Now that innovation in insurance seems to have found a rhythm, many may feel that the pace is manageable and that digital disruption perhaps won't produce the sort of drama imagined a few years ago. So, now seems like a good time to trot out some thoughts from a talk I give occasionally on what happens when an industry goes digital—because that moment still awaits the insurance industry and because the change will be profound.
The example I use of an industry going digital is photography because it's, well, the most visual. Let's start there, then see what the photography experience might say about insurance's future.
A common misconception about digital innovation is that it happens suddenly. In fact, it follows the sort of track described by a character in Hemingway's "The Sun Also Rises," who, when asked how he went bankrupt, said, "Two ways: gradually, then suddenly."
What we think of as photography began in the mid-1820s—nearly two centuries ago—when a French inventor built a camera and took a picture of the rooftops at his estate in Burgundy.
Innovation took a steady path for the next 150 years. Big, clunky cameras became available for professional photographers by the 1850s, and Mathew Brady made photography famous with his images of the Civil War. George Eastman came along (experimenting by baking chemicals into various film substrates in his mother's kitchen) and by the late 1880s had simplified technology enough that amateurs could use cameras. His company, Eastman Kodak, soon produced the first film that could be used in a roll, rather than in hefty plates. and came out with the small, wildly popular Brownie in 1900. Kodak came to dominate photography, and there were huge profits even in this "gradually" phase as the mass market of amateurs began to experience what came to be known as a "Kodak moment."
Digital technology came into existence with the invention of the transistor in 1947 and soon found its way into use with images. Bing Crosby, of all people, financed a lab that produced a digital sensor in 1951 that could record televised video, and the TV industry nurtured the technology.
Cameras made the leap to digital in 1975, when an engineer at Kodak—yes, Kodak—developed a sensor that captured still images. Kodak set the invention aside, because it threatened the industry's sales of film, chemicals, paper and cameras, and Kodak had 85% to 90% of the U.S. market. Kodak more or less got away with stifling the digitalization of photography for more than two decades.
Then the "suddenly" moment happened.
In 1997, another French-born inventor, Philippe Kann, was in the hospital in Santa Cruz, CA, because his wife was getting ready to deliver their daughter. He had a digital camera and intended to upload photos of the newborn to his computer, then email them to friends and family. But Philippe (whom I've known for going on 35 years, because he founded an early PC software company) is not a patient man. He also had a cellphone, and he wondered why he couldn't just send the photos via the phone from the hospital. So, he did.
He rigged up a way to attach his camera to his phone, and sent this image:
In that moment, after many decades of "gradually," the photography industry became truly digital, and photography was stripped down to its bare essentials. Those turned out to be, merely: a lens, a storage mechanism and a means for viewing an image.
Despite the legacy of the industry and Kodak's best efforts to protect its profits, there was no need for film, chemicals or paper, nor for all those one-hour kiosks that processed film and produced prints. There wasn't even a need for a separate camera, because the lens and some related transistors and software could be embedded in a phone (or almost anything else) at a cost of a dollar or two.
When people write about the digitalization of photography, they tend to focus on Kodak, which stumbled into bankruptcy in 2012, and, more generally, on the destruction that ensued. Fair enough. I've written extensively on the topic myself. But there's a flip side to the destruction: Once an industry has been pared down to its simplest, digital parts, those parts can be reassembled in any number of new ways and can be melded with other capabilities to form previously unimaginable products and services. In the case of photography, digitalization created far more value than it destroyed—it's just that the new value was captured by Facebook, Google, Instagram and a host of other companies that figured out what to do with images once they were freed from their physical constraints.
With insurance, there are only three essentials: a contract, a yes/no mechanism that determines whether a payment is made, and capital. Just as with photography, the structures currently built around those essential parts don't have any particular claim on a fully digital future. There don't have to be agents and brokers selling those contracts. Those contracts don't have to be priced by underwriters and actuaries. The yes/no decision doesn't have to involve adjusters or any other aspect of today's claims process. Capital doesn't have to be put up by insurers or even reinsurers; it could come straight from capital markets or even from novel forms of pooling by individuals.
You can argue that all the current players will continue to exist, just in modified form, but don't limit yourself. Focus on those three core elements—the contract, the yes/no mechanism and the capital—and think in two directions. First, how can you deliver those three elements as cost-effectively as possible to customers? Going digital lets you reinvent your cost structure. Second, what new business models can you imagine once insurance takes fully digital form, a la what Facebook et al. did with digital images? A new model could mean layering services, such as advice on prevention, on top of digital insurance, or it could mean embedding insurance in previously separate products—including home insurance with the home, auto insurance with the auto purchase, life insurance with wealth-management products or with the purchase of a business or building, etc.
The key is to take advantage of that "gradually" phase, for however long it lasts, and position yourself for a future based on those three core elements. Because "suddenly" is still out there.
Cheers,
Paul Carroll
Editor-in-Chief
P.S. For those of you who somehow aren't now following every race of Mikaela Shiffrin, the skier I focused on last week because of how competitors are monitoring and trying to copy her every move, here is an update on last weekend that underscores my point about the need to benchmark against others and not against yourself.
Shiffrin has dominated the technical events, especially the slalom, with its quick, precise turns, as much or more than any skier in history but had faltered recently, "only" finishing second and third in the last two slaloms on the World Cup circuit. Perhaps all the camera crews following her every move in training were helping competitors uncover her secrets. But, even as competitors are coming after her, she's moving into new territory, increasingly training for and competing in the 75mph, hair-on-fire, soaring-100-yards-through-the-air-off-jumps speed events. And, over the weekend, she won two speed events, a downhill and a super-G. Lindsey Vonn is known as an all-around skier because, over a 17-year career, she won six events outside her specialty—and Shiffrin won two outside hers in a single weekend.
The competition is always adapting....
