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December 6, 2017

Is Insurance Really Ripe for Disruption?

Summary:

Insurance in its present form does not lend itself to an Amazon “1-Click” purchase. Contracts are not commodities distinguished only by price.

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This morning, I was reading a new article essentially about how insurtech disrupters were going to destroy the insurance industry. As is often the case, these startups were compared to Amazon, something I’ve blogged about on several occasions, including in the article “Insurance and Paper Towels.”

Among the predictions of this article were:

“And you’re going to get disrupted in a way that’s staggering in its infinite nature, with infinitely more data points, infinitely greater opportunities and, as a result, infinitely more options amid a sea of competition, which makes you feel infinitesimally small. Suddenly. This competitive force has built such a commanding, unexpected lead. Yes, a good, old KO before you even heard the bell go off. You will likely default, and it will be too late to pivot.

“For the lucky, the ability to slip into obsolescence and appreciate the nostalgia of the past will do. (Of course, not the positive vibe-nostalgia, the punch-drunk love of sentimental warmth. Nope, as you become a relic of history, the nostalgia will be more like the Greek word root for nostalgia, which translates to pain, or more specifically the debilitating and often fatal medical condition expressing extreme homesickness).”

See also: How to Respond to Industry Disruption  

Yikes! Gadzooks! Godfrey Daniel! (and other “old-timey” expressions of fear and terror used by industry fossils like me). Or, better yet, he “blathers like a bubbly-jock,” an 18th century expression that means to prattle like a gobbling turkey or “to talk rubbish.”

The article concluded with:

“…you’re about to be disrupted. Amazon ring any bells?”

Yep, so does Google Compare. And Airbnb Insurance and Guevara and Guild and Health Republic and Risk Genie and Tribe Cover and Zensure and RiskGone and….

Amazon sells products with a known cost. Insurance involves parties entering into complex, legal, highly regulated indemnification contracts where the costs are not fully known and one event can be financially catastrophic for either or both insurer and insured. Insurance is more process than product. It begins with an individual risk exposure analysis, continues with matching the results of that detailed survey with the proper risk management technique (one of which is “insurance”), then moves to interpreting a complex legal contract IF a loss event occurs.

Insurance in its present form does not lend itself to an Amazon-like “1-Click” purchase. Insurance contracts are not commodities distinguished only by price. If I buy three pairs of crew socks on Amazon and they don’t fit or I don’t like them, at worst I’m out a few bucks or the inconvenience of a return. If I choose the wrong insurance product, I may almost literally lose everything I own, and, in the particular case of liability claims, I may have my income garnished for the next 20 years.

Insurance is a complex process, not a single event where all that matters is a fast/easy/cheap convenient and pleasant customer buying experience. The true test of the insurance product is whether it covers a claim. Again, in the particular case of liability exposures, the value of the purchase may not be known for years.

See also: Why Insurance Is Ripe for Disruption  

Those who think they can disrupt a centuries-old industry with a phone app and an AI bot that extracts bad data from a county tax database without human intervention aren’t being innovative. They simply lack a valid historical perspective of the industry and a fundamental misunderstanding of what the industry is all about.

What the insurance industry is all about is assisting individuals, families and organizations in identifying their exposures to loss and implementing the most appropriate risk management techniques to minimize the potential for serious or catastrophic financial loss. How many insurtech startups will figure this out before they run out of venture capital or ruin the lives of an unsuspecting public?

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About the Author

William C. Wilson, Jr., CPCU, ARM, AIM, AAM is the founder of Insurance Commentary.com. He retired in December 2016 from the Independent Insurance Agents & Brokers of America, where he served as associate vice president of education and research.

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