Amazon in the insurance industry – an underestimated threat? Disruption in the Insurance Market

In mid-November 2017, trade press reported that Amazon would be building an insurance team in London and are in the process of recruiting. Whilst there were some warnings and concerns over this manoeuvre, there was also a noticeable number of responses released in articles, blog entries, and social networks which casted the move by the tech giant aside as seeing little or no potential significance for the European insurance market. With Google having withdrawn from insurance business in 2016, why should Amazon be more successful here?

Even though both corporations – unlike any others of their size worldwide – are specimens of Big Data and customer centricity mindset, there are important differences between the two in terms of their business models. Google traditionally generates the majority of its revenues through advertising and enjoys millions of dollars in profit each year through AdWords from the insurance sector. Its comparative insurance sales portal “Google Compare” (a vehicle insurance comparative portal) was less successful. Google tested it in various markets such as France in 2013 or the USA and the United Kingdom in 2016, but closed it down quickly, in some cases within a few weeks – a move that was regarded by many as a failure. But did Google really fail? Depending on the term and time of the search, a single click on an AdWords ad (cost-per-click) can cost insurance companies more than ten euros even though there is no guarantee that it will lead to the closure of a policy. Google will thus continue to generate high revenues through insurance advertising even though they do not have their own insurance comparison portal.

As one of the largest trading platforms worldwide, Amazon, unlike Google, currently only produces revenues in the insurance sector through a cooperation relating to product insurances. The company offers insurance protection in Europe under the name of “Amazon Protect” for selected electronic articles ordered via Amazon; underwritten by the UK insurance provider London General Insurance Company. If Amazon exited the insurance business as Google did, it would no longer generate revenues through insurance. What‘s more, Amazon already has transparency in its European target markets on how the product ‘Amazon Protect’ is taken on by the market. Accordingly, Amazon would take a comparably smaller risk in extending its insurance activities.

Given the fact that product insurances do not play a significant role for the majority of European insurance companies and brokers, why should the industry be concerned by Amazon’s entrance?

Amazon has in-depth knowledge about the purchasing behaviours of its customers and can thus offer a wide range of insurance protection at any time at the point of need. For example, buyers of dog food or leashes could be offered a dog owner’s liability or dog surgery insurance, or when customers order baby clothing, a pushchair or baby toys, they could be offered temporary life assurance or supplementary health insurance for children. In contrast, insurance companies and comparison portals currently invest millions to place their insurance products at the point of need. For example, over 50% of Allianz Germany’s marketing budget already goes towards its digital channels. With the European ePrivacy directive likely to be implemented, it will become more complex and costly for insurance companies to gain customers online. This access at the point of need, however, is already available to Amazon (almost) free of charge, and Amazon is also not as heavily affected by the implications of the ePrivacy directive as the need for insurance coverage is determined on its own website. So why should the company be satisfied with a product insurance portfolio and not benefit from their obvious competitive advantage to profit from insurance business at a large scale?

Another advantage for Amazon is the subscription membership package “Amazon Prime,” with which it has managed to create a bundle of services ranging from free premium delivery, access to special VIP offers, to e-books, an online video streaming service, a music streaming service, and an unlimited photo cloud. Its experience with subscription models is especially relevant in the UK, where insurance companies are increasingly offering monthly subscription payment models. Beyond this, the company is moving in on various industries, ranging from the stationary food trade with “Amazon Fresh,” the cloud service industry to financial products by offering an Amazon credit card through co-operations with banks as well as building a competitor to PayPal “Amazon Payments.” In terms of logistics, Amazon is again closer to customers than most other companies. In the USA, the company has been offering its own parcel pick-up stations since 2011 whilst in Germany it manages parts of the deliveries with its own subcontractors. This conglomeration of services increasingly bolsters Amazon’s customer loyalty with each new service added.

Amazon could leverage its ecosystem of services without large costs to create a comprehensive insurance portfolio that differs from conventional insurance offers, all the while tightening the link to customers further. For example, customers could receive a 10% higher compensation payment for a claim if they buy a replacement product over Amazon or Amazon Prime customers could be offered a 10% discount on premiums. Would any Amazon or Amazon Prime customers be able to resist?

When just considering this in Germany, where half of the 44 million regular Amazon customers order over Amazon at least once per month and 17 million customers use Amazon Prime, it becomes clear what kind of potential presents itself to the company.

Figure 1: Amazon clients

In October 2016, Amazon launched its intelligent loudspeaker Echo; just 9 months later, 5% of the participants of a representative PwC survey responded that they use Echo with the digital assistant Alexa, while a further 13% planned to. What does this mean? Already, several million customers in Germany can access the digital Amazon assistant with a simple voice command, then purchase products from Amazon and even buy insurance products. Deutsche Familienversicherung was the first German insurance company that published a Skill for this (comparable with an app). If Amazon enters the insurance business, why wouldn’t it utilise Alexa directly for customer care and claims processing? As Amazon already has all relevant data available, the simple voice command “Alexa, I have a claim” would be enough for the friendly voice to guide customers through the claims process in a few steps.

(Digital) insurance companies founded in the last year have shown that with an investment with tens of millions it is relatively easy to receive an underwriting licence and found a risk carrier. A key prerequisite, however, is the sourcing of expertise through employees or external consultancies. For a corporation such as Amazon, with almost unlimited financial resources, having achieved over €2 billion of profit in 2016, the necessary investment for founding an insurance company is small change.

Whether it is as an advisor, intermediary, underwriting agent or even as an insurance company, Amazon will utilise its dominant market position and enter the insurance market. Even if Amazon’s entry mainly appeals to digitally savvy customers as a first step, not only direct insurers and comparison portals will be affected, rather the market entry of such a heavyweight would be felt by everyone in the sector.

How can insurance companies and intermediaries counter this development?

One possible option is the expansion of stationary sales. This statement appears to be almost reactionary when considering the declining numbers of brokers, progressing digitalisation of all fields of insurance as well as the newly founded InsurTech companies and insurance labs.  However, this option appears less reactionary when considering the current steps taken by Amazon in the USA. There, in its home country, Amazon is cultivating a nationwide network of stationary bookshops. Although the company dominates online book sales, a large number of customers still prefer the atmosphere and personal experience from a local bookshop.

In some European markets such as Germany, experience has shown that despite high marketing spend of direct insurers, comparison portals, InsurTech companies, along, the majority of customers – with the exception of some areas such as motor insurance – still continues to trust personal consulting by representatives, banks, and brokers. Insurance companies in Germany could try to benefit from this stationary advantage and continue to expand it. The new advisory centres of Deutsche Bank could be a prime example. There, customers are advised in modern spaces beyond the normal branch opening hours and are also offered advice over telephone, video calls, chat, and co-browsing. This kind of agency format, which combines high quality, high-tech, personal support, trusted advisory services, in modern representative spaces, could represent a way to successfully differentiate itself from a purely digital offer through positive support and customer experiences.

Dr. Fabrice Gerdes

Manager Office Münster

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