Can We Really Disrupt Insurance? 4 Ideas

Insurance is contracts. Why, then, is insurance sold like so many bags of potatoes, while contract lawyers charge like, well, lawyers?

These days, all we hear is: Disrupt this, and disrupt that. I even saw a company on LinkedIn with a chief disruption officer. Really? Now that disruption appears to be the norm, what’s next, disrupt the disruption? The term may have legitimate usage in some context, but insurance? The disruption is supposedly taking place in Silicon Valley, where IT firms are working on new insurance delivery, administration, marketing, and efficiency software models. Okay, so we’re moving all of this transactional and administrative work into cloud-based digital environments, but where’s the disruption? Isn’t this just the natural progression from outdated systems technology to more current technology? Maybe people will transform the old agency management system into an app for your iPhone. That wouldn’t disrupt anything, but it would be cool. A firm in Silicon Valley sponsored a conference called Insurance Disrupted 2016: Inside the Digital Tipping Point. Here is the link. (Note: The link says 2015, but it’s actually for the 2016 conference. Some tech genius didn’t remember which year it was, or was too busy playing foosball to change the link). According to the website, one company “sees software as rewriting the insurance industry,” and others are working on “new insurance distribution plays…that will change the shape of insurance.” What could “rewriting the insurance industry" mean? And what is the “shape of insurance,” anyway? Do you think any of these tech savants know the origins of insurance? A very brief tutorial: In about 1688, Edward Lloyd’s (London) coffee house began selling insurance against loss of ships and their cargo. This basic transaction hasn’t fundamentally changed in the last 329 years. Regardless of all of the current digital hoopla, this is exactly what we do today. See also: Insurance Disruption? Evolution Is Better   Typical of Silicon Valley, the conference website promises something "insanely great," as if insurance isn’t 1,000 light years from anything remotely called insanely great. But that’s perfectly fine. Insurance is the second-oldest profession in the world, with a rich history and an economic mission second to none. It doesn’t need hyperbole to define its importance. Here’s the thing about the Silicon Valley digital wonderfulness – it should enable disruption in the insurance business, not define it (or disrupt it). Technology’s role is not the be-all and end-all; it’s an important supporting player, as all technology has been since time immemorial. Advances in marketing and administration technology do not deserve to be called disruptive -- evolutionary, maybe, but not disruptive. According to the "insanely great" website, insurance industry customer satisfaction is extremely low, but the reason has nothing to do with IT. It’s because we systematically devalue our product, reducing it to a nameless commodity, by constantly reminding our customers that its only value is a cheap premium. The irony is that this is what most insurers think creates value. Question for insurers: how cheap must insurance premiums be before the customer is satisfied? Exhibit A: The Gecko When the gecko tells us that in 15 minutes we can save 15% on our auto insurance, the product disappears. That which really matters — the insurance contract and service after a claim — become valueless and worthy of our contempt. The gecko doesn’t care, as its sole marketing strategy is low cost, not product value, and it serves its purpose. Because the gecko’s relentless TV advertising disregards the value of products and services, it perpetuates the lie that the only way to evaluate an insurance product is by its cost. Many millions of consumers swallow this, hook, line and sinker, every year. No wonder customer satisfaction is so low — a mildly funny, smooth-talking gecko is telling us what’s really important, and it isn’t the quality of the product or the company selling it. It’s ironic because the gecko is owned by Berkshire Hathaway, which is renowned for its “value investing” approach to everything it does. How Did We Get Here? The simple answer is: We did it to ourselves. Imagine the “price is everything” mentality in contract law, which is similar to insurance. Contract lawyers sell their time and expertise, based on their knowledge of contracts. Insurers and insurance agents sell insurance contracts, and, by implication, their time and expertise. A contract lawyer’s value has little to do with her hourly rate; it has to do with her ability to construct and interpret complex contracts. Insurers use many standard contracts, but each company has its own version of many others. Both the lawyer and the insurance company/agent owe a similar duty of care to customers. Why, then, is insurance sold like so many bags of potatoes, and contract law expertise is sold based on the value of the provider and the product? Disrupting the Insurance Status Quo Let’s completely rethink the way insurance is priced, and, in the process, create value for the product and the insurer. (Rates and rating formulae cannot be changed, but pricing can.) Can we design a paradigm that stresses value creation over chasing cheap premiums into the toilet? Here are some ideas on how to really disrupt the insurance business:
  • Align product value with product cost, maybe using some of this new Silicon Valley software. Let’s create a value-based pricing scheme that recognizes that some coverages and features are more (or less) important to different customers. The current, cheap, premium-driven model obviates the need to differentiate product features and benefits.
  • Let’s better identify and allocate insurer capacity (capital) as a basis for competition. The insurance cycle is based on the amount of capital swimming around in the insurance markets. Let’s bring this dynamic down to the individual insurer level and use ROIC (return on invested capital) as part of the basis for pricing the product.
  • Let’s try to redefine insurance from a cheap-is-better necessary evil to an essential financial product, worthy of its cost. What we have now is the opposite: cost worthy of the product. When the cost is cheap, so follows the product, as we see in almost every other facet of economic life.
  • Finally, let’s educate our insurance sales forces to stress product value-for-the-money. The current insurance sales and delivery paradigm defies the old truism, that you get what you pay for, because the only value is a cheap premium, with the understanding that the product will be identical from every insurer regardless of the premium. (For some perverse reason, we must compare “apples to apples.” Why can’t we identify value differences and price them accordingly?)
The cumulative effect of these ideas, in my humble opinion, have the potential to be truly disruptive, as many thousands of insurance salespeople would have to abandon the “I (or the gecko) can save you 15%” mentality, which only serves to devalue the insurance product and, more importantly, devalue the person or company selling it. The ultimate goal of this initiative is for customers to acknowledge the premium, (cheap or otherwise), but also know what the premium is purchasing and why. In other words, where’s the beef? See also: The 5 Charts on Insurance Disruption   Next time, I’ll rough out a new and, I think, disruptive, value-based pricing model. I may be just a lonely voice in the wilderness, but nothing ventured, nothing gained, right? Note – the term “product value” as I use it here includes the cost of losses and all of the expenses necessary to support the insurer’s infrastructure and provide ancillary customer services such as adjusting claims, and loss control/prevention.

Donald Riggin

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Donald Riggin

Donald Riggin is the president of the ART of Captives, a consultancy specializing in alternative risk financing techniques. He provides corporate and public sector clients with state-of-the-art risk financing advice and services.

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