Tag Archives: Fraker

Innovation: ‘Where Do We Start?’

Before “insurtech” becomes the next over-used buzz-phrase to hate, let’s step back for a moment and consider the truly unprecedented scope of opportunity for growth facing those in the various risk management sectors who embrace the inevitable reinvention of this trillion-dollar industry.

As the whirlwind of start-ups and innovation occurring across insurance business models evolved into viral global gold rush, many existing insurers and VCs still struggle with how to participate. Many who understand the reality of disruption as a means of growth struggle even more with the most basic questions:

  • Where do we start?
  • Do we have the expertise?
  • How can we pick the best among the thousands of startups and “smart-ups?”

Most of the established firms I coach are consistently surprised by two lessons learned that have been captured at some point after working through these key strategic questions.

First, they are surprised at the ease with which they were able to answer the one question that can be truly paralyzing: “Where do we start?” Second, they often voice relief at how easily the rest of the core, up-front answers seem to just fall into place. These experiences can be distilled down to a rather straightforward single question: “How do we get unstuck?”

See also: Insurtech and the Law of Large Numbers  

Two timeless bits of wisdom can provide the first steps toward converting chaos into actionable clarity:

  1. A picture is worth a thousand words. Frameworks and models do help create clarity.
  2. A little education goes a long way. This is code for: check as many assumptions as possible at the door and ask, “What if..?”

Here are some pictures that can be useful:

Source: Startupbootcamp, what is an insurtech? [Infographic], 2015

The “4 Ps” model from Matteo Carbone and the Insurance Observatory

Insurtech Landscape by AGC Partners

All three frameworks for understanding insurtechs are solid models by which an audience, subscriber group or client company can gain greater insights. But insurance companies, venture capitalists and regulators need to understand how to use them.

The insurtechs in these models represent but the center of a much larger landscape of forces requiring consideration if you want to be an insurer that defines the rules that all others will have to follow.

Innovation Framework

The reinvention of insurance is simultaneously happening from the inside-out (insurtechs) as well as from the outside-in (exponential technologies). In other words, insurtechs are revolutionizing HOW insurers will manage risk and consumers. Exponential technologies will fundamentally redefine the WHAT—i.e., the very risks that insurers manage.

Now, this raises an important question: How do we define these larger external forces? One organization influencing many of these breakthrough, or exponential, technologies is Singularity University in Sunnyvale, CA. Singularity U coined the phrase “10(9)” Opportunities.” These are opportunities to leverage a technological capability, or domain, to improve 1 billion lives (9 zeros) within a single decade.

Some may question whether this vernacular is more aspirational than attainable. But among the best-kept secrets in the insurance industry is the reality that exponential markets waiting to be discovered outnumber those currently being addressed by existing insurance product lines. So, here is a possible goal: “By year-end 2027, we will have grown by improving the lives of 1 billion or more people by creating products that leverage the technological application of___________________.”

Incumbent insurers must understand how these converging forces relate to discover clarity and scalable growth. A short list of essential questions leading to viral growth strategies needs to include: Which insurtechs will feed my strategy to grow _________ opportunities?

These types of questions can map the insurtechs within the industry and near term to the longer-term, much broader landscape of opportunities. Clarity of these exponential forces—then mapped back to the products, services, and new business models among insurtechs—will open the door to achieving four significant deliverables:

  1. Improve the solicitation, selection and vetting of new ideas generated internally and collaboratively;
  2. Improve the returns on early-stage investments;
  3. Improve the vision, focus and identification of M&A opportunities;
  4. Improve the expectations and returns on new products and services developed and launch by internal innovation teams.

Strategic Framework for Member Services

The world outside of insurance looks into this industry with skepticism with respect to innovation. What is so often misunderstood is that three of the most significant societal shifts of the past 200-plus years were essentially enabled by insurance innovation: homeownership in the late 18th century, the viral adoption of the car and advances in medical treatments as an outgrowth of adoption of health insurance. The DNA for exponential innovation resides within this industry.

Seeing insurtechs as a means to fulfill a longer-term innovation strategy is where the opportunities are being discovered by those who will lead this industry for decades to comes.

See also: Insurtech Is an Epic Climb: Can You Do It?  

To provide feedback, ask for additional information or learn how to apply these concepts, contact Guy Fraker, guy@insurancethoughtleadership.com.

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Beginning of the End for Car Insurance?

Volvo’s statement last week that it would accept all liability when its cars are in autonomous mode takes the threat to traditional auto insurance to a whole new level. Google and Mercedes have already made similar promises, so we now have three major companies saying they will treat certain car accidents as product liability issues and will take on risk that has historically been the responsibility of individual drivers and auto insurers.

For good measure, Tesla just offered a software download that will let real drivers in real Model S cars operate autonomously on real roads.

The future is upon us.

Obviously, this is just the start. In Churchillian terms, we aren’t at the beginning of the end for car insurance, and we aren’t even at the end of the beginning; we’re at the beginning of the beginning.

For the immediate future, there will be zero effect on auto insurers. Only a small number of drivers will be operating their cars autonomously and only for a portion of their time on the road. Tesla isn’t even accepting liability at this point, and auto insurers won’t initially even be asked to adjust their rates to reflect the risk that providers of autonomous technology are taking out of the auto policy equation.

A thoughtful column by Craig Beattie argues that two significant steps still have to happen before much risk for car accidents moves to the product liability side of the ledger. First, courts must sort out the many issues that will be raised when the first unlucky person dies in an accident where an autonomous vehicle is at fault. Second, he says, autonomous cars must be in operation long enough that lack of maintenance, rather than product design, becomes the issue that has an autonomous car cause an accident. Courts will then have to sort through who bears the responsibility for that lack of maintenance.

Although I agree with the first point, about settling key issues in court, I’m not so sure the second is a huge deal. I think vanishingly few people will own autonomous cars once we get through the hybrid phase that Volvo, Mercedes and Tesla are taking us into now, where people can switch into and out of driverless mode in what are otherwise traditional cars. Today, cars sit idle more than 95% of the time, so it’s far more efficient to share cars operated as part of a fleet, rather than pay to have what is usually someone’s most expensive asset, or second-most (after a house), just sit there. A study that Chunka Mui and I cited in our book Driverless Cars: Trillions Are Up for Grabs found that a fleet owner could provide cars to people for 90% less than we pay for car transportation now and still make gobs of money. So I believe that fleets, not individuals, will be responsible for maintenance, removing that as an issue that would be in the province of traditional auto insurance.

I also expect the federal government to get involved at some point. If driverless cars can really reduce the number of traffic deaths on U.S. highways (currently roughly 35,000 a year) by tens of thousands and reduce the number injured in accidents (currently about 2.5 million a year) by many hundreds of thousands, then driverless cars create a clear societal good, and their use should be encouraged. Even if the government decided to be revenue-neutral, it could take the money it currently spends through Social Security, Medicare, Medicaid, etc. because of auto accidents and could perhaps cover all the liability for accidents caused by autonomous vehicles — and have a lot left over, besides.

Politics will rear its ugly head when it comes to deciding what government should do and how quickly it can act, but it’s hard to run a campaign in favor of injury and death.

So the issue about traditional auto insurance is much less about if it goes away and much more about when.

“When” is a legitimate question. It takes 15 years or more for the full complement of cars on U.S. roads to be replaced, so you could decide that autonomous-car technology won’t really be mature for a few years, then start a clock and count out 15 years to a time when roads will be fully autonomous. That approach takes many people’s calculations to 2030 and beyond — by which time today’s C-suite members will be safely retired.

But many autonomous technologies, such as forward collision avoidance systems and automated braking, can be installed as a retrofit — Autonomoustuff, advised by our friend Guy Fraker, is a notable supplier. And the dynamics of auto accidents and insurance change long before every car becomes autonomous. Many studies say 20% to 25% penetration is plenty to cause major changes.

While I won’t venture a precise guess about the fate of car insurance, I’ll offer an observation: When Chunka and I wrote about driverless cars 2 1/2 years ago, we staked out what was then an extremely aggressive position about how quickly the transition to autonomous vehicles would happen and about how far the ripples would reach, including for auto insurance — and we may be turning out to have been too cautious.

Uses of Life Insurance in Estate Planning

Most people think life insurance is used for only one specific purpose: to replace the lost earnings should a primary breadwinner pass away. Those who subscribe to this theory often purchase low-cost, term insurance that expires soon after retirement. However, such thinking ignores the wide variety of uses for life insurance, especially when it comes to estate planning. Let’s examine several alternative uses of life insurance that many perhaps overlook.

1. Estate Creation – One of the most obvious, yet most overlooked, uses of life insurance is to create or expand one’s estate. Every parent wants to leave their children better off financially than they were. Life insurance can create an immediate estate for one’s children, often for pennies on the dollar. In uncertain economic times, life insurance can be an important resource to ensure our children’s economic well-being.

2. Liquidity to Pay Estate Taxes – The truth is, the IRS expects all estate taxes to be paid off within 9 months of your death. Federal estate taxes can be as high as 50% of your gross estate. The average Californian’s estate is dominated by two assets: their personal residence and their Individual Retirement Account. Neither of these assets is easily liquidated on short notice without triggering substantial tax penalties. Even if your heirs were able to liquidate one or more of these assets to pay taxes, using life insurance proceeds instead may make far greater sense.

3. Estate Equalization – In many families, the bulk of their estate is comprised of assets that aren’t easily divided among heirs, such as the family residence. Often, one heir has expressed an interest in preserving the asset, while others would prefer cash instead. Life insurance may allow you to divide your estate equally among your heirs, while reducing the need to divide assets or provide for joint ownership.

4. Family Business – Many parents who have invested their life’s work in their own business dreams that one day their children will follow in their footsteps, and take over the day-to-day management of the company. Often, this simply isn’t the case. A more typical scenario involves one child having an interest (or ability) to take over the family business, while one or more other siblings are interested in pursuing their own life goals. Forcing all your children, regardless of their interest (or business acumen) to participate in running the family business for the sake of receiving their inheritance is often a recipe for disaster. A far more sane (if less sentimental) approach is to hand over the reins of the family business to the child who shows the most
interest/ability. Using life insurance to “cash-out” the other heirs is an ideal way to preserve family harmony, as well as the continued viability of the family business.

5. Wealth Replacement – For many families, philanthropy is an integral part of their value-system. These values are often reflected in their estate plans through sizable bequests to charities upon their death. In such cases, amounts transferred to charity may reduce the inheritance of loved family members. An alternative is to use life insurance to replace the assets given to charity in a cost-effective manner. Such win-win thinking helps to preserve family harmony, while instilling the value of philanthropy in the next generation.

In Conclusion

In each of these scenarios, we can see valuable uses of life insurance that extend far beyond mere “paycheck replacement.” We have yet to meet the family that couldn’t relate to one or more of these examples. Which one applies to your situation? I welcome the opportunity to discuss your needs in more detail.

Important Note:

When using life insurance in estate planning, it is important to use an Irrevocable Life Insurance Trust (ILIT) to own the life insurance policy. This means that the proceeds of the life insurance policy will be paid directly to the beneficiaries of the ILIT free of estate or income tax.

Without an ILIT, a life insurance policy would be included in your gross estate, and your estate tax liability would be increased, not decreased.