March 7, 2021
Incumbents Can Score an Alley-Oop!
The COVID era has created an advantage for incumbents, changed customers’ attitudes on privacy and heightened interest in insurance.
The “alley-oop” can electrify a basketball game if the passing and timing are precise enough and the dunk thunderous.
The possible disintermediation of incumbent insurers via technology has been a favorite topic of discussion in the industry. But the COVID era has created a distinct advantage for incumbents, has changed customers’ attitudes on privacy and has heightened interest in insurance, while there has been a hiccup for insurtech. For the traditional carriers, that’s an alley-oop!
In fact, I believe that the post-COVID era — 2021 forth — will let these incumbents Benjamin Button their way to a new look via a technology-based rehaul of products, services, distribution and operating models.
Big Tech, insurtech, managing general agencies and excess and surplus carriers that have been bubbling along for years will now witness a different outlook from their traditional insurance counterparts, which are gearing to strategize and execute at DEFCON 1 level.
This article is the first of three parts analyzing the posture of the incumbents vis-à-vis new-age competition in the face of COVID-induced global economic slowdown and liquidity strains (in addition to the persistent issues of high cost base, complex underwriting practices and opaque pricing). The overarching view encapsulates commercial and personal lines – property/casualty, life and accident and health.
For the longest time, the insurance industry operated on three maxims:
- Insurance is purely a risk transfer mechanism
- Insurance is sold and not bought
- Insurance incumbents’ grasp on massive data cannot be matched
Big Tech, neo insurers and insurtech have been creating a ripple in the $6 trillion insurance market solely by turning the three maxims on their head.
Apple, Google and Amazon have already charted sophisticated territories in fintech (most notably in payments, banking and lending) and have stirred the insurance sector lately, while the likes of Lemonade, Root and Metromile have attempted to erase the incumbents’ raisons d’être.
The appetite is no surprise given the companies’ access to customer data, prowess in analytics and ease of distribution via popular platforms, which are elite in customer experience and provide real-time customer care while offering pay-as-you-use models.
Some notable actions:
- Amazon: Alexa-focused partnerships (Cigna, Allstate and Geico), Pillpack digital pact (BCBS)
- Google: CapitalG’s investment in Applied Systems, a core insurance agency management software provider; Alphabet’s Verily partnership with Swiss Re
- Apple: John Hancock’s Vitality and UnitedHealthcare’s Motion, a national wearable device program
- Lemonade: powered by machine-learning underwriters and settles claims online within minutes
- Tesla: zooming in on individualized risk pricing and selling insurance directly to its drivers (underwritten by its partner, Markel)
The concept of asymmetries propelling disruptive market entrants (such as the ones listed above) is based on the notion that disruptors aren’t challenged by motivated-enough incumbents because the two do not see the market opportunity the same way. What if, however, the market opportunity itself goes through a sudden seismic shift demanding both the disruptor and incumbent see the landscape through the same lens?
In this post-apocalyptic year, it is easy to miss the quantum leaps that the large carriers took, such as:
- Chubb’s new “digital insurance in a box” — Chubb Studio gave a new meaning to embedded insurance as it extended its products to retail, travel, telecom and banking
- State Farm’s Cape Analytics, which assisted focus on AI-powered geospatial property data
- Travelers’ Qualtrics digital experience manager for experience analytics and real-time detection
- A record-breaking telematics upswing that needs a full article dedicated just to itself: Nationwide (frankly a first mover since 2011, boasting mostly OEM partnerships) USAA’s SafePilot, Berkshire Hathaway’s TrackMRI
- Operational excellence/[rocess redesign examples such as Prudential’s PruFast Track; AIG’s use of ServicePower; or John Hancock’s ExpressTrack
So what gives? A combination of the “slow incumbent” myth’s bursting, along with a change of pace for customers.
Behind the scenes, large carriers have been preparing for the journey to customer advocacy, going from being primarily a claims payment business to engaging with consumers for reduction or prevention of claims and to becoming the byproduct of the services that customers buy — telematics for UBI (usage-based insurance) or IoT to prevent machinery failure or aerial surveillance for risk monitoring or health wearables or use of artificial intelligence and machine learning for loss anticipation.
See also: How AI Can Vanquish Bias
Data was always king for carriers. They are strengthening their prowess via partnerships with social media giants, OEMs and retail and travel companies.
The seemingly stiff carriers were on a path to digital transformation pre-COVID anyway. Powered by “everything as a service,” their move from rigid systems such as agency management system, claims system, etc. to modularized core claims, underwriting, products and pricing are giving them nimbleness now that the world has become ultra-dynamic.
Finally, my personal favorites: the insurtechs! Their potential for turning headwinds into tailwinds when joining hands with carriers is a force to reckon with. Whether as partners or acquisition targets, insurtechs have been a focal point of carriers’ corporate venture capital arms — both for investment and for ingenuity. The courtship has resulted in several wins, such as turbo-charging customer experience and finding pockets of innovation such as in risk selection and in fraud detection. Zurich’s partnership with Snapsheet to simplify the customer claims experience or Travelers’ InsuraMatch acquisition for real-time quoting are notable collaborations.
Carrier-insurtech collaboration is the fastest and most robust way for carriers to become specialists at scale. On the other hand, carriers foresee a bigger realm serving as insurtech’s right hand (e.g., AXA served as a reinsurer for Lemonade, Oscar and Pure).
I won’t spend time expanding on the historic muscle of incumbents, that of capital, access to distribution access, brand, appreciation of the regulatory landscape, etc.
In the parallel universe, customers’ preferences have changed dramatically. They are now ready to relinquish savings in favor of investing in policies. Health and safety undoubtedly take precedence over personal privacy. Customers’ willingness to share data both in personal lines and in commercial space has given a new meaning to the so-far-experimental UBI models.
Of course, the large incumbent carriers should see this new setting as a transient competitive advantage. For the longest time, they have used technology to do more of the same, just faster or cheaper. It’s not easy for large organizations to rethink the proverbial question of, “What do we want to be when we grow up?”
They still much spent a lot of time practicing pick-and-rolls and give-and-goes if they want to score on that alley-oop!