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October 28, 2016

Should Incumbents Ally With Startups?

Summary:

Should incumbents potentially invest in startups? Yes. Give away customer information? Not so much.

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Incumbent insurers have taken decades, and, in many instances, hundreds of years building a business and creating a book of business (almost entirely through the hard work of agents, brokers and MGAs). Why should they share their customer information with startup insurers (regardless of how or why the startup insurer is using technology)? Potentially invest in the startups, yes. Give away customer information — not so much.

Two triggers for the question

There are (at least) two triggers that formed the question of whether incumbents should partner with startups:

  1. Discussions with a CEO of an insurance startup on how technology-dependent startups insurance firms can scale; he mentioned the possibility of looking at the pharma/biotech industry dynamic (i.e. startup biotech firms partnering with traditional pharma companies to achieve scale)
  2. Thinking about what’s in it for traditional insurers to partner with startup insurers that are coming to market using new technology. If the technology-dependent startup insurer believes it is primarily “a tech firm that supports/offers one or more parts of the value chain (distribution, underwriting, or even customer service),” then what really differentiates the startup insurer from a traditional technology company?

See also: Insurtech Has Found Right Question to Ask

Left to their own devices

Might technology-dependent startup insurance firms, if left to their own devices, succeed on their own? Possibly, but there are several hurdles:

  1. They must comply with insurance regulations (at least state and possibly federal)
  2. They must be and remain financially viable. Unlike technology startup firms, the state insurance regulators can’t allow the startup to generate loss after loss. Firms like Salesforce and Amazon can go years without profit, but that situation is not true in the insurance industry.
  3. They need scale (and profitable scale, at that), and, as the CEO mentioned to me, the startup has to “get the word out” and become known. How much is in the technology-dependent startup insurance firm’s marketing/advertising budget (and how is the company spending the money)?

If the technology that the technology-dependent insurance startup uses is its “secret sauce,” then an incumbent insurer can:

  1. Test the technology itself
  2. Invest in the startup to accelerate the lessons of using the technology
  3. Acquire the startup

See also: Insurtech: One More Sign of Renaissance

But my advice to each incumbent insurance firm is to never give away or share your customer list with any technology-dependent startup insurance firm. It makes no sense to do that.

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About the Author

Barry Rabkin is a technology-focused insurance industry analyst. His research focuses on areas where current and emerging technology affects insurance commerce, markets, customers and channels. He has been involved with the insurance industry for more than 35 years.

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