How network effects are leveraged by insurtech startups

You might understand the concept of the "network effect" without necessarily knowing the term.

The network effect is when a good or service becomes more valuable as more people use it. Each additional user creates an opportunity for others to join, making the product or service more robust and likely to be used.

For a social media platform like Twitter or TikTok, it's easy to understand the network effect. But for insurtech, it might not be as clear. However, the network effect is just as powerful.

What are the two types of network effects?

There are two main types of network effects: direct and indirect.

Direct network effects occur when the value of a product or service increases for each additional user that adopts it.

Indirect network effects occur when the value of a product or service increases for users who are connected to others who are using the same product or service.

How does insurtech take advantage of network effects?

Insurtech companies can leverage both direct and indirect network effects to create value for their customers.

For example, a company that offers a digital insurance platform may see increased customer adoption as more insurers provide products on the platform (direct effect).

In addition, the platform may also become more valuable to users as more of their peers and networks adopt it (indirect effect).

Leverage technology

First, insurtech can use technology to connect with more customers and partners, which provides a better experience for everyone involved.

Let's imagine an online platform that makes it easier for customers to compare prices and find the best deals. They can also partner with other companies in the industry to offer discounts or create joint marketing campaigns. In doing so, the platform has more opportunities for everyone who uses it.  

By using technology to connect with more people, insurtech companies can take advantage of network effects and become more successful.

Fueling growth

By creating a virtuous circle of growth, insurtech companies can drive even more growth through word-of-mouth marketing and other forms of organic promotion.

Happy customers are more likely to tell their friends and family about a good experience they had with a company. This, in turn, leads to more business for the company.

They can also create a flywheel of growth by reinvesting their profits back into the business to fuel even more growth. This strategy has worked well for many tech companies, and it could be equally effective for insurtech startups.

By reinvesting their profits, they can keep growing their businesses rapidly, attracting more customers and creating even more profits.

Building a moat

By creating a large and loyal customer base, insurtech companies can form a virtuous circle where new customers are attracted to the company because of its size and existing customer base. This is known as "building a moat" around their business.

Existing customers stay with the company, becoming advocates and champions. This organic goodwill continues to grow growth. Growth creates a barrier to entry for potential competitors, who need to overcome the network effect to attract new customers.

Low-cost, high-quality products and services

Finally, by taking advantage of economies of scale, insurtechs can keep costs low while still delivering high-quality products and services.

By leveraging their customer base and expanding their reach, they evangelize their base without investing as much into reaching new markets. That means they can focus on delivering high-quality products and services.

Now, they can focus on new-product-led customer engagement, increasing their scale and creating a decisive competitive advantage.

Examples of insurers using insurtech to create or leverage network effects

Lemonade is an excellent example of an insurer using insurtech to create network effects. The company has built a platform allowing customers to instantly purchase and manage insurance policies. This convenience has helped Lemonade attract a large customer base, making the platform more attractive to insurers.

Hippo is another insurer that has leveraged insurtech to create network effects. The company offers a unique home insurance product that uses data from smart home devices to provide customized coverage. This data-driven approach has attracted a lot of customers, which has then made Hippo more attractive to insurers looking for new business.

Metromile offers pay-per-mile car insurance, which helps low-mileage drivers save money on their premiums. This model has successfully attracted customers and lowered prices for all Metromile policyholders. By attracting more customers and driving down costs, Metromile creates a virtuous circle that benefits all its policyholders.

What are some challenges associated with leveraging network effects in the insurance industry?

A few challenges come with leveraging network effects in the insurance industry.

First, it can be challenging to establish a sizeable network in the first place. Insurers must offer attractive rates and products to attract customers and get them to switch from their current provider.

Even once a sizeable network is established, maintaining it can be challenging. There is no guarantee that customers will use or continue using the service over time. Insurers need to continually offer attractive rates and products to keep customers from defecting to other providers.

Also, insurance companies are regulated bodies and have to comply with strict regulations regarding their operations, making it time-consuming to implement new technologies or business models.

For example, insurance companies must maintain certain capital levels to operate, making it risky to invest in new technology. Insurance companies are subject to numerous laws and regulations governing pricing, product design, and marketing. These restrictions can limit innovation and competition in the marketplace.

Finally, insurance companies should carefully manage their networks to avoid negative effects, such as adverse selection. These occur when insurance companies don't carefully manage their networks.

Adverse selection happens when people with higher risks are more likely to buy insurance than those with lower stakes. This can cause problems for insurance companies because they end up with multiple high-risk customers, which drives up costs. To avoid this, insurance companies need to make sure that they design their networks to encourage all types of customers to participate.

In conclusion, network effects can help you solidify your position and spiral your growth upwards if they are harnessed deftly. We at Inaza help insurers to leverage these network effects to transform their business.

‍