In my 10+ years in insurance, I’ve never seen the insurance industry struggle as much as it has in the last 5 years.
Indeed, though US equity markets have bounced back from the global financial crisis of the early 2000s with great gusto, I still see many insurers lagging behind.
This is mainly due to a combination of both long-established and newly emerging problems ranging from the constant uphill battle of digital transformation and increased competition from ‘insurtech’ startups to changes in government regulation.
That’s not to mention the devastating impact of Covid-19, which is said to have cost the industry at least $44 billion US dollars.
It’s for this reason that I always stress to my consultancy clients how important it is to gain a sound understanding of the insurance value chain.
Once insurance companies know how the value chain works, they can use it to gain valuable insights into their business, pinpointing those areas that put them in the best position to gain a competitive advantage in the industry despite such challenges.
In the following Insurance Value Chain Explained guide, I’ll outline all you need to know to make sense of the value chain model and use it to make a significant difference when delivering value to customers in the face of increasing competition.
What is the Insurance Value Chain?
The concept of value chains is neither new nor exclusive to the insurance industry.
I first came across the idea while working on my economics major. A few years earlier, Harvard Economics professor Michael Porter had introduced the concept in his seminal work, Competitive Advantage: Creating and Sustaining Superior Performance.
In said book, Porter describes the value chain as an indispensable tool for dividing a company into the core activities most relevant to their overall strategy. In doing so, the overall goal is to identify -and thus focus on- activities most likely yield a competitive advantage.
When I began my career in insurance (first as an appraiser), it made sense to me that this model could be applied to insurance just as easily as it could to the service industry and other markets.
I was hardly alone in this. Today, the term insurance value chain has come to describe how Porter’s value chain theory applies to both individual insurance companies and the insurance industry.
Typically, a company will have its own value chain comprised of activities in five key areas:
- Inbound logistics operations
- Outbound logistics operations
- Marketing and sales
- After Sales service.
At the same time, that value chain is generally integrated into a more comprehensive system of delivering value to customers, which also incorporates their suppliers and distributors.
The most obvious example of this is in the world of manufacturing.
A company that creates components for electronic devices can use value chain modeling to hone in on what differentiates them from its competitors while simultaneously fitting into the broader value chain of the company, which ultimately manufactures and sells those devices.
As it relates to insurance, an individual company can use the value chain approach to analyze critical areas such as new product development and after-sales customer care and assess how they can optimize their processes to deliver maximum value for customers.
Simultaneously, that insurance company may serve as a smaller (yet undoubtedly important) link in a larger value chain, such as by protecting corporate clients should another link in that more extensive chain break.
Understanding the Value Chain in Life Insurance
To better understand how Porter’s value chain applies to insurance, allow me to share with you a case study from a life insurance firm I recently worked with.
Our first task was to carry out a value chain analysis, identifying the company’s five core activity areas as:
- Product Design and Development
- Marketing and Sales
- Underwriting
- Operations and Technology
- Claims management
Taking this analysis further, we worked to unpack these five areas as activities worth doubling down on to provide the added value that attracts and retains clients.
What follows is a more detailed look at these core activities, the trends, challenges, and opportunities surrounding them, and how life insurers may take advantage of them.
1. Product Design and Development
There once was a time when developing new products was a consistently reliable way for life insurers to stand out from their competitors.
In the last several years, however, the industry has witnessed a proliferation of new startups backed by private capital funds whose digital-only approach has allowed them to gain a substantial market share, particularly on the back of policies offering holders intense customization levels.
Ultimately, this has all but stifled innovation among public insurance carriers and smaller firms who, rather than striving to compete in this arena, have begun to scale back, shifting their focus exclusively to products such as investment-only variable annuities and selling legacy back books to those very same privately-backed startups.
Still, opportunities do exist.
An insurer aiming to achieve a competitive advantage in product development may discover that leveraging customer feedback, risk assessment, sales, and claims management together can still present new ways to set themselves a part.
Their approach wasn’t to focus on offering a plethora of new insurance products but by rather on a smaller number of products that provide the highest possible customer value.
Regarding those product categories where an insurer cannot gain a competitive advantage, they may opt to sell such products no longer in-house and instead offer them via a partnership with a third party.
2. Marketing, Sales, and Distribution
Insurers who have long depended on captive agents (those ‘chained’ exclusively to one insurance company) are finding that this means of distribution is becoming increasingly less effective.
Reports consistently show that life insurance sales are declining, with captive agents responsible for fewer and fewer sales.
Many factors could be pointed to as the cause of this decline, from the accessibility and range of choices offered by digital-only insurance platforms to the continuing commoditization of insurance products.
Whatever the reason may be, insurers operating on a captive distribution basis may identify that they can recapture the edge over their competitors by one of two means:
- Shifting to a focus on independent agents (those that are not tied to one company and can therefore sell policies from multiple providers)
- seeking new ways to leverage the work of their captive agents, such as through the upselling of various wealth-management products.
Still, agents are only one component of a company’s sales, marketing, and distribution operations.
To truly get the upper hand over competitors, I encouraged my clients to see their value chain analysis as an opportunity to ask some serious questions about the Unique Selling Points (USP) they offer above and beyond cost and policy details.
As with product development, this required a cross-the-board approach bringing together sales agents, underwriters, and claims management specialists, along with an investment in digital transformation to create and deliver new ways of working that provide added value to clients.
3. Underwriting
Underwriting is the cornerstone of any insurance firm, and it’s here where many insurers find that they are best positioned to gain a competitive advantage.
This would mean eschewing traditional approaches to underwriting in favor of a digital, data-driven approach.
Utilizing data and analytics can empower underwriters to make decisions based on insight rather than hindsight. At the same time, AI (Artificial Intelligence) can automate repetitive tasks, creating a more streamlined and efficient process.
Of course, there is an argument that integrating such technologies into the underwriting process is less about choice and more about necessity, a ‘do-or-die’ situation in which those who fail to adapt to the digital age will fall by the wayside.
While that may be fair, there are still opportunities to be capitalized on here.
Those insurers who can make the most effective use of technology can optimize their underwriting to such an extent that they can deliver maximum value for both clients and stakeholders alike, ultimately making this the one link in the value chain that’s worth the most focus.
4. Operations and Technology
By now, the interconnectedness of each core activity category should be abundantly apparent.
A focus on operations and technology can present widespread improvements across product development, sales, underwriting, and after-sales.
From incompatibility issues between legacy software and newly-emerging cloud platforms to problems with outsourcing to third-party IT companies who over-promise and under-deliver, insurers face many challenges concerning technology and operational efficiency.
For some, a value chain analysis may reveal opportunities to overcome those challenges better, faster, and more cost-effectively than their competitors.
Precisely how they achieve this may vary from insurer to insurer.
For some, it may require a focus on recruitment and talent acquisition, bringing in data scientists and other technology specialists to work in-house.
For others, that focus may be on creating a more harmonious relationship between AI and human involvement to solve problems and meet customer needs.
Whatever the case may be, companies that can design and implement a clearly-defined strategy for utilizing technology may find that this is one area where they can genuinely earn distinction in the marketplace.
5. Claims Management
Claims management is the one link in the insurance value chain that is both the most complex and unwieldy and has the most significant overall impact on customer experience.
Processing a claim typically requires insurers to wade through several lengthy documents, often going through them with the proverbial fine-tooth comb to ensure absolute accuracy.
Combining this with the need to request more information from clients can result in a dragged-out process, creating further stress for clients who are likely already going through a tough time.
Again, this is one area where tackling common problems could pay dividends for insurers in terms of outdoing their competitors.
While technology would undoubtedly play a role in streamlining efficiency, human interaction and customer engagement may play an even more significant role.
Insurers need to ensure that claims administrators are well equipped with a skill set that includes software-specific skills and some degree of proficiency in data analysis, but more importantly, social skills and good, old-fashioned customer care.
Frequently Asked Questions About the Insurance Value Chain
Question: What is a primary and secondary value chain?
Answer: In Porter’s value chain model, primary refers to the five primary activities of inbound and outbound logistics, marketing and sales, and customer service. Secondary activities support all of the above, including purchasing and procurement, human resources, and infrastructure.
Question: What is a value chain analysis?
Answer: A value chain analysis is a process of unpacking a company’s five primary activities to determine which ones should focus on to gain an advantage in the marketplace.
Question: Why is the insurance value chain important?
Answer: Understanding the insurance value chain is particularly important when widespread industry changes have left some insurers struggling to compete.
It can be vital for delivering company-wide optimization and helping teams understand how their work fits into the ‘bigger picture’ of growth and customer satisfaction.
Understanding the Insurance Value Chain: Final Thoughts
After conducting a value chain analysis, a select few companies may find that they are uniquely positioned to gain a competitive advantage across all five core activities.
However, it is worth pointing out that this is the exception rather than the norm.
A more typical scenario would see insurers pinpoint perhaps just one or two areas in which they could excel and focus on generating maximum value from those areas while simultaneously continuing to play to their strengths and offset weaknesses in other areas.
Some may find that they are already on the right path and that a renewed drive toward achieving set goals is all needed to establish a distinctive presence, while others may find that they’re faced with no option but to overhaul their business model.
In either scenario, a thorough and honest evaluation of each link in the value chain may prove essential for insurers who have thus far struggled to remain competitive in the face of the numerous challenges besieging the insurance industry.
For a further understanding of how the value chain model works, see our value chain vs. supply chain guide.
To learn more about identifying your business’s strengths, opportunities, and challenges, see our guide to creating a SWOT analysis.
Related read
- Service Value Chain Explained
- Transnational Strategy Explained
- STEEPLE Analysis Explained
- OLA Model Explained
- OpenAI Competitors Analysis - April 11, 2023
- How Does Chime Make Money? - March 20, 2023
- Insurance Value Chain Explained - January 31, 2023