If the buzz of the P&C insurance conference circuit is to be believed, whizbang new technology and “big data” analytics provide the answers to every problem the industry has ever experienced. More precise risk projections, streamlined customer service functions, 24/7 automated support, claims investigation – they’re all getting better with new technology, and the industry is investing heavily to keep pace. However, while there is no question that carriers need to build better technology and secure better data, neither technology nor data alone will fundamentally improve the customer experience. According to findings in the 2018 U.S. Property Claims Satisfaction Study from J.D. Power, a positive customer experience isn’t driven by which carrier has the slickest photo app, uses drones to survey properties or has streamlined the first notice of loss (FNOL) process to be highly efficient. Instead, customers want to feel their carrier has their back in a time of stress or crisis. Customers simply want to understand that everything is going to be okay; they want to know how the claim process will run; and they want someone to care enough to keep them informed about their loss. Technology can fill some of these customer needs, but before the technology or any type of enhanced processes can be effective, someone must set the right expectations. See also: 3-Step Approach to Big Data Analytics  Consider the Insurance Information Institute’s evaluation of homeowner claims from 2011 to 2015, which indicates that one in 15 insured homes has a claim each year. Excluding catastrophes, the claim frequency for homeowners is quite small, which means most customers have no idea what to expect when they have a loss. Beyond their lack of claim experience, there is also the emotional toll a homeowner loss takes on a customer. The empathy and guidance provided when a customer reports a claim can truly determine whether the customer’s claim experience will be successful. Regardless of the severity or nature of the loss being reported, the carrier must set the right expectations at the beginning of the process. The customer needs to understand what will be covered, how the process will work and how long the claim process will take. Once these expectations have been set, the carrier must effectively manage the process to ensure the schedule is being met and communicate with the customer about whether the process is on track, or, if it isn’t, communicate even more frequently and in more detail. J.D. Power research on property claims has found that customers whose claim took more than 18 days to settle – which would normally create a very low customer satisfaction score – are more satisfied with the process than are those customers whose claims were settled in less than five days. The difference in satisfaction scores is based on having met customer expectations (in fact, the customer satisfaction delta in the 2018 J.D. Power study between meeting customer expectations and missing them is more than 100 points). Creating a speedy process without setting the right expectations does not improve customer satisfaction. If anything, a speedy process can hurt. Setting the right expectations leads to creating the right experience. To a claim professional, a simple fast-tracked water claim may be part of their daily routine, but for the customer, such a loss could be the worst thing that has happened to them in a long time. Without showing empathy for what the customer is going through, the process might be efficient, but it likely won’t be effective. Artificial intelligence technology can certainly help align the right adjuster to the kind of loss being reported, as well as scrub the claim for potential fraud, help align reserves or even trigger a faster payment. However, there also must be a human element to the process. For many carriers, the agent is the source for this empathy and is generally the one to set the level for customer expectations. Yet, as more claim operations move to a direct digital or customer care center, the FNOL process is shifting from the agent (who normally has a personal relationship with the customer) to a faceless website or a call center, where in many cases the process overrides the personal experience. A digital FNOL or a call center is not necessarily a bad approach. Indeed, quite a few carriers have successfully used these channels to handle claims, and digital with a call center or chat function is certainly the wave of the future. But without some personal way to create a level of empathy, the resulting lack of concern and guidance creates a customer who does not feel comfortable with what is happening. When such a customer doesn’t feel at ease, customer satisfaction suffers. Even Gen Y customers (who embrace technological transactions more readily than older customers) find a personal touch at the time of the loss to be a more satisfying experience than using a digital FNOL process. Throughout the claim process, the carrier must maintain a clear, active line of communication with the customer. Simply sending a text notifying the customer that something has changed with a claim is not a sufficient level of communication if the carrier wants to provide a high level of satisfaction. Such a text needs to be informative by letting the customer know what has changed, as well as include what effect it might have on the claim (either good or bad), and it must provide enough information so that the customer doesn't feel the need to call the agent or the carrier. See also: Strategies to Master Massively Big Data   J.D. Power’s insurance industry research affirms that carriers with the most successful claim operations understand how to balance the customer experience with the need for internal efficiencies. Using technology and data analytics as tools to reduce the level of stress and effort for their customers is a clear pathway to developing not only a strong customer experience, but also an enhanced return on investment.

The investment and activity related to the insurtech movement that began about four to five years ago show few signs of abating. If anything, the movement is moving into a new phase. But before even evaluating whether insurtech is maturing, it is important to set some definitions and boundaries. Although some consider any tech firm with insurance solutions to be “insurtech,” for our purposes, we are focusing on recent insurtech startups, typically those that have been launched in the last five years. The question posed here is whether these startups are collectively maturing and moving beyond the initial stages of a startup effort.

To answer that question, I will conduct my own point-counterpoint before drawing a conclusion. There are arguments to be made that insurtech is maturing, but a case can also be made that it is still nascent and, dare I say, immature?

See also: Where Will Unicorn of Insurtech Appear?  

Yes — Insurtech Is Maturing

A strong case can be made that insurtech is maturing. For starters, we are almost five years into the activities related to insurtech, and much experience has been gained by entrepreneurs, investors, insurers and others. In the early days, there were a small number of new ventures and limited involvement by incumbent insurance industry players. Now there are more than 1,200 insurtech startups that SMA tracks, approximately 50 (re)insurers with insurtech investment arms and many more insurers engaging in partnerships, pilots and insurtech strategies. Although there are still new insurtechs being regularly announced, the total number has stabilized in the range of 1,200 due to exits of various kinds. This stabilization, in itself, is an indication that the movement is maturing. Another important development is that winners are beginning to emerge. SMA expects many of the startups to ultimately fail or be absorbed by another entity – perhaps as many as 80% to 90% of the total. But there are currently around 50 that are gaining traction and have the funding to support growth and success in the industry. Eventually, there may be 100 to 200 prominent firms started in the last five years that become more permanent players in the industry.

No — Insurtech Is Still in Early Stages

The counter-argument is also strong – and supports the reasoning that insurtech is still not maturing. Exhibit A for this stance is that there are still only a small number of visible use cases that have made a difference in the industry. True, there are many interesting companies and projects, but there are few case studies that make you say: “Wow!” The impact on individual insurers or overall financial metrics is tiny. Another indicator of the relative immaturity is the lack of industry experience at many of the newest startups. Insurtechs that have been around for a few years have often gained more insights into the complexity of the industry and have brought industry veterans onto the team. And, of course, they have gained their own experience through engaging with insurers over this time. But many of the newer insurtechs still have a negative view of the industry and believe they will disrupt an industry that they see as a dinosaur. A final point in the counter-argument is that there are still vast sums of money set aside in funds to invest in insurtech. Insurers have billions set aside that is not yet invested. New venture funds are being formed even now. Certainly, much of these funds will be allocated to the firms that are emerging as winners, but there will be just as much going into new ventures, resulting in continued momentum over the next few years.

See also: Insurtech Presents Major Opportunities

Conclusion

I don’t want to cop out on the conclusion, but I see elements of both maturity and immaturity in the insurtech startup movement. What we may see is a bifurcation, with a subset of firms producing results, gaining significant funding and making a measurable impact on the industry. In the meantime, there will be a second (larger) group of startups still looking for that big win, that big funding round and the momentum to move them into the winner's circle.

It was 1975. While completing an application for malpractice insurance, a dentist told me his address was 12345 Main St. I commented on how simple it was. He shot back, “So simple even insurance agents can understand it.” In 1994, while speaking about managed care to a conference for librarians, I mentioned the rising cost of healthcare. There were about 250 in attendance. The audience was engaged. Suddenly, someone in the back of the room screamed, “Read the Golden Stethoscope and see what those bastards are doing to us!” I was shocked by this apparent “nut” in the crowd. Looking around, I realized the majority of attendees were nodding in agreement with the “nut.” A few months later, working as the executive director of the Louisiana Managed Healthcare Association, I was at my office. Don, one of my board members, called to say I needed to come to his office right away because two federal agents wanted to talk to us. I did what any of you would have done. I threw up in my garbage can, then went to Don’s office. We met with these two agents for about four hours. They were investigating physicians in two parishes who were allegedly colluding with a hospital to drive patients to their institutions. What they were doing was illegal. Later that week, I spoke to the medical society in one of these parishes. One hundred doctors were in attendance. The doctors had just concluded a meeting that celebrated their leadership in funding a physician-owned HMO. This was a priority because no one was going to tell them what they could or couldn’t do in the practice of medicine. See also: How to Earn Consumers’ Trust   Once introduced as the executive director of the Louisiana Managed Healthcare Association, I began my presentation on Managed Care 101. Ninety-eight of the doctors were polite hosts and a respectful audience. The two other doctors operated in full attack mode. Toward the end of the program, one screamed at me from the back of the room, “I don’t think insurance companies and HMOs should make money in healthcare.” I explained that many people felt doctors were making plenty of money in healthcare and that premiums were too high. I will never forget one doctor’s response. He said, “We’re just getting by.” Ninety-eight of his colleagues bowed their heads in embarrassment. Later, I was told he was grossing $2 million a year. (I wanted to yell, "The Feds are going to get you," but I didn’t.) A November 2012 Gallup survey ranked 23 professions based on the public’s perception of their ethics. Agents rank seventh FROM THE BOTTOM – between legislators and attorneys. Not everyone loves us as much as we love ourselves. The dentist, the librarians, the physicians and the participants in the ethics survey all have their opinions. I’m assuming most see themselves in a positive light but are often suspect of others. This brings me to the point of the story. On TV in 1954, Robert Young played Jim Anderson, an insurance agent, in Father Knows Best. Those were simpler times, and insurance was not the expense that it is today. We now see ourselves as the Main Street agent (adviser), a trusted choice, “like a good neighbor” and other “feel good" personifications. But more and more consumers I talk with are “mad as hell and won’t take it any more” with the cost of insurance. Premium costs, rate increases, larger deductibles and co-pays are breaking our clients. The worst is yet to come. When the National Flood Insurance Program must finally demand actuarially sound rates, and the adverse selection of the ACA finally takes its toll, voters will rebel, and government will gladly welcome the chance to further expand its failed involvement in our industry. See also: Why More Don’t Go Direct-to-Consumer   We can explain all we want. Consumers don’t care. All they want is relief. In my opinion, if we don’t aggressively work to solve the cost problems because we believe nothing can be done, we will lose our industry and agency system as we know it. Peter Drucker stated this clearly in 1993, when he said, “Customers do not see it as their job to ensure manufacturers a profit.” Peter Drucker was a very wise man. Video stores, book stores, travel agents, solo practitioner doctors, full service gas stations, etc. were dumb, fat and happy, and now most are gone. The consumers no longer saw their value. How might consumers spell relief? A – M – A – Z – O – N, or W – A – T – S – O – N or A – I or some other innovation that we can’t even imagine. America's agents need to wake up before it's too late!

Part 2 – You CAN reduce your claims expenses and improve the customer experience. In Part 1, we looked at how your claims processes and systems are a customer experience issue. This time, I will dive into the fact that you can reduce your claims expenses while improving the customer experience. A recent article in A.M. Best’s journal shared a survey that indicated the top two items that needed technology improvement are: --Improving the customer (and agent) experience. --Legacy administrative and claims systems. Reducing the claims expenses of a company does not have to mean a reduction in the customer experience. Improving the customer service or experience does not mean you need to increase expenses by adding human capital in the company. I have learned that there can be a happy medium. See also: Finding Efficiencies in Claims Process   Here are some questions and thoughts to keep in mind as you and your team evaluate ways to reduce the claims expenses while maintaining or enhancing the customer experience: Does your company have a proactive or reactive digital strategy? Digital strategy and digital capabilities are not the same thing. I believe digital channels and experiences are going to change the insurance industry. You must meet your customers where they are and want to meet. If that is mobile, then you need a way for your customers to process claims on their mobile devices. And not just some functions, all of the claims functions. Have you ever started a process on your mobile device only to go down a path that leads to – “We apologize, that function is not available on our mobile app, please go to www dot…” (You get the point.) It is frustrating, to say the least. Insurtech: Does your company just talk about it, or do you actively engage in it? Talking about insurtech and actively engaging are two different topics of discussion. Here is what I have learned in building businesses. A business is always in one of four phases at a given time: innovating, pivoting, growing or dying. Ask yourself, which category are we currently in? Let's hope it isn’t the last category. Insurtech can help your company with the first three categories. However, you must become engaged. This means reaching out to insurtech companies and taking a new approach by working with them. You may be pleasantly surprised by what they can offer to you, your team, your company, your customer experience and your bottom line. Are your legacy systems hindering innovation, or even preventing it? Let’s discuss item #2 of the A.M. Best survey results. I can tell you from experience; When I inquire about legacy systems at life insurance companies, I hear a sigh. This is not a sigh of happiness, it is a sigh of not wanting to discuss this subject. At all! Most people almost cringe at the thought of discussing the legacy systems. See also: Top 10 Claims Trends That Will Affect 2018   Here are the facts: Your legacy systems exist and are currently a necessary part of the business. They will probably get phased out or updated. This process is going to be expensive. But does it have to be? What if an insurtech recognized this issue as a barrier to entry for its product or offering and decided to tackle the legacy issue head on? What if it could connect to your legacy systems and complete the claims processing functions while delighting and providing WOW to your customers? What if it could accomplish this with minimal resources and at a reasonable price? My point is there are many ways your company can be innovative. If you start to have an open mind and explore some of the insurtech companies out there, you may get all of the innovation your business needs! Stay tuned for Part 3 of this article to learn how your claims process can become a revenue driver for your products.

Picture this scenario: For an hour, you have the undivided attention of an expert in your field with years of experience directly relevant to your current job and your career. How would you spend that time with the expert? Specific answers will vary, but chances are that watching a PowerPoint presentation or reading from a textbook together isn't very high on your list. Yet those passive acts sometimes make up most of an organization's training sessions, leading some to wonder if there is a more efficient way to train employees. A growing number of learning and development pros have found success by turning that model on its head with the flipped classroom approach. With this concept, trainees study material on their own time and spend classroom time working through real-world scenarios and having more in-depth discussions with experts on the topic. The Pros and Cons of a Flipped Classroom Proponents of flipped classroom training argue that traditional “sage on the stage” training sessions squander the valuable and limited time trainees get with subject matter experts. The experts essentially become content delivery vehicles. Even if they present the information in an engaging and informative way, much of their expertise and industry know-how remains untapped as they spend time covering the basics. Traditional training sessions are not ideal for learners, either. In a traditional classroom setting, the lesson can progress only at a single speed. In turn, advanced learners may get bored with the pace and lose interest, while less experienced learners may struggle to keep up. See also: How Millennials Are Misunderstood   In flipped classroom structures, trainers record videos or prepare presentations that trainees watch on their own before the training session. They’re expected to show up to the session with a basic understanding of the material and to be ready to discuss it in greater depth with the trainer and fellow participants. This flipped classroom approach offers advantages that may be compelling to many—trainees can learn at their own pace with relatively basic technology requirements in preparation for a collaborative training session focused on social interaction and tapping the expertise of the subject matter expert leading the training. Potential issues do creep up with flipped classroom learning. First and foremost, trainees must find time to complete the pre-assignments. This means either finding time during the workday to watch videos or being sufficiently motivated to review the material after hours—both of which are easier said than done. There’s also a small technology hurdle to overcome. Trainers need to be comfortable creating the content, and trainees need to be tech-savvy and have the resources to access the content. Can Flipped Classrooms Work for Risk and Insurance Training? The flipped classroom concept has already delivered proven results in school classrooms. In one school that implemented the flipped classroom approach, the failure rate dropped from 30% to 10%, and the rate of graduates going on to college increased by almost 20%. The flipped classroom concept is not new to the corporate world, either, though advocates say it’s still underused. Some companies, including McAfee, are already using it to train and onboard new hires. Others are using the basic concept to flip business presentations and meetings. Many insurance professionals are finding success with the approach, as well. The increased interaction between learning and development professionals and trainees is an obvious benefit for students, and employees showing up with a basic understanding of the material can make sessions less frustrating for trainers. In many cases, the flipped format is actually a better fit for learning industry-specific topics like underwriting or claims because the collaborative environment more accurately simulates the workplace. See also: Time to Formalize Insurance Career Path   It’s important to note that the same pitfalls that exist in traditional classrooms can limit the effectiveness of flipped classrooms. The challenge of developing quality materials still exists for those leading the training, as does the challenge of motivating trainees to thoroughly review the pre-training materials and actively participate in discussions. If you can solve these challenges, however, the format has serious potential to reinvent training, from general onboarding to more specific technical topics. Have you had success with the flipped classroom approach or with giving trainees material to review at their own pace before entering the classroom? Let us know in the comments section below.

"My light bulb moment was when I realized that as important as insurance—and by extension insurtech—is, 'risktech' is the future of technology that will be the most helpful to risk leaders going forward.

"I am not talking about today’s popular governance, risk management and compliance systems framework, but rather the technology solutions that will help mitigate risk by more effectively navigating the digitization of the risk profile of organizations."

This was an insight shared by Chris Mandel, Senior VP of Strategic Solutions for Sedgwick, in a recent article, "Insurtech or Risktech," published by Risk & Insurance. Chris's lightbulb moment came during a discussion that occurred during an event on technology hosted by Siemens in Houston, the result of a collaboration between Siemens and Insurance Thought Leadership.

Chris closes this piece with what amounts to a leadership challenge for risk managers in verticals other than insurance: "The good news is that these solutions are already beginning to emerge…. The remaining question is whether or not risk leaders are up to this new world challenge and how they’ll respond." 

The basis for Chris's challenge to risk managers certainly also applies to corporate leaders across the insurance industry. 

Never before have leaders faced a more demanding or compelling challenge to innovate. But, to do so, they must suspend a host of common beliefs: that an innovator first requires size, a particular culture, an abundance of resources or the completion of internal digitization efforts. 

A few quick snapshots from the Innovator's Edge shows why those beliefs must be set aside.

In a relatively short list of technology-based firms, the total funding into their success exceeds $78 billion, spanning 2,096 firms. Look at the mix of technology applications.

Many fall outside of what many might classify as insurtechs, yet, to echo Chris’s phrase, these are very much "risktechs" in that many of these early-stage firms will affect risk—and by extension the insurance industry—to a far greater degree than many of the process improvement benefits being delivered to insurers via insurtechs. Note that many of these companies started with teams of less than five, yet will deliver massive amounts of innovation without meeting many of the common beliefs about how to produce it. 

To highlight the need for broader thinking about innovation, consider the next chart, based on 547 early-stage entities with a funding total exceeding $29 billion. This chart shows that the funding supporting autonomous vehicle startups exceeds the selected insurance categories combined.

While insurtech companies will yield benefits to insurance operations in the near term, in the long term the application of "risktech," such as autonomous vehicles, potentially rewrites the rules of the entire insurance industry.  

Since 2000, the cost of technologies has fallen by a factor of 3,000X while the computational capabilities have grown by a factor of 10,000X, and the insurtechs and risktechs riding those waves will provide the insurance industry with exponential growth opportunities. We maintain that adopting the best practices in insurance innovation is achievable, regardless of the size and perceived resource constraints of an insurance company.

Corporate leaders across the entire insurance value chain would be well served to consider these trends in the context of their legacy. Who will be remembered as the leaders who embraced growth via innovation vs. those who chose not to? Which path truly represents the more significant systemic risk to an enterprise: embracing the possibilities of innovation, or staying the course while competitors become innovators and transform their future?

Guy Fraker
Chief Innovation Officer
Insurance Thought Leadership

p.s. I'll be speaking about the tremendous opportunities for insurance innovation in an upcoming webinar in partnership with Johnson Lambert. Register to attend and join the conversation. 

Over the past nine years, $20.6 billion has been invested into insurtech startups (data below as of March 21). In 2016 and 2017 alone, this figure amounts to $10.7 billion. I love it. There is nothing better than reading about a newly funded startup from a large VC firm. It takes a ton of blood, sweat and tears to get an investment from a high-profile VC, and it is extremely rewarding for the startup that is able to secure funds from one. These transactions tend to generate a lot of press (as they should). The money allows the startup to say, "We have proven ourselves by gaining some traction, have passed the intense due diligence of a VC firm and now have the runway to serve you." "You" in this sense typically means a carrier (in the case of a B2B insurtech startup). There is another group of startups out there that do not get any funding press because they are self-funded. These firms sometimes fall under the radar of carrier innovation teams that are scanning the market for meaningful solutions. This article is NOT to take away from the funded companies. The majority of startups I work with are well-funded by VCs. This article IS to educate on what a self-funded (i.e. bootstrapped) startup is, some advantages and challenges of working with one as well as how a carrier should assess a bootstrapped startup vs. a VC-funded one. To help with this, I had the pleasure of interviewing Nick Mair, CEO and co-founder of Atticus DQPro. Atticus DQPro is a data monitoring platform designed specifically for the operational and regulatory needs of the insurance market. Atticus DQ Pro was bootstrapped from Nick’s first business, Atticus Associates, a consulting service to the London and specialty Insurance market. What is a bootstrapped startup? The self-funding can either come from a founder's personal finances or another revenue stream, such as consulting. A third approach is to fund a company based on the revenue from a product that you are building, though this can be harder to get off the ground. There are also circumstances whereby a company will bootstrap for a period of time to obtain more attractive fundraising terms (more on this later). For Atticus DQPro, Nick had an established consulting business in the U.K. insurance market. The focus was on technological implementation and transformational change for carriers. See also: Where Are the Insurtech Start-Ups?   By gaining on-the-ground understanding of how carriers work and what their problems were, Nick and his team were able to identify a solution for the specific need their clients were facing. They got the idea and the funding from their consulting business. What are some of the advantages to working with a bootstrapped insurtech startup? "When you are bootstrapping, you are living on very limited amount of cash, and this means you are forced to solve a problem faster than a VC-funded outfit." I found Nick’s statement to be quite interesting. Whether a startup is bootstrapped or VC funded, it must have a solution that is relevant to the carriers it is trying to work with. For those that have VC funding, their runway may be a bit longer. VCs are typically looking for a total return/liquidity event five to seven years from time of investment and good traction within one to three years. Bootstrappers do not have this same luxury. "Many bootstrappers are looking to solve a real problem now rather than something truly disruptive," Nick said. Nick explained that, from his experience, bootstrappers must get to product/market fit and real revenues faster. If they don’t (unless they have very deep pockets), then they could be out of business in less than a year. Nick said bootstrappers are pushed to solve problems faster with the carriers they work with and then scale quickly after that. Bootstrappers can mine opportunities that are not of interest to VCs because they’re sub-scale; e.g it’s a $5 million to $30 million opportunity rather than $100 million-plus. That window leaves a lot of niche problems for bootstrappers to fix without competition from funded startups. Nick said: "We can argue revolutionary change is required for our industry, but evolution can happen in parallel to solve real business problems now." Lastly is the area of domain expertise. Many bootstrappers (as in the case with Nick) are industry specialists who have found a need within the domain and want to fix it. By contrast, many of the VC-funded startups come with founders with deep technology backgrounds. They have built great solutions that they believe can enhance or disrupt insurance yet lack the insurance industry domain expertise. I do see this dynamic shifting. There are many more VC-funded startups with founders who come from within the insurance industry. What are some of the challenges to working with a bootstrapped insurtech startup? Not all VC-funded startups are looking for long-term disruptive solutions. Many have product/market fit solutions that solve the existing problems of today’s insurers. These VC-funded startups can scale their teams (specifically in sales/business development) much more quickly than a bootstrapped model allows. Nick shared that this problem typically comes when the bootstrapper has around 10 clients and needs more resources to continue to market and deliver their product. This is typically the time that a bootstrapper needs to try to secure outside funding. Nick’s view is that bootstrappers that can generate a decent annual recurring revenue (of roughly $1 million to $2 million) will be in a better position to get additional funding on more favorable terms (i.e. the startup already knows it has something that works and can be more confident when/if seeking additional funding to scale, through a VC, small private equity firm or carrier). Getting to that point and knowing when to make that call can be hard for a bootstrapper. Another disadvantage of working with one is that the team is primarily the management team and advisory board. Having a VC-funded startup brings the experience of the firm that invested. A VC firm has massive skin in the game for the startups to succeed. If the VCs are with a reputable firm, they have dealt with startups for a long time and likely had some good exits. They will be able to bring a perspective that the founders may not have and may not have access to within their own management team/advisory board. What does this mean for carriers? Should they partner with a bootstrapped insurtech startup or a VC-funded one? A few months ago, I wrote An insurance carrier’s guide to working with an insurtech startup. The first point is to "understand and prioritize your organization’s needs." I would like to reiterate this. A carrier must have a problem/area that needs to be addressed. If the startup fills this need, then I said to move to the next, which is due diligence. If the startup is VC-funded, this is a good first step. VCs have ridiculous due diligence processes (just ask any founder what the process is like). If a startup has secured a Series A or higher from a reputable VC firm, it has passed a certain test. The VC will have looked at the business plan, legal entity setup and founding team to the nth degree (among other things). A carrier must perform its own due diligence but has the assurance that someone else has also done a fair amount. For a bootstrapped one, it is important to know where the funding is coming from and what sort of runway the startup has. For both, it is important to know what sort of engagements they have done. If they are only in pilot stage with the carriers they are working with, this is OK. Ask what sort of results they can share with you from the pilots they have done/are doing to indicate whether that is the sort of result you are looking for. Additionally, when looking at the team of the startup, it is extremely valuable if some of the founders/team members have actual insurance industry experience. This will add another element of understanding of the carrier’s business while working together. Lastly, carriers should start with a pilot when working with a startup (whether funded or bootstrapped). This is a good way to validate the work the startup says it is going to do with you before going fully commercial. Summary There are tons of startups out there. It’s such an exciting time to be in this business and to be working with such smart and energetic people who are trying to make insurance better for consumers. I have deep admiration and respect for all startups, whether they are funded by VCs or bootstrapped. It takes a lot of courage and perseverance to start a business, especially in one as highly regulated as ours. See also: What’s Your Game Plan for Insurtech?   There are many reasons why a startup would be bootstrapped vs. raising funds. The last point Nick made to me was that "self-funded can mean bootstrapped by design/choice rather than trying to get funded. Founder reasons can be keeping control, better work/life balance or greater freedom." For those thinking about starting an insurtech startup, have a look at this article that Nick shared with me. And for those carriers looking to partner with a startup, do your due diligence and make sure you are filling a need and putting the carrier in a better place as a result. VC-funded startups and bootstrapped ones are both good options, and you should consider both for your innovation efforts. This article first appeared at Daily Fintech. 

There’s a lot of talk about how artificial intelligence (AI) will lead to the displacement of vast numbers of agents and brokers in the insurance industry. The truth is, while AI will automate certain processes, it will ultimately enhance — rather than replace — humans in the marketing and distribution of insurance. “Human advisers are going to continue playing an absolutely critical role,” said Farron Blanc, VP, Innovation Studio for RGAx, at Denim Summit 2017. “When you go fully digital, the conversion rates are probably about 1% from seeing an ad all the way through paying the first premium. As soon as we put in a call center, we’re seeing — depending on the segment — a 30% conversion rate.” There’s no question both humans and technology will play a critical role in the future of insurance. But what are the benefits only a human can bring, and what are things humans can’t do without technology? Let’s take a look. The Human Value Below are a few things humans bring to the table that technology can’t do alone:

• Trust. As Chip Bacciocco, CEO of TrustedChoice.com, pointed out during Denim Summit 2017, insurance is, at the end of the day, a social contract and requires trust. “The real point of buying insurance is that you can go to sleep at night feeling like you did the right thing, you’re taking care of your family,” he said. “If you aren’t 100% certain you clicked the right button on that screen, and that real people are really going to pay your claim someday, you never really get to sleep.”
• Accountability. Along with trust, any type of business or social contract needs someone to hold accountable. “You need to know who to talk to when something goes wrong. You need to know who your advocate is,” Bacciocco said.
• Expertise. Let’s be honest: Insurance is confusing. Often, customers and potential customers need to talk to another human being who can empathize with their concerns and truly get at the heart of their questions. Agents and advisers bring years of expertise to the table that can help customers make the right decisions and give them peace of mind.

See also: Cyber: How to Fix the Human Factor   The Technology Value Here are the types of benefits made possible only when technology is added to the equation:

• New markets. Technology makes it possible to reach new market segments. For example, RGAx looked at the needs of Hispanic remitters and found that a $7 per month insurance policy would solve a pain point for them: protecting their loved ones with remittances for two years if something were to happen to them. “How do you get humans to sell $7 insurance to people who really need it?” Blanc asked. “Technology is this great democratic leveler that allows us to reach new forces.That’s why it’s disruptive. It allows us to reimagine the value chain and serve people in whatever way they want.”
• Personalization. There is an unbelievable amount of data available on consumers, especially when it comes to their digital behaviors. Recently, Denim announced we have collected more than 1 billion data points on consumer engagement with mobile and social media ads powered for insurance and financial services companies. Technology allows us to activate data to deliver highly relevant offers and personalized experiences to consumers.
• Multiple channels. Not all consumers want to engage with their insurance and financial services providers the same way. Some would prefer to do everything face-to-face or over the phone, while others would prefer to do everything online. Still others will start the process online but then need to talk to a person to complete the request. Technology makes it possible for consumers to engage with providers in the channel they prefer, any time of the day or night.

See also: How Technology Breaks Down Silos   Key to the future will be combining the best elements of human interaction with the best elements of technology to provide a superior experience to every consumer, every time.

Spring is here … but for many parts of the U.S. you would not know it!  Many are making decisions to wear their gloves, hoping they still fit! For insurance, the dawning of a “new spring” is here, as well: Digital Insurance 2.0. But for many, it does not fit well with their current business model, products, processes and more. They are grounded in Insurance 1.0. The shift from Insurance 1.0 to Digital Insurance 2.0 is rapidly intensifying as we move aggressively into the digital age. And where the business models of the past 20 to 30 years, represented by Insurance 1.0, were resilient for their time, they will not meet the needs or expectations and customer decision models represented by Digital Insurance 2.0. The point of purchase is a pivotal moment in the customer and insurer relationship. It is where insurer growth happens (or doesn’t). It is where customer loyalty begins (or doesn’t). It is where prospects release their misgivings and hand themselves over to insurer care and service (or decide to look elsewhere). Insurers certainly recognize many of the benefits of meeting a new digital age with customized, personalized customer engagement that leverages digital technologies to create seamless customer journeys. However, at the heart of the purchase process is the moment of decision. And Insurance 1.0 hasn’t kept pace with an understanding of how people make decisions. Digital Insurance 2.0 models will dramatically improve purchase decisions by catering to decision motivators and triggers. See also: 4 Insurers’ Great Customer Experiences   In our recent report, Future Trends 2018: Catalyzing the Shift to Digital Insurance 2.0, we look at the behavioral reasons related to insurance purchase decisions that should act as digital motivators for insurers. We begin with a look at why traditional Insurance 1.0 purchasing may actually be reinforcing bad decisions and behaviors. Insurance 1.0 doesn’t work well with how customers make decisions In our Future Trends 2017 report, we explained how customers’ decisions and behaviors are not always driven by rational thought or the desire to maximize utility, as we were taught in traditional economics classes. The rapidly emerging field of behavioral economics helps explain some of the seemingly perplexing and, frankly, “bad” decisions people make about important matters like insurance. Traditional insurance practices, though certainly valuable, may contain some questionable motivational detractors at the point of purchase and service. For example:

• Are prospects ever confused with their insurance options, their actual coverages or their best routes to service?
• Are customers ever hampered from making a final decision by some hurdle presented during the sales process, such as additional requirements that may take time to present?
• Are customers ever encouraged to be “good” customers in uniquely new ways that will remove any future desire to make fraudulent claims?
• Are customers too often left “on their own,” with no personalization or automation to help them through the decision-making process?

A number of new Digital Insurance 2.0 entrants, and some established insurers that are creating new business models, are leveraging behavioral economics principles, in addition to an array of technologies like cloud, digital, mobile, AI/cognitive, IoT and data/analytics to facilitate better decisions for both the customer and the company. Psychological motivators and digital facilitators Here are just a few use cases to illustrate the intersection of Digital Insurance 2.0 and behavioral economics in the decision process"

• Lemonade customers pick a charity to receive premiums left over after claims, creating a further commitment to that charity and a desire to be claim-free for the good of the entire customer population. At the beginning of any claim submission, Lemonade customers also sign an “honesty pledge,” creating a commitment and desire.
• Friendsurance uses a peer-to-peer model to create commitment among group members to avoid claims so the group can share in rebates or lower premiums. This can only be accomplished through a digital framework.
• InsurePeer allows individuals to reduce their premiums by recruiting others (e.g. friends, family) to vouch for their risk-worthiness in exchange for “InsurePal Tokens” – but there is also a financial penalty if an at-fault claim is filed.
• Insurers (existing and new) present customers with several coverage options during the shopping process and position certain choices as ones that “other people like you chose…” to encourage the shopper to make a decision.

Some of these behavioral motivators could possibly be managed without a digital process, but none of them are. They are all firmly rooted in a digital model for quick and easy decision-making that captures the essence of the human desire to be committed, consistent and informed. The Motivation Equation The Fogg Behavior Model, developed by BJ Fogg, the director of the Stanford Behavior Design Lab at Stanford University, lends a simple formula to insurers for making sense of digital services and offerings. While the model incorporates elements of behavioral economics, it consists of just three components: motivation, ability and triggers, all of which have to occur in the same moment for a behavior to occur. Fogg’s model highlights an inverse relationship between motivation and ability. If someone has low ability for a behavior (e.g. a snail mail paper application and service process), a high level of motivation is needed (plus a trigger) to make a behavior happen. Similarly, if someone has low motivation for a behavior (e.g. “I’m marginally satisfied with my current insurer”), whoever wants them to cause a behavior must make it extremely easy (and provide the right trigger). By using this model as a lens for how people make insurance decisions, it reveals the many weaknesses of Insurance 1.0 models that Digital Insurance 2.0 models can exploit. Unfortunately for those companies firmly entrenched in Insurance 1.0, there aren’t any effective deliberate triggers for low-motivation and low-ability scenarios. This is the dynamic that Insurance 1.0 operates in with many customers: They are not very interested in nor engaged with insurance (motivation), and they think it is not easy to do business with (ability). The implication for Insurance 1.0 players is that it will likely be very difficult to encourage their customers to engage in desired behaviors, like purchasing additional policies, signing up for services (e.g. electronic billing), using the company’s app, not submitting fraudulent claims or getting satisfied customers to switch from another carrier. Insurtech startup ClearCover has staked its position on this concept and market realization. The business model is set up to piggyback on customer-originated triggers like life events and in-progress insurance shopping, to create motivation through low price (by avoiding high marketing spending) and to enhance ability through an easy research and purchase process. In reality, many of the triggers that cause customers to engage in Insurance 1.0 behaviors are likely of the serendipitous type, caused by an event on the customer’s end. Commonly cited reasons for shopping and switching are examples of these triggers:

• Trigger: Price increase or poor service
• Motivation: high. Sensation: pain (anger, confusion, perceived unfairness)
• Ability: Low. Our research shows that researching and buying insurance is not easy, but motivation may be strong enough to overcome the lack of ability, especially if competitors make the experience extremely simple. This is a key focus for Digital Insurance 2.0 players.
• Trigger: Life event (marriage, birth of a child, new home, starting a new business, etc.)
• Motivation: high. Anticipation: fear (realization of what you could lose and desire to protect it)
• Ability: Low. Again, as our research shows, insurance researching and buying is not easy, especially for those new to insurance (i.e. millennials, Gen Z).

In stark contrast, Digital Insurance 2.0 companies are using data, technology, platforms and processes to beat Insurance 1.0 models in all three components of the Fogg Behavior Model: Digital Insurance 2.0 Triggers: Using new data sources, including location, activity and condition data from connected devices, combined with improving analytics and AI/cognitive computing, insurers can predict and respond in real time to occasions where people should be highly motivated to act. Using platform-based ecosystems, the trigger for insurance can even be embedded or “invisible” as part of another transaction or activity, like buying a house or an Uber driver picking up a passenger. See also: Much Higher Bar for Customer Service   Digital Insurance 2.0 Motivators: The data and analytics enable triggers that can “catch” customers before or during an event whose immediacy and context should result in higher motivation to act…or to not have to engage in an insurance-related behavior at all, in the case of a platform-based ecosystem. Digital Insurance 2.0 Abilities: AI-driven apps radically simplify and speed insurance transactions like researching and buying insurance and filing claims. Platform-based ecosystems organize all relevant components of a customer’s journey into one place, including insurance, greatly simplifying the process by removing silos and embedding and streamlining tasks. Digital Insurance 2.0 players, many from insurech, are effectively using these three attributes.

• It was the combination of a life event trigger, high motivation and low ability that inspired Yaron Ben-Zvi to start Haven Life in an effort to simplify the process of choosing and buying life insurance.
• Lemonade’s behavioral-economics-based model radically simplified, redesigned and sped up the insurance process, from buying to claims, positioning the company for growth.
• PingAn’s model as an ecosystem platform has found opportunities to embed insurance within the purchase of other things, such as for shipping insurance of Alibaba purchases.

While these are just a representation, they highlight the fundamental differences in Digital Insurance 2.0 business model assumptions and approach, leveraging people and technology, to trigger, motivate and make it easy for customers to take action in buying insurance. It may go without saying, but these digital enhancements to the research, purchase and service processes should also be accompanied by innovative ideas in product development and corresponding organizational transformation. However, now you can add at least one more compelling business reason to shift into the realm of Digital Insurance 2.0. Not only is it the right move for the organization’s customer-first focus, but it is also a practical way to fill the sales pipeline with customers who will be better-informed, more loyal, likely more profitable and certainly more satisfied with the purchase process.

Small commercial remains a fundamentally attractive sub-segment of commercial insurance. It is intrinsically a large and underserved market; while many small businesses are confident about their business needs, they are often unknowingly underinsured. For example, according to our recent global survey of small business owners, nearly two-thirds of U.S. small businesses do not have business interruption coverage, and 53% lack indemnity coverage. Additionally, once small business owners have a policy in place, they are generally less prone to shopping and switching carriers than larger customers. Their agents also have limited incentives to facilitate this process given lower levels of commission. This has traditionally helped well-established small commercial players better navigate the ebbs and flows of the underwriting cycle, with more than decent levels of profitability for those who can navigate the more sophisticated pricing environment and agency consolidation trends. A market primed for significant disruption Most traditional small commercial players, which rely primarily on agency distribution, have operated the same way for decades and are now saddled with inefficient operations and bloated cost structures. While some of them have made sensible strategic moves (e.g., expanding their underwriting appetite by acquiring or building excess and surplus lines capabilities), none has demonstrated a “silver bullet” solution that puts them safely ahead of the pack or better positioned to deter entrants. In a challenge to incumbents, technology (e.g., advances in automation transforming underwriting and servicing) is increasingly lowering barriers to entry. Additionally, there is unmet demand among small business owners for digital insurance offerings due to a shift in purchasing preferences. Nearly 90% of small commercial purchasing decisions are made by business owners, many of whom have been conditioned by their personal shopping experiences (e.g., 77% of customers who purchase personal insurance online prefer purchasing commercial insurance online, as well). This has had a major impact on their attitudes for other insurance products, as 33% of U.S. small businesses would prefer purchasing commercial insurance online. For millennial small business owners, that number climbs to 75%. Despite this rise in demand, only about 1% of commercial insurance policies are currently sold without any intermediaries, compared with around 10% of homeowners policies and 30% of personal auto policies. This confluence of factors may convince a number of players that entering or further breaking into small commercial and successfully underpricing incumbents should be a relatively straightforward exercise. However, we have yet to see even early disruption of this sub-segment, even though it has grabbed recent headlines and many players have increased their focus and investments in the space (either as new entrants or incumbents who have not traditionally prioritized their small commercial business). While incumbents have generally maintained their dominant position, small commercial outsiders, including 1) predominantly middle market carriers moving downmarket, 2) personal lines carriers moving upmarket and 3) startups, have found the market challenging. We explain below why this is has been the case. A) Middle market and super-regional commercial carriers The lower end of the small business market can constitute a logical growth opportunity for middle market and super-regional commercial carriers, especially as their producers avoid small and micro risks. For carriers, these risks are attractive because they are generally less price-sensitive and easier to underwrite than the more complex business they typically handle. Channel conflicts. One key challenge is managing channel conflict with the existing agency force. Generally, entering small commercial requires expanding the agency network. In addition to committing the time and resources necessary for expansion, carriers also need to be extremely careful and subtle in how they assuage the concerns of their existing agency force, many of whom may view the shift downmarket as a “decommitment” by the carrier to its existing larger accounts and loyal agents. Because smaller risks can be costly for agents to acquire and service relative to commission, many carriers going after small commercial have to regularly emphasize to their top producers that they are pursuing business that producers don’t want. Others look to collaborate with their mid-market agents by providing incentive compensation for referring micro accounts. See also: The 5 Big Initiatives in Commercial Lines   Operational efficiency. Another key challenge is operational efficiency. Given the risks these carriers traditionally underwrite and process, many of them have grown comfortable with manually intensive processes. Succeeding in small commercial requires low-to-no touch processes that support the speed and scalability required to handle a high transaction volume. Straight-through processing has become table stakes to acquire and service a greater number of customers at a lower cost, as has using tools to monitor the performance of the book in real time to avoid adverse selection. B) Personal lines carriers For predominantly personal lines carriers, diversifying away from increasingly commoditized business and moving upmarket can also constitute the next logical growth opportunity. In fact, several leading personal lines players, including Allstate, Berkshire Hathaway through biBERK and Progressive, have clearly announced or demonstrated over the last few years that they are making small commercial a higher priority. Advertising. A key challenge for these carriers as they move upmarket is generating awareness of their offerings. While spending billions of dollars annually on mass advertising may work in personal lines, small commercial requires a different marketing approach. They need to consider alternative means of getting small business owners’ attention, such as building affinity partnerships that can help funnel traffic in preferred customer segments, or deploying targeted advertisements on social media. Distribution. Another top challenge is picking the right distribution channel(s). Building a brand new network of small commercial agents can be an expensive enough proposition for middle market carriers, but with personal lines carriers that rely on independent agents the cost can be even higher as there is usually less overlap with their current agency force. As such, sticking with an agency distribution channel may be a significant barrier to entry for some players. Building strong digital customer-facing quote, bind and service capabilities can be a way around that. In addition to aligning with trends in small business owner expectations, personal lines carriers that choose to go direct can potentially take advantage of a lower expense base from not having to pay commission and redirect that to price savings. But it makes the advertising challenge even more significant. C) Startups Even though a non-traditional player has yet to make a significant dent into the market, a variety of tailored solutions continue to emerge. Newer entrants like Bunker and Founder Shield have focused on specific underserved customer segments. Others have attempted to innovate by providing purely direct-to-customer offerings for commercial lines (e.g., Pie Insurance for workers’ compensation). Insurance knowledge. Many insurance startups owe more to their marketing ideas and technology-savvy staff than to their founders’ understanding of the industry, which can leave some significant blind spots. Incumbents often are able to rely on extensive, high-quality experience datasets to distinguish good risks from bad ones and appropriately price them. Startups usually lack this fundamental information. Foundational insurance infrastructure. A slick front-end website has limited benefits if it’s not backed by essential middle- and back-office functions like risk management, policy endorsements processing and other post-bind servicing (e.g., annual premium audits). Many startups have to stand up these functions and don’t have the expertise to effectively navigate and operate in different state regulatory environments. For startups looking to grow fast, building these capabilities from scratch can seem prohibitively expensive and time-consuming. However, there are plenty of partnership opportunities that can expedite this process, as well as options for renting solutions as opposed to buying them (e.g., licensed producers, cloud-based platforms). The digital opportunity Small commercial outsiders need to consider how they are going to provide a digital end-to-end experience along the entire customer journey to meet small business owner needs. This requires a clearly defined digital small commercial go-to-market strategy that addresses customers, products and services, pricing, channels and brand. Indeed, many current small commercial players have already recognized this shift and are investing in enhancing their existing digital capabilities, including via strategic partnerships (e.g., with fintechs). These players are looking to create true omni-channel offerings and increase the loyalty of their existing customers. Other players are pursuing small commercial opportunities by building differentiating business models. These “digital attackers” are creating purely digital offerings that emphasize speed and ease-of-use while avoiding the constraints of legacy systems. New aggregators are occupying the client interface and consolidating different product providers (e.g., Simply Business). Other integrators are starting to build new business models for the customer journey (e.g., Flock). And various segment-specific digital direct-to-customer and B2B2C models are emerging (e.g., Cake). Given the relatively large opportunity in the space (particularly the micro space), these options are worth considering for small commercial outsiders. See also: 3 C’s for Commercial Brokers in 2018   The outsiders that will be best set up for success in small commercial are those that can both strategically plan for the risks that have tripped up similar players in the past while finding opportunities to inject digital capabilities into their operations. They will be able to hit the ground running and differentiate themselves from both incumbents and other new entrants. Furthermore, they will be better positioned to meet the changing and currently unmet preferences of small business owners. Implications

• Small commercial has changed very little over the years. We believe the market is ripe for disruption although there have been no major changes to date.
• Small commercial generally has been a profitable line that has weathered underwriting cycles well, but it does suffer from inefficient operations and bloated cost structures. Lowering costs of entry into the market are putting pressure on incumbents to improve their business operations.
• As in personal lines, there is increasing desire among small commercial customers for a digital purchasing process. As of yet, customer expectations have gone largely unfulfilled, which provides a real opportunity for whoever can meet them.
• Digital solutions – often from insurtechs – offer promise to improve not just the customer experience but also operational efficiencies and cost structures.
• Though nascent, aggregators are consolidating different product providers, integrators are starting to build new business models for the customer journey and various segment-specific digital direct-to-customer and B2B2C models are emerging.

You can find the report here. This article was written by Jamie Yoder, Jon Blough, Francois Ramette, and Marie Carr.