Back in 2015 and 2016, we heard from oh-so-many insurtechs whose business model hinged on having carriers buy their gadget and give it away to customers because of the benefits the gadget provided. This model was flawed from the outset because of the prohibition in the insurance industry against this thing called rebating.
Fast forward to 2019, and a lot of innovative companies are thinking about a similar business model, only in reverse. Instead of selling insurance and throwing in something of value, companies are considering selling something and throwing in the insurance. This time, the idea may pass muster.
The combination could be especially hard for regulators to turn down if it enhances consumer safety, which, after all, is a key goal for insurers. Let's say a transportation network company (TNC) such as Uber has a device like a two-way camera system that monitors driving behavior and offers free insurance to drivers who will install it. How does a regulator say no to safer drivers?
What if the TNC gets clever with the bookkeeping to meet regulatory requirements? Just because a driver sees herself as buying a device and getting free insurance doesn't mean the TNC has to account for revenue that way.
Regulators will face some key questions, in new forms. Does an offer represent an inducement beyond what is reasonable? Are newcomers being given an advantage over incumbents? While regulators have traditionally been more protective in personal lines than in commercial lines, figuring that businesses have more expertise at their disposal, does the digital blurring of personal/commercial boundaries change the thinking? In a world of on-demand insurance and microinsurance, where the cover is increasingly tied to a physical device, how do you separate the two?
If some sort of bundling/rebating does work this time, the changes could be profound. Buy a cellphone from T Mobile and get a little life insurance with that. Agree to rent a property via Airbnb and get some homeowners insurance. The possibilities are endless.
In many ways, the history of the computer industry can be traced to the 1969 consent decree between IBM and the Department of Justice, which threw out the longstanding structure of the industry. In that case, IBM was no longer allowed to bundle everything—hardware, software and services—and sell only to those that would buy a whole package. The unbundling created opportunities for mainframe clones, services companies such as today's big consultants, etc., eventually including Intel, Microsoft, Google, Facebook and so on. Allowing for a rebundling of insurance could lead to similar innovation.
During the first internet boom, a Harvard Business School professor described to me what he called the Las Vegas business model—it's hard to have a normal restaurant or hotel in Las Vegas when casinos are giving away good food and rooms to entice gamblers. With the new possibilities of bundling/rebating, many in the insurance world may soon see just what the Las Vegas business model feels like.