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Does nature favor the specialist?

Does nature favor the specialist?

Wysłane przez James McCully dnia

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In my last blog, I wrote about the potential value for both policyholders and insurers of market segmentation – creating ‘boxes’ that meet specific shopping (marketing), buying (quoting), using (servicing), and assessing (renewing) needs. Overall, I believe this is the direction insurers need to take as consumers raise the demand for a more personalized experience – across both personal and commercial engagements.

However, there is a question as to the where the line lies – will micro-segmentation lead eventually to market-of-one or individually tailored insurance products? Is that a good or bad thing? One issue with segmentation is that it seems to conflict with the law of large numbers – instead of having many instances to build predictability, there are fewer and fewer as the segments narrow. This could lead to over-exposure in narrow risk segments where a market shift occurs or an unanticipated condition exists. However, when aggregated over more broad traditional categorizations, there may not be a great difference. With watchful governance, the case for segmentation is one for differentiation and the identification of opportunities to get the right price for the right risk.

Looking at segmentation from another perspective, what happens to less-defined/less-granular segments in an insurer’s market space? When breaking a market into segments, there is almost inevitably an ‘other’ category that will not receive special attention. This is not necessarily undesirable business, but it may lack the necessary volume or knowledge base to warrant a specific segmentation effort. The challenge here is the potential for an increased risk of adverse selection. If a competitor does create a micro-segment for those risks, it may result in only less desirable risks becoming policyholders – those who will turn out to be underpriced or inappropriately covered. In this way, segmentation could begin to exert additional competitive pressure in the market, making profitability difficult under a generalist approach. One interesting possibility is the rise of alliances between insurers who can combine their specialties in market segments and/or exposures to offer more comprehensive coverage for policyholders. This narrows the breadth of coverage for an individual insurer, but also decreases the risk of not having enough market expertise to service a segment. For very large insurers, they may need to take an approach where the insurer must ‘act small’ to achieve this same objective. It will be interesting to watch how an increased focus on market segmentation will affect the structure of the industry.

Will insurers who commit to micro-segmentation become specialized like the giant panda, able to subsist only by eating bamboo shoots and are at risk of extinction, or become the ultra-pliable ant, that flourishes by adapting to nearly any environment and succeeding in each?

“It is not the strongest or the most intelligent who will survive but those who can best manage change.” ― Charles Darwin

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