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LIMRA INSIGHTS

Disruption: The Perceived Threat Is Real

Disruption has become a buzzword — one that may be starting to lose its meaning. People could use it to describe innovations regardless of their true impact, as well as anything that presents a challenge to an organization.

As you look ahead, where should you focus? We define disruption as something with significant impact, including things that may severely hinder revenue or have a crippling effect on a business or an entire industry. 

We anticipate that new market entrants are the greatest potential disruptive threat to the financial services industry. 

In 1995, Harvard University Professor Clayton Christensen coined the term “disruptive innovation,” which he describes as:

“[A] process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”

Building on Christensen’s work, we’ve defined three types of new market entrants based on how they enter the industry:

1. Under the radar. These firms are comparatively smaller and more agile than incumbents, and target underserved markets with products that are initially inferior to those of incumbents. For example, discount retailers disrupted full-service department stores.

2. Head on. These new market entrants are direct competitors who take aim squarely at established players, as Uber did with the taxi industry. However, as Christensen notes, incumbents who find themselves under direct attack will in turn accelerate their own innovation — or in some way partner with the disruptor — in order to protect their turf. Robo-advisors that burst onto the scene a few years ago were initially designed as self-directed consumer models. In response, industry incumbents designed their own platforms, acquired or partnered with these new entrants.

3. Here I come. Some firms make their intentions known far in advance of entering the market. Many start-up fintech firms describe themselves as disruptive. One example is the strategy that property/casualty insurer Lemonade deployed — announcing that it would reinvent the insurance industry business model before it even opened for business.

Disruption is a matter of perspective. While we frequently cite Google and Amazon as threats to financial services, do they really threaten the entire industry? 

From a distribution perspective, the perceived threat is real. Imagine Google or Amazon leveraging their expertise in retail sales to create consumer-centric platforms that distribute financial services products. This could raise overall sales, especially for product manufacturers on the platform. The “old way” of purchasing financial services products could become obsolete. On the other hand, these platforms could help insulate the industry from disruption, essentially raising the bar for any would-be disruptive new market entrant.

Further, consider what would happen if Google or Amazon used their vast consumer knowledge to selectively target those with the lowest potential risk. They could then offer insurance and investment products personalized to each individual. How would this affect the business models for life and medical insurance?

What can you do about disruption? Doing nothing is not an option, yet not everyone can be a disruptor. The answer is somewhere in the middle. What actions should be taken? Here are three ways for incumbents to fend off disruption.

1. Be vigilant. Remember Christensen’s prime tenet that disruptors are small, agile and start by offering inferior products to underserved markets. Be vigilant and make environmental awareness part of your organization’s DNA. It is conceivable that organizations can protect themselves from disruption if they are aware of a new market entrant’s perfecting an offering for the mainstream.

2. Remember that the need won’t go away. The products may change, and the ways that consumers wish to engage with companies may evolve, but people still need retirement savings and insurance. How that need is met will change. Incumbents should consider new ideas and imagine new ways to meet the needs of today’s consumers.

3. Reflect on why you’re in the business. Innovators challenge the long-held assumptions of how their business works. Ask yourself why you’re in financial services. Is your mission to generate revenues, help people protect their families and futures, or something else? Are your measures of success tied to that mission? Amazon’s first guiding principle is “customer obsession.” As a result, 80 percent of its success metrics give feedback on how well the retailer helps customers achieve their goals, according to research published in Harvard Business Review.

In the face of disruption, organizations can remain complacent or take action. Many are choosing complacency, as the industry’s immune system is inherently designed to attack change (even from within) rather than embrace it. As this year continues to unfold, focus on the sources of disruption that will have the greatest impact on your future success.

Scott Kallenbach is associate research director for LIMRA’s Strategic Research. He is responsible for identifying strategic issues that can impact the financial services industry, and for helping member companies develop strategies to meet these challenges. [email protected].


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