Insurance Companies Learn That Leaner Is Better
Learning to leverage data in the insurance industry [Source: http://www.youtube.com/watch?v=_7ECOyxNMvI]
I don't know about you, but the recent news that an eminent French academic has won the 2014 Nobel Prize in economics reminded me of the theory of so-called 'perfect competition.' One thing you learn upon getting a job in the real world is that perfect competition is hard to find.
In fact, that's one of the reasons Jean Tirole won the latest Nobel in economics. He began performing some pretty amazing research after the onset of the global economic crisis that showed how innovation is stifled in many industries that are dominated by a few large companies. Instead of there existing perfect competition between companies, the very biggest enterprises tend to set prices (simply because they can), sit back, and bask in the glory of a lack of any substantial competition.
Mr. Tirole's work has helped government regulators to address problems like monopolies. I realize that the 'm-word' is a controversial one, especially when referring to any enterprise in the financial services industry. (In America, for example, some experts still enjoy using the term 'too-big-to-fail' to refer to banks with a veritable lock on the market.) But there are such things as profound shortcomings in regulation that allow giant insurance companies and banks to keep prices and fees artificially high, thereby stifling innovation and new entrants into the marketplace.
In the insurance industry in particular, such paralysis and lack of innovation can have an adverse effect on the people who need their services the most: patients who are sick with maladies or diseases that might take years to treat and might require the prescribing of expensive pharmaceuticals. In the United States, it's not unheard of for large groups of ailing senior citizens to charter buses that take them across the border to Canada, where treatments and drugs are much more affordable. Canada's insurance system is regulated in ways similar to those in European countries. In the United States, few such regulations exist.
According to a dispatch I read just this morning, the Nobel recipient has been advocating increased regulation of the banking sector for years. He most recently said that he approved of new liquidity regulations as well as the need for governments to watch carefully the connections between the regulated and unregulated areas of the financial services world. That's because these enterprises are increasingly becoming global in scale, he said.
What's encouraging about the insurance industry is that because of Big Data analytics, some innovative start-ups are beginning to re-define the age-old insurance business model. They're moving the insurance sector from companies that once existed because of data collection to those that thrive because of data analysis. In the same way the retail industry was shaken up by web stores that focused on the distinct needs of consumers, insurance companies are coming to learn that being consumer-centric has its advantages. It used to be that the only time a customer had any substantial contact with her insurance company was when she needed to file a claim. Today, however, companies are being proactive as to how they engage customers. In doing so, they learn more about them and their habits and can better offer customized policies.
The latest economist to win the Nobel Prize has been warning us all about the dangers inherent in financial services behemoths that dictate products and services to their consumer base. What's a positive development - besides him winning the prize - is that insurance companies are starting to look to their customers for ways to develop new products and cement those relationships. Those companies are realizing that unless they listen to their base, their sheer size and near-monopolistic status is no longer enough to keep those customers coming back for more.