Warning: While this is not quite as disturbing as the poor woman with a spider in her ear on Twitter, I’m still sleeping with one eye open.

Also, TLDR: Prices play a key role in free markets, right? They help set supply and demand and indicate value. My guess is that the vast majority of healthcare and by extension health insurance in the U.S. is a badly functioning market in part because prices are nearly irrelevant.

The story, in which I bravely warn my family of danger.

Not long ago, I went to bed early and was woken up by what sounded like a very loud fly knocking against the inside of our bedroom window. I turned on the light to see a bat weaving and darting just overhead. (We have low ceilings – the bat was way closer to me than any bat should be.)

I’m happy to report that I bravely warned the rest of my family by shrieking (repetitively) at the top of my lungs; the bat got a broom-to-the-rear-end assist out the bedroom window.

Really, there was no dignity to be had for anyone that night.

But, I had a bigger problem. I had two little marks on my arm that Dr. Google suggested could be a bat bite; my primary care physician’s office told me to go to the emergency room. 

Turns out, showing up as bat woman at a suburban ER late on a Monday night makes you an absolute rock star.

I ended up getting the rabies vaccine and a shot of human rabies immunoglobulin, which was absolutely the largest shot I have ever seen in my life. Follow up was three more doses of vaccine over a three-week period.

And that’s why I received an $18,289 bill: $1,120 for the ER visit, which didn’t shock me, and $17,169 for the shots, which did.

Pic, or it didn't happen:

I looked at the bill, nearly fell over and fortunately made it as far as the “You owe” box. My share, luckily, is $300; my insurance company paid $3,986.

Then I started thinking.

Why do we pay people to make up prices for healthcare, and what does it feel like to do that job?

Is $17,169 even a real price? Does anyone actually pay that?

I’m guessing no, if my health insurance company can get the hospital to knock 74% off the tab. And, given the way health insurance works in the U.S., I’d assume that every other insurance plan has negotiated some similar discount.

So, how does it feel to sit in a room with Excel open, presumably, and figure out what the rack rate is for care? What are the numbers even based on, if anything? And how does it feel to know that the only people who may get charged that are the people who are uninsured? (More on that later.)

The Centers for Disease Control and Prevention’s page on the cost of rabies prevention (published June 2019) pegs the expense for the immunoglobulin plus the four vaccine doses at $1,200 to $6,500, for the medications alone, not the hospital charge. So, how do you get to north of $17,000? And, according to First Databank, a company that monitors drug prices, the price of the drugs I received has increased 388% in the last decade, for no obvious reason, as best I can tell. Think the CDC missed that.

What is it like to be on the opposite side of this pricing, to be negotiating on behalf of the health insurer? Does someone go back to the boss to say, “Hey, I negotiated us a 74% discount!”? Doesn’t that doesn’t just strike everyone involved as laughably bizarre?

Why do we ask people to do useless work? What does that do to them, and what are we failing to grow or build or improve by asking them to focus on this nonsense?

Was it cost-effective to treat me?

This bill got me metaphorically scribbling on the back of an envelope.

Is $17,169 a fair price? Well, maybe that’s a silly question, because that’s not what my insurer and I paid together.

Let’s just assume that the fair price is about $4,000, which is roughly what we paid for the shots.

Rabies is a nearly completely fatal disease, and the onset of symptoms to death is about seven days. Let’s say the resulting hospitalization and treatment costs $100,000 (source: wild guess). Soullessly assigning no economic value whatsoever to my life (which I, by the way, value greatly), we should be willing to pay for 25 courses of rabies shots to prevent one case, or whenever the risk of catching rabies is 4% or higher.

What was my risk of catching rabies? The estimates I saw suggested that anywhere from .1% to 10% of bats are infected with rabies, depending heavily on local conditions. It is easily transmissible, apparently, especially with a confirmed bite, so let’s assume that, if my bat friend had rabies, I would get it.

So we’re within a wide margin of error based on avoiding costs. What if we ghoulishly try to value a life? There are lots of papers on this topic. I’m no expert, but I’m going to pick $100,000 per remaining high-quality year of life left, which seems roughly reasonable based on the literature. Let’s assume I have 40 high-quality years left, or $4 million of value.

Treating a known bat bite definitely makes sense.

Maybe the cost makes sense from that perspective? But would you need to consider it as part of all of the healthcare I will receive from this point on in my lifetime? Or just at this moment, with this choice?

I don’t know, but I’m pleased that I was able to make a rational economic decision on the fly.

Ha.

See also: Mental Health Even More Critical Now

How did we end up in a place where life-saving, cost-effective treatment is most ruinously expensive for the people least able to afford it?

If I had been uninsured and gone to the hospital, I’m going to assume I would have been treated, at least with the first set of shots, though I don’t know for sure. If I had gotten the full series of shots, how much would I have been billed? The full rack rate? The worst negotiated rate with an insurance company? Something different?

(My $300 ER copay alone represents a significant burden for many families, including those affected by joblessness or reduced working hours because of COVID.)

I did some research – it turns out the major manufacturers of rabies treatments have programs to pick up the cost for those who can’t afford it. I’m sure this is an enormous relief for those who qualify, which I desperately hope is everyone who can’t pay the price. I also hope it’s easy to apply.

But, systemically, how does this make sense?

We set fake prices that are beyond crushing for most families. Then we don’t charge them to people who are insured. We save the worst prices for people who don’t have health insurance, who are even likely less able to pay ruinous prices than those who do have insurance. So then the manufacturers have programs (complete with separate paperwork!) to waive or minimize the cost for the uninsured, at least those who apply.

And since the manufacturers still need to make a profit, those waived costs actually get funneled back into the pricing the insurance companies negotiate with the healthcare systems.

Again, what information is in the pricing for these drugs? And in what ways are the healthcare and health insurance markets dysregulated as a result of the lack of clear pricing information?

As both the consumer of our healthcare insurance and the employer paying for it, how am I supposed to assess this situation?

My co-founder and I picked out our health insurance plan. While there seemed to be a whole lot of choice for a business of our size, the plans were really all the same… $2,000 deductible with $50 copays? $2,005 deductible with $49.75 copays? And so on.

I’m exaggerating, but not by much.

The service our healthcare plan provides is fine, and the cost seems reasonable, but how do I assess whether the plan is as efficient as it could be? The costs paid to healthcare providers get passed back to us (all of us insureds) through pricing. If the plan pays too little, it isn't fairly compensating the medical providers, which will eventually refuse to work with our health insurance or go out of business, meaning we have an availability problem. If the plan pays too much, we pay for it.

Am I supposed to be really pleased that our health insurer negotiated a $14,000 discount? Or should I be mad it didn’t negotiate a $15,000 discount? How would I know? How could I make a more rational decision?

The answer is…I can’t. There’s so little information in the pricing, and so much opaqueness, that we’ll have to make another decision next year based on price and service when we renew our health insurance. 

Why do we tolerate the healthcare and health insurance mess we have in the U.S.?

I’m willing to believe that all of these ridiculous pricing mechanics exist for a reason, but do the reasons still make sense?

There are so many distortions here…

• Even when I am both the buyer and user of employer-sponsored health insurance, I don’t have the information I need to make any kind of a rational decision except what makes the most sense for us for the next year.
• There’s no easy way to understand how much healthcare will cost before treatment, especially in emergency situations.
• The list prices are no more than sky high caps on medical procedure prices.

I’m no expert in health insurance, but I see that same underlying issue here that I do in my own familiar property and casualty space – massive systemic complexity.

In the P&C space, I’d argue that most of the complexity derives from old court cases that created boundaries between lines of insurance. This led to technology solutions for each line and specialized staff and culture to handle input into, maintenance of and output from these ossified systems. The market need for those silos has blurred or disappeared, but thus far they’ve been indelible marks in the insurance landscape.

The same is probably true of health insurance. I’ll add the root of employer-sponsored health insurance (which usually separates the buyer from the end user), which stemmed from wage controls during World War II.

There’s an interesting historical summary in National Bureau of Economic Research Working Paper 14839. In short, fringe benefits were excluded

The issue is that systemic problems require systemic solutions. Systemic solutions are so much less attractive than quick fixes – they don’t sound catchy, they don’t boil down to one sentence, they take time to implement.

Yet, as a people, our failure to fight for systemic solutions is surely catching up with us.

from WWII wage controls, which caused employers to add more benefits to attract and retain workers. Health insurance existed in a fragmented way before this, but really came into its own and was firmly established as an employer benefit in the period. And now, 55% of Americans get their health insurance through their jobs, according to the Census Bureau. This has to be a piece of the complexity.

See also: 6 Life, Health Trends in the Pandemic

Public Service Announcement: Rabies is really nasty. Nearly always fatal, and really, really nasty – it kills tens of thousands of people worldwide each year, mostly in places where rabid dogs are common. It’s also not specifically spread by animal bites; it’s spread in the saliva of ill animals, so a scratch or a lick to a mucus membrane can also spread it. If you may have been exposed (including if you wake up in a room with a bat -- bat bites don’t necessarily hurt and can be nearly invisible), you really need to talk to a medical professional.

Postscript: I had a long conversation about CEO pay at pharmaceutical companies with someone regarding this whole situation. CEO pay can be grotesque, especially at companies that do not pay their workers living wages and don’t provide decent benefits. However, cutting CEO pay is largely an issue of equity, not much of a solution to this cost issue. I looked up the 2019 salary of the immediate past CEO of Sanofi Pasteur, which manufactured the shots I was given. If he had worked totally for free, applying the savings evenly over their revenue, my bill would have been $4 lower.

Continuing our series of helping leaders listen and think better, in this post I share why I recommend Edward de Bono’s thinking hats.

Over 20 years ago, when I was learning my trade as a leader, most management training programs included his technique. However, in recent years, I find that it’s fallen off the radar. Many analysts and leaders have never heard of De Bono nor his hats.

So, I will use this post to help reintroduce this technique and explain how I’ve seen it help analysts and leaders.

Introducing Edward de Bono and his hats

Edward Charles Francis Publius de Bono (phew, what a name), was born in 1933 in Malta. He has numerous degrees and has published 85 books, mostly focused on thinking and use of language. Indeed, he is the originator of the term "lateral thinking."

One of his most popular techniques for lateral thinking (solving problems by an indirect and creative approach) is called Six Thinking Hats, or 6TH. The technique is based on the idea that there are six imaginary hats. Each hat is a different color and represents a different type of thinking.

When you "put a hat on," you operate exclusively in that mode of thinking. When you change from one hat to another, you change thinking modes. Importantly, everyone thinks the same way at the same time – to avoid conflict.

Why and how 6TH?

DeBono developed the technique having noticed that when critical or contentious decisions need to be made, teams can find themselves in deadlock, stuck in a rut. They end up simply recycling the same ideas or variations on the same.

De Bono chose six hats to cover the different approaches to thinking he’d identified, and he gave them different colors to allow easy association and visualization. Each colored hat represents a particular type of thinking, each with its own rules about that type of thinking.

By requiring everyone to use the same hat – everyone is using the same way of thinking – at the same time. 6TH ensures both that everyone has the opportunity to air his or her views and that every angle of the issue is properly explored. So, you should get a full and open discussion with everyone working together.

Introducing those 6 different Thinking Hats

So, in a 6 hats workshop, a facilitator guides each participant to put on, in order, the following hats:

White Hat (Facts and Information)

With this hat on, you must think about any and all relevant facts, the data you can observe or have already captured. You look at what is already known and any information gaps you identify -- a great place to start for data and analytics teams. The workshop works best if robust data has been filtered and curated beforehand so you know you are on firm foundations. This hat is white because of the association with white paper for printed facts.

Red Hat (Feelings and Intuition)

This hat is about feelings, insights and intuition. So, you feel free to share your emotions and impressions. You focus, through discussion, on what people feel about the issue – including gut instincts. Importantly, there is no need to rationalize or explain your evidence for this stage. Red is associated with strong emotions, which are captured on flip-chart/Post-It notes/digital whiteboard.

Yellow Hat (Benefits and Advantages)

With this hat on, you all focus on being optimistic. What could go right? What’s the best that could happen? Together, you capture possible advantages, benefits or opportunities. This can be really fun for the more positive extroverts in the group. Yellow is used because of its association with sunshine and positivity.

Black Hat (Caution and Problems)

Like a yin to the above yang, this hat is all about being a pessimist or at least a risk manager. What could go wrong? Why wouldn’t that other idea work? As a group, you focus on the problems, risks and challenges that you can imagine. Black is not used to be associated with evil or depression, but rather the formality of lawyers' robes. Wearing this hat is like conducting a cross-examination.

Green Hat (Creativity and Solutions)

With this hat on, it’s like the green-fingered getting to work in a new garden. What can you germinate? The team is asked to consider new ideas or build on ones already identified. This stage is most akin to brainstorming or mind mapping in other creative workshops, but with the help of prompts from work done already. Green represents new growth.

Blue Hat (Managing Your Thinking)

Unlike the other hats, this one is worn by just the facilitator, who wears it throughout the exercise to ensure that people understand and follow the process. At the final stage, the facilitator reviews and summarizes the thinking so far and prompts the team to spot themes, draw conclusions and decide on next steps. The color blue is used because of its association with the sky, to represent oversight.

De Bono suggested that these hats could be used in different orders for different needs/challenges. However, the order above is the sequence that I’ve found most often helps data and analytics teams generate useful new thinking.

See also: How to Train Remote Workers as Teams

How does 6TH help data and analytics teams?

While this exercise may seem to lend itself to marketing or management types, I have seen (and led) sessions where this approach can help analysts, data teams and their leaders break through what have been intractable problems.

You may recall that I have shared before how structured thinking techniques can really help with generating customer insights from analytics. I’ve also stressed the importance of domain knowledge and working with others in your business to improve the quality of your analysis and interpretation.

When working on using data or analytics to tackle an issue for your business or create an opportunity – the technical work alone is rarely enough. A deeper understanding of your business, processes, market and customers is often needed. Following robust analysis or model building, it’s important to take time to think well about what it means for your business and next best steps (the Sign-Off step in my 9-step model).

How will you use 6 Thinking Hats?

For all those situations, I recommend trying this approach. You may well be surprised how well it works in getting the most out of the collective intelligence of your team.

Consumers do not generally enjoy shopping for insurance. This is not surprising, as they are spending money on something that may be required by law but that they hope never to use. Making an insurance claim means something bad has happened: A tree has fallen on a house, a piece of jewelry was stolen or someone has been in an accident. If something bad happens, the insurance is welcome; if nothing bad happens, customers may feel as if their money is being wasted -- like a black hole swallowing their money.

In these socially distant days, an increasing number of insurance purchases are occurring online, which can make a complicated transaction feel even more foreign for consumers. They only purchase once a year and may feel unease as they have to weigh options such as deductibles and whether to purchase coverage for particular perils. These sorts of decisions are easier when a human is with them; in fact, the personal relationship with an agent or broker can be the biggest factor in client retention.

The challenge for insurance industry players is to find ways to create real relationships with customers despite so much of the exchange being digital. Here are some suggestions:

Core Insurance Services Should Be Straightforward

If you are selling and servicing insurance policies, your platform has to make this easy. As consumers use many different systems -- they may start a search on their phone and later move to a laptop or tablet -- your platform has to be flexible technologically. So, the first challenge is very basic: You have to make everything work.

It should go without saying that you have to address the insurance issues. This means designing your website so that everything -- from purchasing insurance to making claims, when necessary -- can be done easily. Let customers know, in advance, what information they'll need to supply, such as a driver's license. You should also design your website to ask them a series of questions so that they can make the best decision. For example, if their car already has a few dings and dents, they may want to skip the collision coverage. Also, encourage them as they go through the different pages with phrases such as, "Just a few more questions, and you're done!"

When people have entered the data, you need to respond quickly. These days, consumers are accustomed to instant gratification; they may expect a quote or a settlement within minutes. When their needs are straightforward, a quote can be generated automatically. However, that isn't always possible; sometimes an application and certainly a claim will require additional review.

If instant gratification isn't possible, make sure you send an email or a text telling the person you have received the submission. Let people know the time frame in which they can expect a response. If there is some delay -- it happens; insurance employees are people, too -- let them know.

When you are ready to complete the transaction, remind customers of anything they may need to do to fulfill legal requirements, such as keeping proof of insurance with them while driving.

All of the above is just a description of the basics. Your company cannot survive without performing these tasks. However, the world is full of competitors, and you can expect others to master these basics, too. To improve customer satisfaction, the type of satisfaction that leads to retention, you need positive, personal interactions, even if those interactions must be socially distanced.

Positive, Personal but Virtual Interactions

Give customers reassurance. First, people buy insurance either because it's required, such as for a mortgage or car, or because they are concerned they may need it. Not only do you need to make sure they have fulfilled these requirements, but you have to give them the assurance that your company will be able to take care of them if it becomes necessary. Words such as, "Welcome to the XYZ Insurance Family, rated A+ by A.M. Best," is a good message to send.

Offer rewards for good behavior. If your customers make changes to reduce their exposure or simply don't file claims, give them rebates. This encourages safer behavior. However, don't just reduce premiums. Let people know you have reduced their premium by sending an email or a letter when it first happens. Congratulate them on being a better driver or a more responsible homeowner. Remind them, too, when they renew and whenever they visit your website. 

Remember important dates. People like their birthdays -- as well as other important events -- to be remembered. If you have the data, and it is not against company policy to make use of it, send a card or an email on significant anniversaries.

Send swag. If you have to use snail mail to reach people anyway, consider sending along some swag with your company logo. Perhaps you can send them a flashlight that they can store in their glove compartment. Perhaps you can send a mask with your logo discreetly placed on it. Perhaps you can send a magnet with useful information in addition to your logo. And, everyone can always use a good-quality pen!

Deliver news they can use. If your customers buy car insurance from you, send tips on driving and car ownership. For example, when do brakes need to be replaced? When are tires safe, and when are they worn out? How often should people check tire pressure? What should they have in their cars in case of an accident? These things are all useful and can increase their safety -- and they’ll appreciate your looking out for them. 

If they’re homeowners, they might want to know what they can do to reduce the risk of fire. Has the family practiced a quick evacuation in case of an emergency? How can people protect themselves from problems such as radon, mold and termites?

See also: COVID-19 and Need for Analytical Insurers

You can send people information that will help them save money on their insurance by informing them of any new offers and programs you introduce (e.g., only pa‌⁠‍y for what you ‬‍‬need). 

A regular email newsletter, with practical tips -- and those tips then stored on the website -- can give customers the sense that they matter and that you are concerned for their safety and wellbeing. A newsletter can also encourage them to take steps to reduce the risks in their lives, which the insurance industry always appreciates.

Conclusion

Your customer touchpoints and interactions are the face of your business -- more so now than ever before -- and the race is on to engage meaningfully via a slew of digital channels. The only way you can effectively cut through the noise of all the COVID-related content? You will need to be relevant and useful to your clients’ situations. Personalized experiences, offers and services will be important. 

Actual employees can be expensive to deploy, but they should still be used, as they can deepen a customer's relationship with your company and improve retention rates. However, the methods of reaching out to customers and personalization mentioned here will help give them the sense that your insurance company is not just there to take their money but is actually there to make their world safer every day. Use them to keep your customers feeling cared for -- even during the pandemic.

After almost a decade working in a large, global bank, I can speak to the challenges faced by all three lines of defense in trying to combat financial crime. I can also attest to the effect these processes had on our clients. As a front-line corporate relationship manager, I frequently had to navigate the know your customer (KYC), remediation and payment screening process for my clients. 

Not only was this an incredibly time-consuming and frustrating process on an organizational level, but more painful was the deleterious effect it had on our clients and their business: Crucial payments to vendors were delayed unnecessarily; accounts took months to open and required incessant back and forth among multiple parties; and account fundings/transactions always came down to the wire because of basic due diligence, regardless how much work you tried to do ahead of time.

Much of the process that required our intervention seemed mundane, repetitive and inefficient, which compounded everyone’s frustration. 

Sound familiar?

These types of repetitive, mundane tasks are ideally suited to be outsourced to artificial intelligence, which the industry seems to now realize. 

Artificial intelligence can be an incredibly valuable tool, in that it can offload mundane tasks, provide insight into customer and employee behavior, create more standardization and help reduce or manage costs.

But as technology becomes increasingly sophisticated, there are many factors to weigh in the decision-making process. 

After countless conversations with stakeholders and decision makers in the industry, I have learned that there are five main concerns when implementing regulatory technology, especially AI technology, in the financial sector: 

1. How transparent is the AI? 
2. What if the AI learns the wrong behaviors, such as bias?  
3. Does it have more than one purpose? What is the road map?
4. Is it better than what I have now? More accurate, faster, more standardized, more cost effective? Can "better" be tested quantifiably?
5. What are the redundancies? How will this technology affect my operational resiliency?

Let’s look at each point in order.

1. How transparent is the AI? 

While this seems like a straightforward question, “transparent” really encompasses three separate factors:  

• Will my team and our stakeholders be able to understand how it works? 
• Will I be able to easily demonstrate to audit, the board and regulators that it’s doing what it’s supposed to do?
• Can I get a snapshot of what is happening at any given moment? 

See also: Stop Being Scared of Artificial Intelligence

All of the major regulators have stipulated that artificial intelligence solutions be explainable and demonstrable. Both of these concepts are rather self-explanatory but still worth exploring.

Explainability 

It’s not sufficient for your compliance team to understand how the AI makes decisions. They also need to be comfortable explaining the process to key stakeholders, whether they are board members, the internal model committee, audit or the regulators. 

If your technical team can’t understand the technology or how decisions are made, or if the vendor claims confidentiality to protect its IP, this is a cause for concern.

Demonstrability

Like transparency, demonstrability captures a few components - it means you have to be able to demonstrate:

• What decisions the AI has made; 
• What changes you’ve made to how the AI makes decisions; and
• Who made the changes.

This is where an audit trail comes into play. First of all, is there one? If so, is it immutable, and does it capture all actions in the AI or just some of them? Is it exportable in report format, and, if so, is the report readable and can it be easily understood?

Compliance is a data-driven world, and the risk associated with being deemed non-compliant is substantial. Being able to capture and export changes to, and decisions made within, your AI is crucial to your relationships with your stakeholders.

As personal liability expands in the corporate world, board members and committees increasingly require an understanding of not only how compliance risk is being mitigated, but also clear evidence that it’s being done, how and by whom.

2. What if the AI learns the wrong behaviors, such as bias?

The underlying questions here, without detracting from the very serious concern about embedding existing unconscious bias into your AI, are:

• If the AI is wrong, or my requirements change, can I fix it? How easily? 
• What impact will tweaking the AI have on everything it’s already learned?

An industry journalist recently asked me if I thought bias was a problem with AI. My answer to her, and to all of you, is that AI simply learns what’s already happening within your organization. As a result, unconscious bias is one of the things that AI can learn, but it doesn’t have to be a problem. 

While you can’t really prevent AI from learning from past decisions (that’s kind of the point), good technology should enable you to identify when it’s learned something wrong, and to tweak it easily to prevent bad decision-making from becoming embedded into your AI’s decision making.

This ties in to the need for transparency and reporting. It’s not only necessary to see how decisions are made, you also need to be able to prevent poor decisions or bias from being part of the AI’s education. And all of these things need to be documented. 

When testing new vendors, once the AI engine has been trained initially for your proof of concept, you should be able to clearly understand the findings and be able to make changes at that time (and thereafter). You will very likely be surprised by some of the ways decisions are currently being made within your organization. 

For example, at Silent Eight, our technology investigates and solves name and transaction alerts for banks. This work is typically done by teams of analysts, who investigate these alerts, and close them as either a true positive (there is risk here) or false positive (there is no risk). True positive alerts require substantially more time to investigate and close than alerts deemed to be false positives. 

Analysts typically have KPIs around the number of alerts they’re expected to investigate and close each week. 

By late Friday, the analysts are doing everything they can to make sure they meet this quota. As a result, it’s not unusual during the AI training process that the AI learns that 4pm on Fridays is a great reason to close out pending alerts as false positives. 

Obviously this is a good example of AI learning the wrong behavior and needing to be tweaked. It’s also a good example of mistaking correlation for causation, which is a topic worthy of its own examination on another day.

Today, as regulations are introduced and amended, you’re continually updating your policies to reflect these changes. It’s no different with artificial intelligence. It’s imperative that your AI engine is correspondingly easy to tweak, and that, when you tweak it, you don’t lose everything it has already learned. 

Thoughtful, well-designed technology should be built in a manner that makes it easy to update or amend part of the AI engine, without affecting the rest of the learnings. This is something you should both ask about, and test.

3. Does the AI have more than one purpose? What is the road map?

Many financial institutions have the dueling mandates to be both innovative and transform digitally, but also to rationalize vendors. So, when considering artificial intelligence solutions, which are often niche, it’s worthwhile finding out:

• How the vendors decide to build out features;
• Whether they are willing to customize their offering for you;
• How reliably they’ve delivered on features in the past; and
• Whether what’s on their road map adds value for you.

This way you can ensure that the decision you’re making is one that is future-proofed and set up for longevity.

See also: 3 Steps to Demystify Artificial Intelligence

4. Is it better than what you have now? 

Better can mean different things to different organizations and individuals. It’s typically tied into the problems you’re experiencing now, and what your organization’s strategic focus and priorities are.  When I ask clients and prospects what they mean by ‘better’ the answers I hear most commonly are:

• Is it more accurate?
• Is it faster?
• Will it give me greater standardization?
• Will it enable me to identify more risk?
• Will it enable me to federate by jurisdiction?
• Will it lead to greater efficiencies?
• Is it more cost-effective?
• Does it increase my visibility? I.e., is it transparent?

Once you’ve defined what "better" means to you and your organization, you need to find out from your prospective vendors if and how "better" can be tested quantifiably. 

5. What are the third-party dependencies? How will this technology affect my operational resiliency?

Operational resiliency and third-party due diligence have become a significant focus in the industry and can be a barrier to doing business.  Many regulators, including the EBA and the FCA, have issued guidelines on the topic, and continue to revisit it.

It’s vital to understand if a vendor is reliant on any other vendors in its tech stack, if it's using open source code, what the deployment is (on premise, in the cloud, in a private cloud) and what security standards the vendor adheres to.

Take back the things you can control 

Right now, the financial services industry is beset by many challenges that are outside of its control, including low interest rates, working remotely, bad debt provisions and the increased new accounts and suspicious activity resulting from COVID. 

Your compliance costs and processes are a piece of the puzzle you can control. Good artificial intelligence technology will enable you to offload some of your mundane, repetitive tasks, freeing you and your team to focus on more complex risks and higher value projects. 

I recognize that artificial intelligence can be a bit daunting, and that it has a mixed reputation in the industry. However, if you’re armed with a dose of skepticism, have the right questions to ask and approach it with an open mind, you’ll be amazed by what it can do.

Normally, July and August are fairly quiet in the insurance industry --- but was not the case this year! Bold moves are abounding, by both new and traditional insurers alike, setting a new pace in creating the future of insurance and distribution. 

In this new era of insurance, nearly every insurance process is rapidly becoming frictionless, including buying. If channels are easy to use with products that are easy to understand, then insurance has the opportunity to grow through a friction-free experience. The benefit is that we move from needing to constantly go out and “sell” people on insurance to introducing insurance that is ready to be “bought” seamlessly at the point of need.

This is a sustainable business model, where, instead of perpetually fighting for prospects and leads, we are perpetually making insurance easier and more appealing to buy. 

Multi-Channel Is the Mantra for the Future of Distribution

Changing customer expectations and behaviors are rapidly pushing insurers into a multi-channel world, whether they like it or not. This requires a rethinking of their strategy and how they partner with others to reach customers in new ways – creating a porous market, where engagement is everything and the relationships among partners, insurers, customers and channels is crucial. 

In our newest thought leadership based on primary research with buyers of auto and life insurance, the agent and broker channel is still a top choice for both the younger generation of millennials and Gen Z and the older generation of Boomers and Gen X, with 74% to 80% indicating they would still use this traditional channel. But that is where the commonality ends. 

Unsurprisingly, members of the younger generations are open to buying insurance from a wide array of options. For auto insurance, 66% of the younger generation is interested in it being part of the purchase of the vehicle as compared with 52% of the older generation. 64% of the younger generation versus 52% of the older generation would buy from the auto manufacturer’s website or app. 

For life insurance, 54% of the younger generation would buy insurance via a fitness app, as compared with only 38% of the older generation.

For both auto and life insurance, the younger generation is very open to buying insurance from Amazon; 56% of the younger generation would do so, as compared with 46% for auto and only 38% for life by the older generation. 

The interest and acceptance of a wider range of purchase options underscores why insurers must consider when, how and where they interact with the younger generation, and to be there with timely purchase prompts. This is where having partnerships and an ecosystem becomes very strategic in helping insurers expand their reach and presence to where their customers will be.

Leaders Making Bold Moves

A number of announcements by some leading insurers about new partnerships will accelerate improvements in the customer experience, expanding distribution reach and the ability to buy seamlessly at the point of need! 

John Hancock announced the integration of its Vitality Program with Amazon Halo, allowing Hancock’s Vitality customers to use the Amazon Halo Band to earn vitality points based on their daily efforts for a healthier lifestyle that should mean a longer life. The Amazon Halo Band, a wearable health and wellness device, will measure and analyze users’ activity, heart rate, sleep and tone of voice to provide individual health insights and help encourage healthier habits – thereby earning users Vitality points. 

State Farm announced a partnership with Ford for usage-based insurance (UBI) using the auto telematics and connected data from eligible connected Ford vehicles. Ford vehicle owners will be able to opt in to State Farm’s Drive Safe & Save program, which aligns premium to miles driven while also rewarding safe and good driving behavior with potential discounts.

Tesla announced plans to harness the data from its cars and drivers to build a “revolutionary” insurer that provides better insurance value and also to help adjust the design of cars to make them safer and less costly to repair. Tesla believes the accuracy of the data from the car and driver behavior is “at the heart of being competitive” with insurance that looks forward, not backward. Uniquely, Tesla wants to assess the vehicle damage data to create a continuous loop of adjusting the design of the cars to make them safer and less costly to repair, which will further drive down the insurance cost.

Amazon had two interesting moves. First, Amazon’s India business is now offering auto insurance through a deal with Acko General Insurance (Amazon is an investor in Acko) to cover car and motor-bike insurance in India, marking Amazon’s entrance into auto insurance. Second, Amazon Web Services (AWS) and Toyota's Mobility Service Platform (MSPF) announced a collaborative mobility insurance program. AWS leverages its cloud platform and consulting to access and analyze Toyota and Lexus vehicle data and driver behavior, another step forward in a program to offer insurance to Amazon customers. 

See also: Digital Distribution in Life Insurance

Expanding Partner Ecosystems Separating the Leaders from the Pack

With these and other examples, market boundaries are no longer clear. They are shifting and, in some cases, evaporating. The combination of technology and customer expectations is directly affecting insurance by altering the traditional ecosystem of agents and brokers – who, yes, are still relevant – to have insurance embedded or sold differently across a broader ecosystem including automotive, transportation businesses, big tech and more. 

By doing so, these partners are breaking down business and market boundaries to make the ecosystems operate fluidly, based on the customer needs and expectations for both the risk product and other value-added services. This, in turn, creates greater value for these insurers due to new revenue streams and access to a broader market through the multiplier effect. 

The Future of Distribution Is Multi-Channel

For decades, agents and brokers have been the channel of choice for P&C and L&A insurers. This decades-long choice and channel landscape, however, is rapidly shifting and changing, driven by a number of factors, but especially customers and partner ecosystems. Customer expectations are shifting to a multi-channel world, challenging insurers to provide channel options and choice, whether directly or through partners. Multi-channel distribution options enhance customer interactions on the customer’s terms … not the insurer’s.

What are the inhibitors to establishing a multi-channel strategy?

• Current business models remain aligned with older generation buyers, not the younger generation. 
• Many insurers remain focused only on the agent/broker channel and lack plans as a way forward to a multi-channel world in terms of strategy, technology and partnerships. 
• Many insurers do not have next-generation distribution management capabilities – often still operating with home-grown solutions or multitudes of spreadsheets. These insurers lack depth of core distribution capabilities from on-boarding, licensing and appointments, compensation and incentive schemes, automation and data insights to effectively optimize a multi-channel distribution strategy, let alone to be competitive in attracting new partners.
• The lack of digital, next-generation technologies inhibits the ability to easily build a partner ecosystem, embed insurance offerings and more.

The result is that insurers’ ability to expand and effectively support new channels is beginning to redefine new leaders in the industry. In our Strategic Priorities research from earlier this year we found Leaders – those focused on new channels, partner ecosystems and technology – are well out ahead of Followers and Laggards. Leaders are expanding channels at a staggering rate of 20% more than Followers and 60% more than Laggards – expanding market reach and the ability to acquire and retain customers and revenue.

Market success increasingly depends on multi-channel strategies, including how to support the traditional agent/broker channel and new strategic partnerships are crucial to insurer’s ability to maximize growth strategies today and in the future. Insurers must master the science and art of making relevant and timely digital connections with customers who are motivated by life events and make it easy and satisfying for them to purchase insurance.

A distribution strategy and ecosystem are foundational to bring together a range of distribution and digital capabilities, channels and partners that will exponentially expand reach, brand and customer engagement while meeting the customer expectations of a digital, multi-channel world. Watch our webinar, The Future of Distribution Management – A 3D View, to learn how P&C and L&A insurers are using a 3D strategy (digital, data, distribution) to manage this changing distribution landscape.

See also: Modernizing Distribution – Now

In this new era of insurance, market leaders are experimenting with new opportunities. They are establishing new strategic partnerships. They are offering innovative products. They are experimenting with offering insurance when and where customers want it. They are experimenting with direct distribution. They are still committed to agents and brokers, but they are evolving to a multi-channel world. 

Market boundaries are being redefined. The combination of technology and customer expectations is directly affecting insurance by altering the traditional ecosystem of agents and brokers, to have insurance embedded or sold differently across a broader ecosystem, including wellness, health, financial services and other entities. 

How does your business strategy align to what leaders are doing? What is your multi-channel strategy? Will your technology support your strategy? What specific plans can you take to improve your odds of success? 

In my previous article (New Operating Model for Insurers (Part 1)), I set out the steps that an insurer can take to redesign its operating model to meet its new business priorities. Here, I’m going to offer some observations on what that new insurance Target Operating Model might look like.

My core assumption is that the insurer wants a model that focuses on delivering a high-quality customer experience at a reasonable cost.

To keep it manageable, I’ll restrict my Target Operating Model's scope to:

• Locations
• People Organization
• Governance
• Major Business Processes
• Key Technologies

…and I’ll go no deeper than the design principles level.

Locations

I’ll start with locations, as this is a hot topic in a pandemic world.

Insurers’ responses to COVID-19 have proved that remote working is a lot easier than many had thought. But I’m not anticipating that “everyone works from home” will often be adopted as a design principle. Why? Because in certain circumstances there are still benefits from, and even a necessity for, some face-to-face interaction. So I would expect to see design principles such as:

• All staff should be enabled to do most of their work without attending an office
• But all staff (or perhaps just certain types or grades of staff) must live within X hours of an office that they can use when needed or when they desire
• Offices must have flexible space catering for individual working and interactions of multiple types and sizes (for example 1:1s, small group meetings, large group meetings, workshops)
• Where possible, staff should be hired in low-cost locations ahead of high-cost locations

Each insurer will need to set its own rules for when staff must attend an office and figure out what its resulting occupancy levels and space requirements might be.

Beyond this, there will be customer expectations or regulatory requirements that compel insurers to have physical offices in locations (typically states or countries) in which they sell. Hence, there will often be a principle that:

• We will locate offices to meet the expectations of both our customers and our regulators

People Organization and Governance

At the level of this article, we can treat these two dimensions together.

As people are replaced by automation, I would expect to see increasingly flat organization structures. So a Target Operating Model design principle might be:

• Our organization structure will have no more than five layers

There might also be a corresponding principle setting out minimum or maximum spans of control.

But if there are few layers, and staff are highly distributed, there need to be ways to ensure that staff work effectively and make smart decisions without being micro-managed. Possible design principles for governance might therefore be:

• The mission, values, goals and objectives of the company are the primary arbiter of whether a proposed action or decision is a good one and must be visible to all employees at all times
• Role descriptions will clarify the limits of a role’s authority and autonomy (its scope, or guard rails), but within those our staff will enjoy a high degree of independence

Of course, a switch to this type of organization is unlikely to be possible without high-quality change management in place.

See also: Should Insurers Use Amazon Model?

Major Business Processes

In A New Target Operating Model for Insurers – Part 1, I offered the following generic insurance value chain, which, at this level of abstraction, covers both P&C and life:

It’s beyond the scope of this article to take each element in turn, but here are potential design principles that could apply to pretty much all of them:

• The process should be customer-centric: designed to fulfill its customers’ needs at the highest quality, at lowest cost, in the shortest time
• The process should be both common and shared across business lines, products and geographies to the greatest extent possible
• Automation (core automation, artificial intelligence, robotic process automation, etc.) should be employed as widely as possible, to accelerate delivery and minimize processing errors
• Unless we possess differentiating expertise in a process or sub-process, it should be outsourced to one or more third parties possessing the appropriate expertise

Some of these customer experience and efficiency themes are explored, in a greater level of detail, on my website focused on the Insurer of the Future.

Key Technologies

I’ve left key technologies until last, as some of the major design principles here depend on the areas already covered.

Here, I would increasingly expect to see design principles along the following lines:

• The primary function of our technology is to automate our Major Business Processes
• The primary non-functional requirement of our technology is that it be secure from external and internal threats
• Our IT systems will be shared across business lines, products and geographies to the greatest extent possible
• Our IT systems will be available to our staff from any location they choose
• Data will be shared across business lines, products and geographies to the greatest extent allowed by applicable regulation
• Unless we possess differentiating expertise in a particular aspect of technology (or its design, development or running), it should be outsourced to one or more third parties possessing the appropriate expertise

It is also possible that design principles at this level might lead directly to additional, more specific, principles such as:

• We will maximize the use of cloud technologies

Technology change is often, of course, the type of change that takes longest to deliver. So it wouldn’t be surprising to see one or more interim Target Operating Models (see New Operating Model for Insurers (Part 1)) as staging points on the roadmap for technology transformation.

See also: 10 Tips for Moving Online in COVID World

* * *

It’s an interesting time for insurers, with the changes to insurers’ business models arising from COVID-19 set against a background of continuing opportunities for digital transformation.

Using the approach set out in A New Target Operating Model for Insurers – Part 1, and developing a set of design principles such as the above, an insurer will be well-placed to design its new Target Operating Model.

And using the specific design principles as a starting point for discussion will help set an insurer on the road to delivering a higher-quality customer experience at a reasonable cost.

Over the last decade or so, there has been considerable investment in innovation across insurance, but one group has been hesitant to follow the path into the age of digitization -- independent agents.

Independent agents have always tied their strength to their personal relationships -- deals made over in-person meetings while grabbing a cup of coffee or lunch. Customer interaction was their bread and butter. Unfortunately for them, COVID-19 has tipped the scales. A business that once thrived on personal connection is now witnessing sales dropping and premiums and commissions decreasing.

COVID-19 has served as a brutal wake-up call. Survival in the era of COVID-19 will be determined by the independent agent’s ability to implement digitization. 

Consumer behavior is shifting 

Independent agents are starting to lose market share. Although direct writers in auto and home haven't replaced independent agents, the direct writers have cut into the channel's share. Many agencies are privately held family companies with modest organic growth, so growth over the last several years has come from consolidation and acquisition.

While personal relationships have limited the need for change, customer behavior is changing. Recent data from Jornaya showed that, across segments, insurance online shopping activity remains strong and since the start of COVID-19 has trended higher than normal. Due to the rise in consumers turning to online resources for guidance, independent agents are running the risk of being replaced by digital brokers and carriers. 

So what has been COVID-19’s impact on business?   

Research from the Independent Insurance Agents & Brokers of America found that nearly 50% of agencies they polled reported decreased revenue for the year; 46% said they had lost commercial clients due to the pandemic.

For many independent agents, a big part of their business is tied to writing policies for small businesses, which have been hit significantly by COVID-19. Consumers have been working to save wherever they can, which for some means cutting back on insurance policies or withdrawing from policies altogether.  

When the global workforce went remote, many independent agents were still in the office because they were unequipped to work remotely. Lack of access to digital products and Voice over Internet Protocol (VOIP), combined with the inability to meet with clients face-to-face, has been far more damaging to agents than many anticipated.

Some carriers have tried to support agents and customers and solve for COVID-19’s challenges by offering benefits such as profit-sharing advances, carrier-based service models, low-driving discounts and more online resources. Many carriers have also worked to adapt a hybrid work from home/office model and have invested in cloud-based solutions to better equip their agents to work remotely.

See also: New Digital Communications

Jumping on the digital bandwagon 

If COVID-19 has taught us anything, it's that business as usual is no longer possible for independent agents. But they have lacked the resources to change fast enough.

Agency principals need to recognize that COVID-19 has jump-started the need for investment in digital innovation. There are five things all independent agents can do: 

1. Know your customer: Read the data on consumer behavior and acknowledge the need to serve customers in the manner they choose.
2. Borrow resources: Review what carrier partners offer and take advantage of tools that can help support day-to-day business operations, including cloud and agency management systems (AMS). 
3. Model from other industries: Offer your customers access to the same tools and technology resources that are available to them during other service and business transactions (e.g., with banks, healthcare providers and mortgage lenders). 
4. Create a digital agency: Provide customers with a way to transact digitally on servicing, product cross-sales and online binding. 
5. Invest internally: Make sure that employees as well as customers have access to updated technology, including laptops, mobile devices and cloud solutions, and offer training on new resources. 

Many new entrants to the insurtech space including Hippo and Clearcover are already recognizing the distribution value of independent agents and have started appointing those that are willing to step outside of the carrier comfort zone for tech-first providers. 

See also: New Sense of Urgency on Going Digital

Digital transformation will make independent agents stronger in the long term; they just need some guidance on how to reinvent themselves and their business structure. If agents invest in the right tools, the combined value of a personal and digital relationship with customers will enable independent agents to compete and grow.

An Early Taste of Climate Change Disrupting Insurance Paul Carroll, Editor-in-Chief of ITL There’s a line that I first heard only a few months ago but keep running across: You may think you have a 30-year mortgage on your house, but you really just have a one-year mortgage. Why is that? you ask. Because you have to renew your homeowners insurance every year, and your house is only affordable if your insurance is. In the vast majority of cases, homeowners have nothing to worry about. Their premiums will change modestly from year to year. But those on the front lines of climate change — along coasts, where water levels are rising, and in parts of the country where wildfires are escalating and violent storms may become more frequent — may face sudden changes that could even put them out of their homes... continue reading > Complimentary Q&A Panel The Future of Smart Property and Insurance  Watch Now SIX THINGS How ‘Explainable AI’ Changes the Game by Dustin Oxborrow AI often performs its magic with little insight into how it reached its recommendations. "Explainable AI" makes all the difference. Read More The Future Isn’t Just for Insurtech by Dan Epstein The new promise — the modern concept of insurtech — is a strategy driven by collaboration and innovation rather than disruption. Read More ‘Virtualizing’ Your Customer Service by Fara Haron For the insurance industry, meeting increased customer demands with excellent service requires the right combination of technology and training. Read More New Operating Model for Insurers (Part 1) by Alan Walker Taking a few key steps will enable an insurer to resolve its operational challenges and lay the foundations for future success. Read More COVID-19 and Need for Analytical Insurers by Dave Ovenden Stronger analytics can assist insurers through the COVID-19 crisis, and create building blocks for longer-term business benefits. Read More Of Independent Agents, Heirloom Tomatoes by Kate Terry Direct vs agency is a silly fight. Neither channel maps cleanly to customer preferences. Both have advantages and disadvantages. Read More GET INVOLVED Write for Us Our authors are what set Insurance Thought Leadership apart. Get Started Partner with Us We’d love to talk to you about how we can improve your marketing ROI. Learn More SPREAD THE WORD Share Share Tweet Be Innovative Learn about Notion's easy-to-launch programs to get started. Learn More SUBSCRIBE TO SIX THINGS

There's a line that I first heard only a few months ago but keep running across: You may think you have a 30-year mortgage on your house, but you really just have a one-year mortgage.

Why is that? Because you have to renew your homeowners insurance every year, and your house is only affordable if your insurance is.

In the vast majority of cases, homeowners have nothing to worry about. Their premiums will change modestly from year to year. But those on the front lines of climate change -- along coasts, where water levels are rising, and in parts of the country where wildfires are escalating and violent storms may become more frequent -- may face sudden changes that could even force them out of their homes.

California, the bellwether for so many things in the U.S., is again in the lead on this insurance issue, showing how very complicated it will be.

Wildfires have burned more than 2 million acres in California this year. That is already an annual record even though September and October are historically the worst for wildfires.

The possibility of wildfires has put some 800,000 homes at risk of becoming uninhabitable because of soaring insurance premiums or of having insurers simply decline to cover them. State regulators ordered insurers not to cancel policies on those 800,000 homes, which are in or near dangerous areas, but the ban expires in December and can't be renewed. As this New York Times article details, insurers, regulators and customers are all working to solve the problem -- but not having much luck.

Data suggest that, in other areas, insurers are canceling policies or pricing homes out of the market. As the Times reports, "The number of households buying coverage from California’s high-risk insurance program, a costly and bare-bones alternative for people who can’t get private coverage, has increased by more than 50% between the start of 2019 and June 2020, to almost 200,000 households."

And even that program is becoming less accessible: The article adds that the program "has asked the state for permission to raise its rates by 15.6%, after initially seeking an increase more than double that amount."

Obviously, insurers need to be able to price based on the risk associated with each home, but it's not that simple. People demonize insurance companies that pull out of a market or that jack up rates after a disaster -- and people vote. So, regulators -- at least, those who want to be reelected or reappointed -- tend to limit rate increases and may block cancellations.

California has a further wrinkle (as it so often does): Insurers are only allowed to use historical data when underwriting policies. So, even though projections are for the fires to keep getting worse as the climate heats up, that information doesn't count -- it can't be used in pricing.

State lawmakers attempted a compromise that would have let insurers use projections and incorporate some other costs into pricing, if insurers would make coverage more widely available and provide incentives for measures that would reduce fire risk. But consumer groups argued that the deal was too favorable to insurers, and it eventually fell apart.

Economics has to win. There's no alternative. Assuming that climate change continues to worsen the wildfire threat in California and elsewhere, insurers will have to increase rates a lot or drop coverage, and homeowners in endangered areas will have to harden their properties to greatly reduce risk, pay those higher rates or move.

As I noted in last week's Six Things, some 43,000 homeowners have already taken buyouts from the federal government and relocated rather than continue to fight nature in areas being inundated by coastal waters. A similar shakeup will have to account for wildfire and perhaps other types of storms, such as the derecho that damaged millions of acres of Iowa farmland last month and will reduce this year's harvest by 25% to 50%.

But economics won't necessarily win any time soon. The failure to reach a compromise in California suggests that the state will muddle along, with consumer groups and insurers at odds and with regulators caught somewhere in the middle.

Muddling along is hardly ideal. A clear vision that could lead to an actual plan would be far preferable. But the best I can suggest is that those of you who don't live in California and don't have to experience the dysfunction directly should keep an eye on what we go through. Lots of insurers, regulators and homeowners will likely have to confront issues related to climate change, so you might as well learn from the mistakes by those of us in California so you don't have to make all of them yourselves when your turn comes.

Stay safe.

Paul

P.S. Here are the six articles I'd like to highlight from the past week:

How ‘Explainable AI’ Changes the Game

AI often performs its magic with little insight into how it reached its recommendations. "Explainable AI" makes all the difference.

The Future Isn’t Just for Insurtech

The new promise — the modern concept of insurtech — is a strategy driven by collaboration and innovation rather than disruption.

‘Virtualizing’ Your Customer Service

For the insurance industry, meeting increased customer demands with excellent service requires the right combination of technology and training.

New Operating Model for Insurers (Part 1)

Taking a few key steps will enable an insurer to resolve its operational challenges and lay the foundations for future success.

COVID-19 and Need for Analytical Insurers

Stronger analytics can assist insurers through the COVID-19 crisis, and create building blocks for longer-term business benefits.

Of Independent Agents, Heirloom Tomatoes

Direct vs agency is a silly fight. Neither channel maps cleanly to customer preferences. Both have advantages and disadvantages.

I was recently chatting with someone who insisted that we needed to sell directly to consumers to be successful…you know, like Progressive.

Progressive is where I cut my teeth on insurance, but it’s been years, so I grabbed the annual report:

Source: Progressive’s 2019 annual report

Yup, of the plain old auto policies in force, 47% were sold through independent agents.

My friend and I also had a nice chat about farmers markets. You know, where, at least pre-COVID, people would walk around with their “Shop Local” reusable bags and buy $5.99-a-pound heirloom tomatoes?

Shop local, but not for insurance?

Turns out we’re oversimplifying again.

Tomatoes come in varieties, insurance buyers don’t. There is no such thing as a direct consumer or an agency consumer.

This is kind of crushing if you’re proud of the insurance company you work for:

If you ask the first 10 people you find in the street who their insurer is, maybe four will give you an accurate answer. (Unless you’re standing outside an insurance convention, back when we used to have those). Another three will give you the name of a company they used to be insured with, or whose commercial they last saw. The last three will give you the name of an agency, which they may not actually be insured through. These numbers are approximate, of course, but they are close.

Even more dispiriting is if you choose 10 of your own customers and ask the same question….and get roughly the same set of answers.

Uh-oh. So, customers don’t care enough to remember who they bought insurance from?

This isn’t to blame consumers. Quick, last time you went to the emergency room for yourself or a loved one, what was the name of the medical professional who was most involved in your treatment?

Yeah, most of us have no idea, and it’s not because a medical emergency isn’t important. It’s just that the name doesn’t stick because it generally doesn’t matter – so long as the ER is staffed correctly, there’s someone to treat you. Similarly, so long as you’re insured, you’re fine. (Until you have a claim, which most customers won’t most years, and then fingers crossed…)

This lack of recollection also means that there are very few customers marching around insisting that they purchase insurance from a carrier that sells directly vs. through an agent.

Rather, people are just looking for what fits best in their lives.

People buy insurance based on the experience they are looking for and what’s easily available to them, at the point they want to buy in the context of their own lives.

• It might be the web search that they can do at 3am when they’re endlessly rocking the baby.
• It could be the person they can call who can explain what the heck they need to buy to make sure they’re covered if they hit a deer again this year.
• It could be the person who can switch around the day their payment is withdrawn when they take a new job and payday changes.
• It could be the friend they golf with who can explain what they need now that their general contracting business is expanding.

Note that none of these are specifically the purview of an agency or direct-to-consumer business.

There are agents with fantastic digital presence serving that 3am customer, and there are salespeople from direct-to-consumer businesses playing in the local charity golf tournament.

Yeah, the specifics of your economics just don’t matter to your customers, only whether you can provide what they want at a competitive price.

The economics of agency and direct businesses have different patterns, but aren’t that different overall.

No, it’s not cheaper to sell directly. And it’s not cheaper to sell through agents.

How can that be?

Well, you have to reach, sell to and service customers somehow, and that either costs Google Adwords and web development and call centers or it costs commission and co-marketing.

Again, consumers couldn’t give one whit about the line items in your acquisition or operational expense. They just know how they want to be served, and they want the cheapest prices they can find, too.

If Facebook suddenly started giving insurance advertising away as a social good, direct-to-consumer insurance would get cheaper. Customers would migrate that way, some agents would start accepting less commission to stay afloat and other agents would deploy sophisticated Facebook advertising campaigns. Net/net, you end up in the same place, where the pricing algorithms might be different but price levels are pretty much the same for a given consumer in either channel.

The reverse is true, too. Should digital advertising double in price, direct prices will increase, agents can ask for more commission, etc.

That’s not to say that the economic gambles aren’t different – upfront acquisition expense then work to maintain retention vs a more or less level commission year after year - just that the cost of customer acquisition to lifetime value is close to the same for a given product and segment.

See also: A Quarantine Dispatch on the Insurtech Trio

Finally, you can’t disintermediate a channel without somehow paying for the services that channel provides.

This is why “traditional broker-based insurance incumbents” (a term from Lemonade’s recent quarterly earnings call) as a pejorative is just, well, silly.

Where there are old monopolies, sure, you can squeeze costs out of a channel quite a bit (see Warby Parker). And if consumer shopping tastes change, you can replace a channel. Well, some small fraction of a channel in big markets where consumers have lots of different preferences (see Allbirds and Rothys), or nearly the entire channel if those preferences replace older shopping patterns (Netflix).

But, when there is variety in consumer preferences, those customers can be served in multiple ways by different channels. When the channels don’t just provide acquisition, but also counsel, peace of mind and simplification of product complexity (which is a topic for another day…), you can’t just replace them without paying to serve the same functions somehow.

And that’s why direct vs agency is a silly fight – neither channel maps cleanly to customer preferences, and they both have their advantages and disadvantages.

Like so many other things in life, your success depends on how well your goals and your actions align.

The companies that succeed are not those that are dogmatically direct or agency for no good reason.

They are the companies that know specifically which insurance buyers they are serving, how those customers want to be served AND how to build profitable insurance operations.

That, after all, is what supports both your customers and your channel in the long run.

It's not about us; it's about them.