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Why Haven’t More Startups Failed?

We’re about five years into the insurtech boom, but we’re also in the middle of a pandemic. Excitement around emerging technology and startup innovation has taken a backseat as the insurance industry shifted its focus to COVID-19. 

Yet startups have not failed as quickly as the industry might have predicted. It’s possible that some startups will begin to outrun their funding and close their doors in the next year or two. But for the time being, the insurtech market and funding remain relatively stable. What’s driving this?

COVID-19 and Insurtech Partnerships

The pandemic has altered insurers’ approach to insurtech investment. Insurers appear to be focused on tactical initiatives that can produce more immediate results. This contrasts with the R&D that was more prominent pre-pandemic. 

Yet it turns out that startup activity and the global pandemic are not necessarily mutually exclusive. Insurer priorities most notably changed focus to cloud computing and digital strategy — with digital covering both external channels and internal workflows. Cloud and digital are two areas in which almost every insurtech excels and have led to additional opportunities in many cases. Insurers expect that these areas will continue to be prioritized even when the pandemic is over. 

Lemonade’s IPO and What It Means for Insurtech  

Lemonade’s IPO cemented one of the most notable insurtech players as a certified unicorn. IPOs validate the potential returns of insurtech and will help attract more investment dollars into the space, whether from venture capitalists or insurer investment arms. Few other startups have gained the investment attention that Lemonade has, but others — like life insurance startup Ethos or property insurer Hippo — have received funding over $100 million. Each of these startups’ successes helps attract dollars for the rest of the insurtech ecosystem.

See also: How Startups Will Save Insurance

New Growth Paths 

Many insurtechs, especially startup MGAs, are exploring new revenue streams. For some, this means selling a wider variety of coverages directly online or embedding at different points of sale. Some MGAS are also moving to become full-stack carriers, like Buckle and Clearcover. Still other startup carriers, like Slice, Trov and Metromile, have gotten into the software business and are licensing their platforms out to other insurers. 

Platform and analytics players are also finding success proving value to insurers in the current environment. Atidot, for example, partnered with Pacific Life to analyze product and pricing changes to help optimize market penetration for the insurer. In addition, Principal is licensing Human API’s medical records platform to circumvent paramedical exams for disability insurance during the pandemic. 

Many startups have interesting ideas but haven’t thought through long-term financial or regulatory hurdles. The goal of many startups is to validate a business model first, then work out the details later. It’s possible that some startups will start to outrun their funding and eventually close their doors. But it will be interesting to see how insurtech evolves in a post-pandemic world, especially as new realities cause insurers to rethink processes that were manually intensive. For startups that can show value to insurers, this new normal may be an opportunity.

Why Isn’t Customer Experience Better?

Whether you’re browsing an article about the latest trends in insurtech or listening to a panel of insurance industry disrupters discussing customer acquisition strategies, it’s hard to avoid references about emerging technologies such as machine learning, artificial intelligence, chatbots and data analytics. But, have these digital advancements truly transformed the experience for customers shopping for insurance? Are insurers, agencies and consumers benefiting from such enhancements in technology?

Arguably, the answer is yes. The insurance buying experience has evolved dramatically in the last decade, and insurers, their agents and consumers have all benefited. However, when we examine the underlying products and the various touchpoints throughout the customer journey, we can see there are significant opportunities for improvement.

Insurance Shopping: Consumer shopping patterns and expectations have changed in all industries, and insurance is no exception. The enormous dollars spent by top insurers are pushing more consumers to start their shopping process in a digital format, where speed and accuracy are paramount in keeping customers engaged. Consumers have become accustomed to choosing from multiple product options and to one-click shopping, but replicating an Amazon experience in the insurance industry is extremely challenging.

For one thing, insurance products are highly complex and regulated, and premiums can change based on a multitude of variables that are not immediately transparent to consumers. Variables such as: age, coverage limits, credit, driving history, prior claims or age of home can dramatically affect eligibility or policy premium. And while these factors are key data points for underwriting, verification of these inputs often leads to lengthy question sets and inaccuracies in pricing at point of sale and beyond. Then there are the costs associated with verifying reports such as credit, MVR, CLUE and prior carrier through third party vendors, which add friction and cost in the shopping process.

These are among the challenges that a few digitally focused, independent insurance agencies such as Gabi Insurance are aiming to overcome. Such digital platforms can simplify the quote process while representing both traditional carriers and newer entrants to the market like Clearcover. Digital agencies stay engaged with the customer throughout the life of the policy and may help reduce the cost of third-party reports, which are currently passed on to consumers.

See also: Is Insurtech a Game Changer? It Sure Is  

Beyond the Quote: While the point-of-sale experience is critical in effective customer acquisition, the entire customer journey — meaning all the touchpoints along the way — help maintain customer loyalty. Digital distribution channels that leverage emerging technologies can track customer interaction and use the data to identify improvement opportunities up- or downstream. While some insurers have made significant improvements in their frontline underwriting and product design, most still rely on products that were designed for traditional distribution channels (brick and mortar) and require some level of post-sale verification of policy attributes. As a result, customer experience can quickly shift from digital to paper-intensive, snail mail and the requirements can vary based on the type of products purchased. Consumers may be required to send proof of discounts, photos or evidence of insurance that were unverified at the time of the quote.

In such cases, digital agencies like Gabi may be better equipped to quickly engage customers via text, chat or email and expedite requirements on behalf of their insurance partners while contributing to higher net promoter scores (NPS) and improved overall retention.

Ultimately, to create an optimal insurance shopping experience that’s more aligned with customer expectations, insurers need to invest in revamping their products and processes for digital distribution channels. That’s easier said than done, as bringing products to market takes multiple years to deploy and millions of dollars in investment. Large, established insurers may require additional investment in core technologies, rebranding and potentially cultural and ideological transformation, while new insurers such as Clearcover, Hippo and Lemonade are not encumbered by legacy systems.

Adopting the entire digital transformation ecosystem is difficult and costly for insurers and involves multiple departments within an organization, which often have competing objectives and operate in silos. Insurers may have much to gain from partnering with digital agencies as their distribution models provide growth opportunities and turnkey access to customers who are less likely to buy from brick and mortar agencies. Further, insurers can gain valuable insight into customer demographics and behavior that are unique to online shoppers and use this information in future product development and process improvement strategies.

New Customer Decision Models

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.