June 14, 2016
Can Insurance Innovate?
Yes, insurers can clearly innovate. But the industry is missing the last mile: the technology that can connect to product innovation.
It’s a simple question — can insurance innovate? Think about your answer; I will give you mine at the end of this post.
Here’s a quick story from an insurance book that helps set the stage for how the industry got to where it is today:
There once was a membership association called the American Insurance Underwriters (AIU). The AIU acted as an agent for member insurance companies in international markets. Each member insurance company held a percentage of the AIU pool by which payments and liabilities were assigned.
In the 1960s, an AIU member bid on a contract to insure a large church in Boston. But the insurance company didn’t bid the insurance like everyone else. Instead, the insurer created a tailored contract with its own rate calculations, “rather than the standard forms and prices other (AIU) insurers had agreed to use.”
The incumbent insurer was not pleased:
“Executives at Continental Insurance, which held about 27% of the AIU pool, went ballistic…. [Continental Chairman Victor] Hurd objected that this radical maneuver of using competitive pricing and deductibles in fire insurance was somehow going to ruin the insurance industry.”
Executives at the heretic insurance company convened. One “old-fashioned insurance man” (the book’s description, not mine) argued that the relationship with the AIU must remain intact as it was an important revenue source to the company. The executive urged the group to stick to the AIU practices.
See also: Underwriters Need Some Power Tools
Another executive who participated in the custom underwriting urged another path:
“We should not be tethered to outmoded practices,” he said, “whether the custom of rate-setting associations, the terms of our policies or anything else.”
Who was that executive? Maurice Greenburg, who later became the CEO of AIG, one of the largest commercial insurance carriers in the world. But before AIG, Greenberg had to fight to change the way things were working at American Home, the heretic insurance company. Greenberg had to argue that remaining a part of an organization that sets international practices and shares profits and liabilities across insurers was not the best approach. Today, this seems obvious; at the time, some viewed this as blasphemy.
But Greenberg’s innovation didn’t stop there. According to Greenberg’s book, he used the AIU discussion to point out another outmoded practice relating to insurance agents:
“Insurance agents worked for themselves in the field writing policies, yet they possessed the authority to bind the insurance companies they represented…. American Home’s agents seemed to care more about commissions than quality. Greenberg envisioned moving American Home away from its reliance on agents in favor of setting its own underwriting standards and moving away from the personal lines that agents tended to underwrite in favor of commercial risks that tended to be identified by brokers.”
Of course, every insurance company operates this way today.
Reading The AIG Story has led me to a couple of ideas.
There is absolutely no doubt that insurance companies can and do innovate. Insurance companies create new insurance products every day. For example, AIG launched kidnapping insurance in the 1970s in response to the emerging threat to wealthy individuals. You can see this kind of innovation today in the insurance products that were created to cover the Uber gap.
But, as I take a step back and survey the insurance technology (insurtech) scene, I believe we are missing one important discussion: the connection between the technology and new insurance products. How will your mobile app help AIG identify a new product that should be underwritten? How will your health data help Zurich create variable rates for health insurance? How will your technology-enabled policy review software help an insurance company identify outlier language that may create additional liabilities? (I have an answer to this last question!)
See also: 6 Key Ways to Drive Innovation
The last mile is missing from insurtech discussions. The last mile is showing how your awesome new software can actually improve the underwriting or claims experience for insurance professionals. The last mile requires an inordinate level of expertise by the creators of the new technology. Most technologists won’t finish the last mile. Pitch decks and 10-minute question and answer periods won’t get you there.
So yes, insurance can innovate. The question is, can insurtech truly support this innovation?