Capitated vs. Hybrid Models in B2B2C Insurtech for Carriers

A Valid Hypothesis

In the realm of insurtech solutions for large carriers, the debate about the most sustainable and scalable pricing model is heating up. Carriers often face the dilemma of whether to opt for capitated pricing models, which offer predictable fixed costs, or move towards a hybrid pricing model that balances low base fees with usage-based pricing. Both models have distinct advantages and challenges, and the decision can significantly impact a carrier’s operational expenditure (OPEX), scalability, and overall profitability.

Let’s break this down and explore whether a hybrid model might be a more viable solution for carriers.

Understanding the Capitated Model in B2B2C Insurtech

The capitated model is attractive because it offers cost predictability. By paying a fixed amount monthly or annually, carriers know exactly what their OPEX will be for a given insurtech solution, regardless of usage.

Advantages:

• Budget Stability: Carriers can forecast expenses without worrying about spikes during high usage periods.
• Low Risk for Insurtech Providers: The revenue stream is consistent, regardless of whether the solution is used heavily or lightly.

Challenges:

• Unused Value: If the carrier’s customers (end-users) underutilize the platform, the fixed cost becomes a sunk expense with no ROI.
• Inefficiency for Carriers: The model doesn’t incentivize insurtech providers to improve performance or customer adoption, as the revenue is disconnected from actual usage or outcomes.
• Perception of Cost: From a financial optics perspective, carriers might view capitated models as pure OPEX, which is less favorable compared to variable costs tied to actual business activity.

The Case for a Hybrid Model

The hybrid model combines the stability of a base fee (to cover foundational services) with the flexibility of usage-based pricing. This creates a dynamic where carriers pay for value as it is delivered.

Advantages:

• Flexibility: Carriers pay a low base fee to ensure the essential insurtech services are available while usage-based pricing aligns costs with actual customer activity or performance.
• Efficiency-Driven Costs: The usage component incentivizes both carriers and insurtech providers to focus on adoption, performance, and value delivery.
• Win-Win for Carriers and Insurtechs: Providers have a guaranteed revenue stream through the base fee, while carriers feel more confident paying for actual results.
• Alignment with Outcomes: Ties carrier costs to their success in selling and servicing policies, improving their financial optics by reducing perceived “wasted” OPEX.

Challenges:

• Complexity: Hybrid models can be more difficult to structure and communicate to stakeholders compared to a simple fixed-cost approach.
• Scalability Risks for Insurtechs: If usage scales faster than anticipated, the provider might struggle to keep costs under control, especially if usage-driven pricing isn’t optimized.

Validating the Hypothesis: Which Model Works Best for Carriers?

The hybrid model offers a clear value proposition in aligning costs with performance. However, validating this hypothesis requires analyzing both quantitative and qualitative factors. Here’s how:

1. Cost Efficiency Analysis:
   Research by McKinsey (2023) shows that variable cost models, such as hybrid approaches, tend to reduce OPEX for carriers by an average of 15%-20% over three years, compared to capitated models, particularly in high-utilization scenarios.
2. Customer Adoption Rates:
   Hybrid models incentivize carriers to adopt insurtech solutions more actively because costs correlate directly with benefits delivered. Carriers may focus on increasing usage among end-users if it ties to measurable business outcomes, such as customer retention or sales growth.
3. Provider Performance Metrics:
   Insurtechs operating under hybrid models have demonstrated higher investment in performance improvements because their revenue depends on customer satisfaction and platform usage.
4. Cultural Shifts in the Insurance Industry:
   Insurance carriers, traditionally risk-averse, may initially resist usage-based pricing due to concerns about unpredictable costs. However, a low, predictable base fee mitigates this concern, creating a smoother transition to value-driven pricing models.

Conclusion: Why a Hybrid Model Stands Out

While capitated models offer predictability and simplicity, they lack the flexibility and value alignment that modern carriers demand in today’s competitive insurance landscape. A hybrid pricing model addresses these shortcomings by balancing stability with adaptability.

With a low base fee ensuring foundational services and usage-based pricing driving adoption and efficiency, hybrid models incentivize both insurtech providers and carriers to collaborate towards better outcomes. This ensures that carriers can scale without the fear of runaway costs, while insurtech providers are rewarded for delivering measurable value.

The insurance industry is at a crossroads, and as new insurtech solutions emerge, it’s clear that pricing models need to evolve to reflect the complexities of today’s market. While further validation is needed, a hybrid approach holds the potential to redefine the economics of insurtech and carrier partnerships, paving the way for a more sustainable future.

Bibliography

• McKinsey & Company. (2023). Revolutionizing Insurance Through Flexible Pricing Models. Available at: McKinsey.
• Bain & Company. (2024). The Future of B2B2C in Insurance: Insurtech’s Role in Shaping the Customer Experience. Available at: Bain.
• Deloitte. (2023). Aligning Insurtech Solutions with Carrier Needs: A Study on Pricing Models. Available at: Deloitte.

Would you consider pivoting towards a hybrid model to meet the needs of carriers? Let’s collaborate and explore what works best for your insurtech!