Abstract

In insurance parlance, the word ‘unbundling’ means different things depending on the context in which it is used.

For example, in auto and home insurance, it means purchasing policies from different carriers instead of one. In permanent life insurance, it means the separation of risk, investment, and expense components. In health insurance, it means providing open, transparent, and niche services across the various contours of healthcare. In the current technology-driven business environment, unbundling carries an entirely different connotation. It is the ongoing initiative to reimagine insurance products well beyond the traditional constraints of how risks are sliced, priced, packaged, and rendered. Today’s insurers are exploring ways to atomize business models, products, and services to create hyper-personalized solutions that can gratify the ‘what, when, where, and how’ needs of customers. We explore how creating and positioning unbundled products change the way insurance is offered to customers.

Risk bundles from the past

The concept of modern insurance has evolved since the early decades of the 17th century.

Every successive industrial revolution has tremendously influenced the way in which the insurance industry functions. While the technologies that emerged from each revolution shaped insurers' business and operational models, insurers' product portfolios expanded by covering old risks with new capabilities and catering to new risks. It is a myth to typecast insurance as an industry that is reluctant to adopt any new technology. Insurers have never shied away from embracing technologies that effectively improve risk management.

The ongoing fourth industrial revolution is reinvigorating the insurance industry like never before. While the proliferation of technologies like connected devices, artificial intelligence (AI), and machine learning (ML) are empowering insurers to assess and monitor risks accurately, they also provide customers with more freedom to choose, control, and engage. The data-centric narrative of insurance is undergoing a paradigm shift with the upsurge of real-time data in contrast to traditional retrospective data. Insurers’ aggressive digitalization is further accelerating product simplification and customer engagement. The emergence of open insurance and the availability of application programming interfaces (APIs) and microservices are enabling insurance companies and customers to share access to their data with trusted third parties for offering insurance-as-a-service. 

In addition to these, the emergence of millennials as a powerful demographic cohort and a new customer segment has led to a slew of pivotal changes. Many of the traditional insurance concepts such as insurable interest, the law of large numbers, cross-subsidization, information asymmetry, and indemnity-based payouts are now being challenged. As a result, traditional bundled, monolithic, complex, and inflexible product structures in insurance are making way for atomized, flexible, and personalized coverages.

Unbundling leads change in insurance

Driven by the needs of millennials, insurers are retailizing insurance by thinking and acting like retailers.

New products are designed and sold in a way that aligns with the personalized life journeys of customers. Retailization is being enabled by technology-led unbundling of products and services, which removes the constraints insurers faced in the past. It empowers them to slice the cover for each risk, peril, and hazard as a separate element. It also allows insurers to monitor and appraise the risk of each customer personally, and design offerings for flexible periods and ticket sizes. As a result, unbundling has led to the emergence of several new business models, processes, and product innovations. 

Unbundling and atomization act as catalysts for new product offerings such as on-demand and subscription-based covers that consumers can buy when they need them and for the period and quantum required. These bite-sized or micro-insurance products focus on financial inclusion and mitigation of protection gaps as well as redefining the customer’s insurance purchase experience. These coverages are embedded with various products, services, or platforms offered by non-insurers and sold as a part of the whole proposition. Unbundling also enables insurers to experiment with a new model of product sales—customers indicate the range of the premium they can pay and the optimized risk cover components that fit the wallet share, are intelligently bundled.

The changing face of insurance

Atomization of risk enables insurers to separate fortuitous losses caused by named perils from losses caused by human behavior and usage. This helps insurers to both granularize and monitor the risk-causing factors and treat them appropriately. 

While good usage and behaviors are rewarded, bad ones are penalized. The continuous monitoring of healthy lifestyle adoption in life insurance and good driving in auto insurance are examples of this model. A few products in auto insurance even allow users to stop usage-related coverage when a car is not in use while continuing to keep the cover for fortuitous losses active. 

Unbundling of the coverage allows insurers to innovate on claim payout methods. Instead of following a rigid indemnity-based model, they can design parametric loss indices for certain risk covers to envisage a parametric payout. These parametric layers are positioned either as a standalone or integrated with conventional products as a hybrid option. The simplification of unbundling helps insurers target customers during their life cycle, with tailored and proactive risk-based insurance propositions presented across their journeys. 

With the benefit of insurance shifting from risk remediation to risk mitigation and risk prevention, the business structure of insurance is changing from siloed providers to ecosystem-oriented players. Unbundling helps insurers to innovatively stack the granular cover or service slice with the offerings from respective ecosystem partners to ensure protection and customer engagement. Interestingly, unbundling and bundling are not antithetical to one another. Both are interdependent with unbundling directly influencing and increasing the need for bundling. Insurers now bundle insurance coverages and services in unconventional ways along with non-insurance-based offerings to stage hyper-personalized experiences to consumers.

The way forward and beyond

The current experiments in unbundling show that insurers market the atomized coverage slices either individually or in bundles with other non-insurance solutions.

Going forward, insurance-as-a-solution will be offered holistically in partnership with several companies as part of a larger ecosystem. This will be a customer-centric ecosystem that accommodates insurance companies specializing in various lines of business and their sub-ecosystems. Customers will be able to cover all their protection needs with a single policy that comprises the required granularized coverages. The providers of the coverages will be curated from a list of carriers and purchased from a single entity that can be a non-insurance company. 

Besides the products, the service value chain offers immense potential for unbundling and innovation. Usage of policy-related services like call centers, mail services, or in-person visits can be decoupled. This allows customers to choose how the interaction with the insurer should be for each cover and service element. For example, they can choose a service through intermediaries and service executives, online, or hybrid. As with on-demand insurance, the charges for services will also be levied on demand, only when there is a service request. Customers will choose a low operating cost policy that is self-driven for which the insurer does not provide proactive services such as reminders. For value-added services from the ecosystem, the customer will be able to select either from bundles of curated services, personalized themes, or connected offerings, or they can create their own à la carte package.