place?

Jean-Marc: It is a question of generational transition. For the younger generations, under the age of 35, there is no doubt that a one-stop-shop experience and embedded offers are already the preferred solutions, while among us ‘youngsters’ of the previous generations, there is still a significant proportion who favours direct relationships and a traditional approach. But it is there for all to see that the size of the embedded finance market is increasing and accelerating day by day, thanks in part to Covid, which has acted on the behaviour and habits of more mature consumers, prompting them almost inevitably to touch the benefits and value of digital purchasing and advisory models. It is demand that drives the market, and if the traditional realities do not manage to adapt, within the next 20 years, we could see some great changes on the financial market: with the emergence of newcomers from Europe US or China, fully digital or semi traditional, with the transfer of large part of the business to Big Tech, but also with the increase of new potential business segments. As usual a revolution generates big risks and great opportunities for those who dare to transform the current models even if they are still profitable.

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