Tag Archives: disruption

The Real Disruption of Insurance

I recently wrote about the disruption the insurance industry faced in the late 1990s and early 2000s as the internet became an increasingly regular part of business. The theme of disruption in that period was one of changing how we did business. The main target was distribution via agents and brokers, which was wrongly predicted to go the way of the dodo.

While disruption has not stopped, it has changed dramatically from what it was back then.

As discussed in my new book, The Future of Insurance: From Disruption to Evolution, the current disruption the industry faces is not just about enabling technologies and new approaches to how insurance products and services are delivered.

While there have continued to be new approaches to the existing industry being created by tech-enabled startups, technology is enabling something else – direct threats to carriers themselves, not just their partners and providers.

There have always been new carriers starting up, either with their own capital or via the MGA model with backing from existing players. Historically, though, these startup carriers looked and felt like traditional carriers, but were just newer.

A New Breed of Startup Carrier

Today, while we still have these traditional startup carriers, we also have a new breed of carrier that is built from the ground up to be fully digital, often started by people from outside the insurance industry. These founders generally have tech backgrounds and are often engineers.

Engineers like to solve problems and figure out better ways of doing things.

That is exactly what these startups are born out of – a view of the insurance industry and desire to find a better way to protect people using the flexibility, intelligence and customer-experience-friendly digital tools that abound today.

This is a very different kind of threat to incumbent or legacy carriers.

See also: Insurance Disruption? Evolution Is Better

The Implicit Disruptive Threat

The disruptive threat these new carriers pose is not necessarily existential for legacy carriers. The chance that any existing P&C player will go out of business because of a startup carrier is extremely small. That is not quite what’s at stake.

Instead, the threat is that the startups will respond to customer demands in a way the industry has struggled to do and capture market share.

Increasingly, insurance buyers are demanding a more modern experience of their carriers because they’re getting this in most other aspects of their lives (both personally and professionally). Buyers get help with flight reservations from airlines via Twitter, text to pay municipal taxes, watch their packages get delivered to their home from far away, have their schedule automatically adjusted based on traffic and more.

Then a carrier needs a document faxed or mailed to it. Or sends the insured some communication in all caps because the company can’t produce varied-capitalization in communications, and ends up seeming to yell at customers while looking dated. Or requires you to go get your car inspected at some certified inspection facility after binding coverage, or get canceled.

Enter the startup carriers. They sell a policy in minutes (at most), employing AI, third-party data, self-service tools and more to make being a customer easy, if not delightful.

Disruption, Destruction or Evolution?

So what does the future look like in the face of rapidly changing customer expectations and a new generation of carriers that are free from many of the constraints you face?

The key is to take the disruptive players as an impetus to evolve.

What does that mean?

It means holding your core ability to manage capital, transfer risk and deliver insurance service in a way that gets people’s lives back together again after a loss.

What needs to change, though, is how we do that. The tools we use, our willingness to kill sacred cows that tend to be identified by the phrase, “…because we’ve always done it that way.”

See also: The 5 Charts on Insurance Disruption

There are many areas where we as an industry can embrace the new approaches identified by the disruptors. Embracing digital distribution with simpler, faster application processes. Using self-service tools like those that allow self-inspection of property for underwriting or loss adjusting. Relying on the flexibility and extensibility of the new cloud-based solutions on the scene, which can facilitate experimenting on new approaches to how you deliver insurance products and services.

There are many specific answers to how to evolve that will depend greatly on your particular situation. One overarching piece of advice is not to ignore or write off new players simply because they’re new or because their underwriting results may not be attractive (few new carriers ever do have enviable combined ratios as they lack the scale to smooth losses and spread expense loads).

Look at the tools they’re using and where in the process they’re focusing their efforts, then ask what you can do in that area (or beyond). Ask your customers directly, empower your staff to make change and focus on making meaningful change, not just on being good enough.

Will COVID-19 Disrupt Insurtech?

If there is one thing that we have all learned with the spread of COVID-19, it is that there is virtually no industry that is immune to its impact. The global pandemic is disrupting the daily lives of individuals, the operations of businesses, the activities of governments and even the approach of cherished institutions like museums, universities and religious organizations. The P&C insurance industry, like many others, is reeling from the implications of the virus. Amid the rapid changes, it is important to assess the impact of COVID-19 on the insurtech movement. After all, insurtech has always been touted as the ultimate disruptor of the insurance industry. But, might COVID-19 prove to be a disruptor to insurtech?  

First, it is essential to recognize that the ultimate impact will depend largely on the duration of the virus. If the U.S. and the world at large gain control of the virus in the next six to eight weeks, then there will be short-term pain for all (including insurtech). But there is likely to be a sharp rebound – the V-shaped recovery that economists are talking about. If the spread accelerates and the fight goes on for months or years, then it becomes a whole different scenario. Let’s look at several dimensions of insurtech and how they may be affected in the short term and long term, with the understanding that the implications for insurtech insurers, distributors and tech companies may be very different.

  • Full-Stack Insurers: Companies like Root, Lemonade and Next should be well-positioned to thrive when the virus subsides. As digital-native companies, they can capitalize as the world accelerates transformation to online, digital and mobile engagement. In the short term, there may be fewer claims on the auto insurance side, as the roadways are empty. The offsetting factor is that fewer people will be buying new cars, moving into new apartments or buying/building homes – at least in the short term.  
  • Digital Distribution Players: Like the full-stack insurers, the digital agents, MGAs, comparison platforms and others in the distribution space stand to succeed as more people gain experience with moving their personal lives online. Of course, individuals and businesses can still call their agents or brokers or use their web capabilities, but, generally speaking, the insurtech digital distribution players have more advanced capabilities. Like the full-stack insurers, they will be affected by fewer “changes” requiring insurance – fewer car and home purchases, less likelihood that business will be expanding fleets, etc. Then again, maybe there will be more shopping around to try to cut expenses.
  • Tech Companies: Insurtechs that offer new capabilities for underwriting, claims or internal operations may face a more mixed future. Those that offer digital capabilities to interact with agents, prospects, customers and claimants will likely be okay, especially if the economy is starting to recover within 10 to 12 weeks. Self-service, DIY, mobile and virtual capabilities will all be elevated in importance – not just for the period when people are sheltering in place and businesses are closed or at limited capacity – but for the long run. Any insurer that has not already focused on the importance of digital transformation via these types of capabilities is sure to pick up the pace when the storm passes. Fortunately, most insurtechs provide the types of capabilities that enable a digital transformation. On the downside, the ability for insurtechs to be in the market meeting with insurers, increasing their brand visibility and building their pipeline will be reduced. Of course, marketing and sales can be done digitally. But in the case of insurtech, the physical presence is important. In addition, conducting pilots and proofs of concept (POCs) may be more difficult as they often require individuals to be onsite with the insurer. Finally, some insurers may be reluctant to sign new contracts in the short term.

One factor affecting all of this is that the funding picture is fuzzy. Up through the end of 2019, there was great momentum for insurtech around the world, and funding levels were continuing to increase. Now, capital is already starting to tighten up. And the longer the COVID-19 virus continues, the more reluctant investors will be to fund new ventures.

See also: Will COVID-19 Be Digital Tipping Point?  

Considering all these factors, will insurtech be disrupted? Over the next couple of months, the answer is most certainly yes. And there will most certainly be failures as some insurtechs run out of cash over the next few months. Another implication is that M&A might accelerate. insurtechs that have been reluctant to sell may be willing to cash out at lower amounts and acquirers are already out seeking bargains.

If the pandemic accelerates and lasts for a long time, all bets are off. If business starts to return to normal by summer, then most insurtech will be very well-positioned for success as insurers look to accelerate their digital transformation and inject even more innovation into their business.

Technology Cannot Replace Brokers

Amid all the investment activity in the insurance industry, I distinguish two types of startups by using a very straightforward – and I believe a black-and-white, legal – perspective: If a firm must comply with insurance regulations then it is an insurance firm, and not a technology firm, regardless of what technology it uses to get and keep customers.

Why all the activity? Why is the insurance industry a target for transformation or a destination for disruption for investors?

VCs, other investors and the startup entrepreneurs view the trillion-dollar global insurance industry as a group of (very) old companies using (very) old processes to conduct commerce. From their perspective, the industry is an extremely large addressable market of companies that are seriously out of touch with the realities of how commerce is, and should be, conducted in the mobile, digital, connected marketplace in the Internet era. 

For investors, it is an industry ready to be plundered!

Brokers: the sweet spot of many startups

Quite a few of the insurance startups are targeting insurance brokers as a sweet spot to be disrupted. And a sweet spot it is. Estimates from various sources put the number of agents and brokers in the U.S. insurance industry at between 300,000 and 400,000. 

See also: Agents, Brokers Are Dead? Not So Fast!  

[Note: For the purposes of this post, I will use the term “broker” to mean either insurance broker or insurance agent. I agree that I’m taking liberties doing that.]

Brokers: target for transformation

There is an important fact about insurance brokers: Customers can’t legally purchase insurance without using one.  

I believe that investors forget that brokers are legally required in the purchase of insurance, think that fact (i.e. the law) will change to the benefit of the startup they are invested in, are ignorant of the fact or willingly ignore the fact.

(If you’re wondering … Yes, I believe there are VCs or other investors who would willingly and illegally ignore insurance regulatory requirements and related laws.)

The key question is: Can the insurance broker space be disrupted or transformed?

My answer is no.

I believe the broker space can’t be disrupted, as in, broken apart, thrown into disorder or interrupted in their normal course or unity.

Customer-Broker Paths

However, I believe the broker space can be transformed. 

Specifically, the customer-broker paths can be transformed. In reality, through the applications of technology through the decades, these paths have been transformed, are being transformed and, I suggest, will continue to be transformed.

See also: What a Safer World Means for Brokers  

Consider the visual below. The visual captures past, existing and potential future customer-broker paths. But keep in mind two points:

  1. Even through the process of transformation, the broker (whether person or algorithm) remains because the broker is legally required in the insurance purchase.
  2. The transformation is about transforming the path between customer and broker but is not about transforming the role (or the essence of the role) of the broker.

The history of customer-broker paths is founded on face-to-face (F2F) meetings, whether in the customer’s home, in the broker’s office, at car dealerships or in banks. 

Beyond F2F paths, technology has acted as an interface that has eliminated time and distance between the customer and the broker. But whether at the other side of a computer screen, via a mobile app, through an email or using a chatbot on an insurer web portal, there must be a broker present to sell the insurance line of business. Even algorithms used as brokers have to comply with the requisite insurance regulations: no leprechauns, no pixie dust, no magic. 

Technology redefines the existing paths, introduces new paths and makes the activities enabling any of the customer-broker paths both more effective and more efficient. 

The technologies, whatever they are, do not, of course, replace the broker even if they make the broker appear in a virtual reality or in Second Life or “embed” the broker in a hologram.

The Reinsurers Are Coming!

In most instances, when A.M. Best issues its Top 200 U.S Property/Casualty Writers results, there is some jockeying for position – up or down a position or two. However, the 2018 results issued in July 2019 revealed something that literally flew off the page. One insurer moved up 28 positions, another 29 and a third a staggering 121 positions. While the upward movement is interesting in and of itself, it was who the insurers are that really caught my attention – reinsurers! Swiss Re jumped 28 spots, Everest Re 29 and Arch 121. And Munich Re is already at number 18.

See also: More Opportunities for Reinsurers in Health  

Now, it is easy to rationalize these position changes – mergers and acquisitions. However, it’s what lies beneath that is critical for all insurers to recognize – and changes the market’s competitive landscape in four critical areas:

  • Data: Reinsurers have an abundance of data, across numerous categories and geographies. Data is king, and reinsurers have it in spades. This changes the foundation for insights and puts these organizations ahead of the pack because most primary insurers do not have diverse data – at least not yet.
  • Information: Data generates information. Reinsurers have information about products, segments, buyers, distributors, channels, loss outcomes – you name it. This allows their decision making to be immediately more robust.
  • Skills: At a time when every insurance executive sees a lack of skill as a major issue for their organization, reinsurers have had skills, particularly data and analytics skills, embedded in their organizations for a long time. This puts them down the road in terms of leveraging the explosion of data and information – and using cutting-edge technology to do so.
  • Money: Reinsurers have a good deal of money. For a number of years, catastrophe outcomes have not drained coffers, and capital remains abundant. This allows reinsurers to invest in their subsidiaries. And they are doing so, which affects primary insurers directly.

See also: The Dawn of Digital Reinsurance  

So, the message is not to lock the front door, turn off the lights and send everyone home because the reinsurers are coming. The message is – the competitors of yesterday may not be the competitors of tomorrow. There are competitors that are focused on changing business decisions and how those decisions are made. There are competitors whose DNA is innovation and transformation, and no one can run from that. The bottom-line message is urgency.

If your organization believes it has many years before innovation will transform your operating environment and market position, or that innovation and transformation can be a secondary focus for your organization, consider that there may be a reinsurer just around the corner that has another idea.

Insurance: On the Cusp of Disruption

The insurance industry, started in the 17th century at Lloyd’s of London, has made significant progress since then, but it is only now that it is truly at the cusp of disruption.

The traditional models of business development through intermediaries, pricing through actuarial models and underwriting on the basis of experience and data collected through physical inspection of risk and proposal forms are being challenged, as are the policy contract issuance and claims handling methods.

The digital revolution has led to all types of information and data not only available in public domain, but easy to access and share at lightning speed. People are connected to each other on social media, devices are connected to the internet, homes and cars are becoming smarter through IoT and robotics and AI are increasingly prevalent in our everyday lives.

Almost 150 years back, when the first self-propelled car came out and could drive at only 4mph, a person with a red flag would walk in front of the car to ensure road safety. Fast forward, and we are now looking at cars that can drive themselves.

While insurance was slower to adapt than other industries, there has been a recent boom of insurtechs. This creates meaningful opportunities and one of the most exciting times in the insurance space.

Today’s customer expects information to be available at her fingertips. Information is either a click away on search engines or through voice prompts on your smart phone or smart assistant.

We also face changing risk scenarios and heightened unpredictability. Cyber is at the top of the list – and headlines. Increase in terrorism or “lone wolf events” – at places one would never imagine to be faced with such risks. Changing global weather patterns – the recent floods in Houston, hurricanes in Florida, wildfires and mudslides in California and the extreme winter freezes in the Northeast. And changing geopolitical and socioeconomic environments.

See also: In Age of Disruption, What Is Insurance?  

How do we cope with this rapidly changing risk profile and environment? Will traditional insurance be able to provide relevant protection and, more importantly, will it be delivered, serviced and provided in a manner to match customer expectations in today’s digital age?

Insurers are responding to this challenge in two ways:

  1. Digitizing the front-end user experience and user interface but still continuing to follow the traditional model of underwriting, pricing, risk selection and claims.
  2. Disrupting the whole value chain from the front end of the business to the entire back end.

These responses are happening at both startups and established insurers. The winners will be companies that are willing to disrupt the entire value chain from front to back end.

What does that mean?

With the amount of internal and external data sources available today, we can get enough information on prospective customers and the risks they face so as to enable us to personalize their insurance and meet their specific needs.

How will we do it?

By harnessing big data, connected people and devices, smarter homes and cars and so on, and combining this with years of customer and claims data available with insurance companies. Insurers able to use this wealth of internal and external data in a manner to create distinct customer profiles will:

  • Know the customer
  • Anticipate the risks they are exposed to
  • Find the gaps and where they may need insurance
  • Give consumers a tailored solution to cover these gaps

As an example, and subject to compliance and other protected privacy considerations, let’s assume the IP address or phone number is linked as the unique identifier of a person. As soon as that person calls or logs in with her device, the insurer should be able to pull up all of her available information. Then, without the person answering all kinds of questions and forms, the insurer could automatically offer relevant insurance:

“Welcome, Joan, for your two cars and home in Ohio, here are the coverages and premiums. Please select one.”

As permissible, the same data can be used for underwriting, risk selection and pricing. Today, we as insurers have access to much more data and information on the risks and needs of our customers than ever before — provided we are able to use the data effectively, a big challenge most incumbents face today.

As with underwriting and risk selection, we can use data sources and technology such as sensors, AI and IoT at the time of claims. That includes the possible use of parametric insurance for natural catastrophes, and even smart contracts on a blockchain that self-execute the adjusting and settling of certain types of claims – the objective being to pay claims in a frictionless manner.

Before we get there, we will need to work with regulators on data privacy laws that are fit for purpose for this digital age.

See also: When Incumbents Downplay Disruption…  

The other very important aspect of the new age insurer is to offer a full suite of “personal risk management services.” What that means is that, using the insights gathered over years of claims data, coupled with the availability of external data and AI, we should be able to:

  • Predict – help insureds prevent a potential loss before it occurs. I believe people do not buy insurance to make a claim — the real purpose is protection. What better protection is there than someone helping continuously monitor and help prevent bad things from happening?
  • Assist – if even after efforts of prevention something unfortunate happens, insurers should be able to tap into their claims handling. Some companies have invested in risk management and loss mitigation units to actually assist the insureds through the time of need.
  • Restore – and finally help the insureds to restore the loss or damage. This is the actual claim settlement, which is what most insurers do as the only activity at the time of claims.

In what I propose, the insurance (restoration or loss indemnification) is only one-third of what a new age insurer should be doing. And all of this needs to be seamless and digital with the use of available and developing technology.

Time has come to disrupt the centuries-old insurance industry from what some would call a “necessary evil” to “a pleasant experience called insurance.”