InsurTech Series #3: Marketplace incentives in the insurance industry

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  • 18. July 2017

Dr. Teddy Amberg, who works as a partner at CreditGate24 and is responsible for business development, speaks in this article about marketplace incentives in the insurance industry. 

Dr. Teddy Amberg marketplace incentives

Incentives are everywhere. Salesmen get a bonus when they sell more. Shoppers get a discount when they buy two of the same items. Children get dessert when they clean their room.

I am a big fan of incentives and once even wrote a book about the subject. Incentives can be extremely powerful to motivate people – or they can be the exact opposite. According to psychologist Richard De Charms, motivation is “a mild form of obsession”.

Motivation can be both extrinsic and intrinsic: We either follow or do something because we get an economic incentive (extrinsic motivation). Or we follow or do something because we like it or find it fair or meaningful (intrinsic motivation). The most powerful incentives are those that combine extrinsic and intrinsic motivation.

Let’s think of incentives when looking at online marketplaces.

Online marketplaces typically connect two individual parties. For example, Uber connects drivers and passengers. Airbnb connects hosts and guests. Amazon connects buyers and sellers.

All these marketplace business models will only work as long as they can create win-win situations. If either side of customers is unhappy, the model stops working. Marketplaces are forced to create win-win situations.

From an incentives perspective, the “win” is either an economic benefit (extrinsic motivation), for example a cheaper room for the night. Or it has a fun or purpose element (intrinsic motivation), such as meeting new people or supporting a good cause.

In any case, there is little room for hidden elements such as hidden fees or unexpected features. Marketplaces require transparency to function properly. They undertake a lot of effort to increase transparency through user ratings, transparent fees and detailed product descriptions including pictures.

An online insurance platform is also a marketplace. On one side, customers (or brokers) look for insurance. And on the other side, insurers (or brokers) offer their services.

Online insurance platforms thus face the same requirements:
– Win-win situation for both sides.
– Ideally addressing extrinsic and intrinsic motivation.
– No hidden elements.

The win-win is based on insurers getting customer access. And customers getting better offers faster. Insurers and customers should have a cost or efficiency benefit (extrinsic motivation). And they should experience the service as balanced and fair (intrinsic motivation).

This is the key element in my view: In order for customers to perceive a service as fair, there should be no hidden costs. Or in the insurance industry: no hidden sales commissions or kickbacks that are paid by the insurer to the broker or marketplace. This especially applies for services that are authorized to change an insurance policy on behalf of the client. And earn the respective kickbacks from the insurer.

To be successful in the long-term, online marketplaces must consequently focus on the win-win for both sides of customers. And they must be transparent about any hidden costs or kickbacks.

There is enormous potential for digital insurance services such as marketplaces that digitize the customer journey.

The biggest change or disruptive element in my view is to give up kickbacks. Or at least make them transparent and share them with the customer.

About the author:
Dr. Teddy Amberg is a partner at CreditGate24 and responsible for business development. Before joining CreditGate24, he spent eight years in the private equity industry at Partners Group. He holds a M.A. in Banking and Finance from the University of St. Gallen (HSG) and a PhD in Sociology from the University of Zurich. His book about private equity management incentives was published by the Swiss Private Equity & Corporate Finance Association (SECA) in 2016.