Insurance technology was once the red-headed stepchild of financial technology. But with more than 800 insurtech startups garnering almost 150 deals totaling $3.5 billion of investment since 2015, insurtech is a force to be reckoned with.
With this infusion of new blood have come some interesting and provocative pronouncements about this great industry. Some have come from people who are smart, insightful and engaged, while others are just plain arrogant, full of hubris, with their feet firmly planted in the air. Some of these observations have been eye-opening and challenging, others benign, some uninformed, some just plain dead wrong.
Of all the things said, one is downright wrong. This pronouncement of misinformation is that insurance is a commodity, that all insurance policies are the same, that there is no real difference between policies issued from different companies.
What is a commodity?
The best definition of a commodity that I can find reads: a product or service that is indistinguishable from ones manufactured or provided by competing companies and that therefore sells primarily on the basis of price rather than quality or style.
The key word in that definition is “indistinguishable.” The products or services when put side by side act the same, delivering the same results.
A perfect example is a battery. When I need a AA battery, I go to the store and buy one. Now it does not matter what store I go to or what brand I buy. As long as it was labeled AA, I knew that it would both fit and work by delivering just the right amount of electricity (provided I put it in the right way, but we’ll save that story for another time).
Another example is gasoline for our cars. It really does not matter which gas station I go to, or which grade I select; the gas goes into the gas tank, and the car runs. Yes, we can debate the benefits of different additives and octane grades: regular (usually 87 octane), mid-grade (usually 89 octane), and premium (usually 92 or 93) and their impact on engine knock. But the simple truth is that I put any gas into my car and it runs.
In one sense, I understand that insurance can be thought of as a commodity. Go to a website, enter a handful of fields, and multiple quotes are presented for you to choose from. In this narrow and limited perspective, insurance can look like a commodity on the front side of the transaction.
But the real question is not if a handful of fields can get you a number of quotes, but if those policies are the same? Do they cover the same things? Will claims be paid at the same amount? If insurance truly is a commodity, policies will all pretty much look the same, covering the same things.
A Personal Example
I was in Las Vegas for InsureTech Connect when Hurricane Matthew came up the Florida coast. I got a text message from the airline that my return flight to Orlando was canceled, and I would be contacted about rebooking. Quickly looking at the Orlando airport website, I read that it was going to be closed starting Thursday noon and at least all day Friday. Once Matthew passed, airport personnel would assess the damage and then determine when to reopen and at what capacity.
I was now in full scramble mode, calling the hotel to extend my stay. The agents was very empathetic and most willing to help. This made me feel somewhat relieved until the agent cheerfully informed me that I certainly could extend my stay another night for $780! I almost said, “Is that with or without dancing girls?” But remembering that I was in Las Vegas, I found myself wondering if that might be an actual option. Holding my tongue, I thought best not to say anything other than to thank the agent for the kind offer.
Yes, I was able to find another hotel room that was less expensive. Hurricane Matthew passed without doing much damage in the Orlando area. The airport reopened on Saturday, and I was able to get home without much trouble.
The reason for telling you this story is to use it as a backdrop to see if insurance is a commodity, using perhaps the simplest form of insurance: trip insurance.
Go to a trip insurance website, enter four pieces of information, get a bunch of quotes, select one and pay for it via credit card. Very simple, very straightforward. Trip insurance certainly walks and talks like a commodity.
The question is, when did my trip insurance start? What was covered? What compensation was I due? How much could I expect? This is where our journey really begins.
Trip insurance will run you on average between 4% and 9% of the trip cost. But a survey of 10 different trip insurance policies found that the terms and payments were very different. Also, the most expensive policy did not have either the lowest deductibles or the highest benefits. As a matter of fact, one carrier that was priced around 5% of the trip cost had many of the highest benefits. Here are some details of the different policies.
As you can clearly see, the coverages differ significantly in both their cost and potential benefit. Let’s walk through Delay Compensation as an example. One policy costs 4% of the trip and pays as much as $500 for a delay of 12 hours or more (not even covering the cost of my hotel room)/ Another policy costs 5% of the trip yet pays as much as $2,000 for a delay of five hours or more. The most expensive policy costs 9% of the trip but only pays as much as $1,000.
Pricing, coverage and benefits are not just mildly different, they are wildly different based on product differentiation and competition. This example is based on a simple trip insurance model. When it comes to healthcare choices, “Comparing plan premiums and deductibles only scratches the surface of what you should evaluate before selecting a plan this fall. Policy details can make an important difference in coverage and costs, but it may take some digging to uncover them.”
This caution also applies to personal insurance sold directly to the public. I’m familiar with one person who selected a personal auto carrier because it was the low-cost policy. However, when he had an accident, he discovered that the policy had no collision coverage. The few dollars he saved on the premium were insignificant compared with the $3,800 repair he had to pay for.
Differences in coverage and payment, inclusions and exclusions across different types of insurance are as numerous as options on a Rubik’s Cube.
There are a number of other ways that insurance is not a commodity.
Users – a commodity does not care who is using it; it just works. The fuel in your car does not care who is behind the wheel or in passenger seats. Insurance, however, does care who is using it. With insurance, depending on circumstances and policy wording, not all drivers of your car are covered by your personal auto policy.
Ownership – a commodity does not care who owns it; it works. With insurance, a vehicle may be owned by a company with a commercial auto policy, but that does not guarantee that the vehicle is covered.
Termination – a commodity works until it stops; the battery runs out of energy, the car runs out of fuel. That’s it. Insurance, however, is still in effect beyond its expiration date. Florida victims of Hurricane Matthew have five years to file a claim.
Location – a commodity behaves the same regardless of where it is used. Put a battery into a device, and it provides energy no matter where you go. With insurance, the location matters greatly. While most states have either two or three years to report a real estate property claim, the timeframe varies wildly from a low of one year to a high of 10 years depending on the state. Also, when you drive your car into Mexico, the gas still works, but your auto insurance stops at the border.
Consistency – a commodity does what it does; its specifications or requirements do not change over time. A battery is designed to deliver so much power over time based on its design. Batteries can lose their charge, and gas can degrade, but their basic function does not change. The same cannot be said about insurance, even if it is written into policy wording or legislative edict. Two recent court cases have dramatically changed the cost and coverage of workers’ compensation policies in Florida. The first removed limits on how many billable hours and cost can be accumulated by claimant attorneys. The second changed the duration that temporary total disability claims are to be paid, from two years to five years. Both these decisions were made long after the policies they affect were sold.
Cost – when a commodity is produced, its costs are known. You know all the parts of the battery, you source them, assemble the battery, distribute and sell them. The same can be said for gas. With a commodity, costs cannot suddenly go up for products already sold. But when you price and sell an insurance policy, you cannot predict all the costs or even what is to be paid and for how long. Think about the two Florida workers’ compensation examples above; policies were priced and sold based on “known” limitations on both claimant attorney fees and temporary total disability payments. Insurance companies will now pay unanticipated claim costs above and beyond what was originally covered, even though they were not factored into the original pricing. And there is no way to go back to the customer and charge extra for the added claim costs that are above and beyond the original policy.
Importance – if a battery fails, you throw it out and get another one. If fuel is old or contaminated, your car may sputter for a while, but that’s it. However, insurance is oh so much more important. Insurance gives stability to our financial markets. Insurance encourages entrepreneurial investment and risk taking. Insurance helps people rebuild their lives when tragedy happens.
Insurance is vitally important to our economy. Virtually no commerce is conducted without it. Insurance is also wildly complex, varying from state to state, company to company, policy to policy. It requires attention to detail, rigorous and serious thought.
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Who can forget Don McLean’s iconic “American Pie”? Released in 1971, it was a four-week No. 1 hit in the U.S. It is listed as the No. 5 song of the century by the Recording Industry Association of America (RIAA) and the National Endowment for the Arts. The original 16-page manuscript sold for $1.2 million last year.
For me, the most memorable line in the nearly 800-word, eight-and-a-half-minute song is: “The day the music died.” It marks Feb. 3, 1959, where there was a seismic shift in music. The senseless and untimely deaths of rock-and-roll legends Buddy Holly and the Big Bopper (J.P. Richardson) are interpreted in highly symbolic and blurry verbal pictures.
After the recent presidential election, the question before us is whether Tuesday, Nov. 8, 2016, will become known as “the day the data died.”
No matter your political or ideological viewpoint, no one predicted what happened at the polls. Even with mountains of data and 21st century technology, mainstream media and academia completely missed the mark — and not by a little. We now know that the data wasn’t just slightly off track; it was a couple of interstate exits away from reality.
To try to figure out where we in the insurance industry should go from here in terms of thinking about how to use data and of projecting trends, I revisited a number of new technologies that either did not live up to the hype or just never achieved the projected dominance. Here are some of my favorites and their potential insurtech applications:
Debuting in 1971, it had four-track sound instead of a stereo’s two. And everyone knows more is always better. Quadrophonic sound was portrayed as not just sitting in front of musicians but sitting in the middle of them. I actually bought a quad system with four speakers and some tapes. The problem was that there are about a billion ways to produce recordings, and no single format was ever agreed on.
Implications for Insurtech
Standards are vitally important for insurance data exchange and widespread blockchain deployment and success. But, as a McKinsey report noted, the insurance industry is not known for its cooperation, its creation of standards, its adoption or its enforcement of standards.
Steve Jobs said it would be bigger than the PC. Time magazine called it “reinventing the wheel.” Venture capitalist John Doerr (who backed Netscape and Amazon) said it would be bigger than the internet. Jeff Bezos spurred huge hype, saying the Segway “is one of the most famous and anticipated product introductions of all time.” With pre-orders from the National Park Service and the U.S. Postal Service and with more than $90 million in venture capital funds, the Segway’s inventor, Dean Kamen, said it would be to the car what “the car was to the horse and buggy.” All original 6,000 Segways were rapidly recalled because of customer injuries when the battery was low. While it has bounced back a little bit, the Segway never lived up to its hype.
If you Google “insurtech,” you get more than half a billion hits. With more than 800 insurtech startups and almost 150 deals worth $3.5 billion of investment since 2015, insurtech is a force to be reckoned with. There is more than enough hype to go around. Remember that just because an analyst, consultant or media outlet writes about a company or technology does not mean it is destined to take over the world — or even survive.
Everyone reading these words probably just about blew a gasket when they saw microwave ovens on this list of technologies that have not lived up to their promise. With more than 100 million units shipped in the past 10 years, how could microwave ovens be declared a failure? Well, microwaves were originally advertised as the death knell of traditional ovens. It’s not that microwaves are a failure, per se, it is that they never lived up to the hype. More than three million traditional ovens are still being sold annually, with a full 33% increase in sales over the past five years. As microwave radiation (yes, radiation) is used to heat water inside of food, it cooks from the inside-out. While microwave ovens are great for popcorn and reheating, they still cannot brown or fry, nor are they terrific for baking. I once caused a minor event (a fire) at work when I reheated some chicken in the microwave. I had failed to notice that the paper wrapping from the grocery store where I bought the chicken was lined with foil. While the ensuing fireworks and smoke were entertaining, my coworkers were less than thrilled.
While I keep count of the number of times I’ve ridden Pirates of the Caribbean in Walt Disney World (42 as of this article), I have completely lost count of the number of times the death of the mainframe was pronounced with great fanfare and assurance. The tablet was supposed to replace the PC, but, like the microwave, it has become a complementary device. We all need to exercise patience and caution whenever the next “bright shiny object” is set forth.
No, this is not a spelling error or an April Fools’ prank. Not only did someone actually think it was a good idea to combine two wildly different technologies in a single device, someone else approved and financed it. I find it hard to understand what a cell phone and electric razor have in common other than they are both battery powered and operate next to your face. Having a similar name to Motorola’s Razr phone turned out to create colossal confusion; the bottom line is that consumers were not at all attracted to this “cutting edge” device.
Putting together different technologies may make some sense or add value on the surface, but it may also have unintended consequences. I once worked for an insurance company that built a 40-story headquarters. It aggressively employed all the latest safety designs and technologies. One Monday morning, I woke up to discover that I could not go to work because of a significant fire on the fourth floor. It was later discovered that an office machine caught fire and burned undetected for about eight hours, causing considerable damage and disruption to the company. How could a fire burn that long without being detected, you may ask? The problem was the same as the Razr Phone: two technologies that seemed to make sense but had results that were problematic (at best). Smoke detectors were imbedded into the ventilation system and, to conserve electricity, the ventilation system had been turned off over the weekend, disabling the smoke detectors’ sensors. With no smoke detectors, the fire was allowed to burn until an overnight computer operator happened to open the door to the 25th floor stairway. With smoke billowing out, the operator manually pulled the fire alarm. One other note: With its reliance on all the latest technology and fire resistant materials, the building did not have sprinklers, much to the chagrin of the insurance company, the architect and city officials who approved the plans. A state-of-the-art sprinkler system was retrofitted, costing much more than if it had been installed during the original construction.
While no one should boast about the outcome of the recent elections, we all should question what is going on when it comes to the media and “the experts” who proudly boast they know the truth because they have the data.
In these cases, their feet were firmly planted in the air.
I really like the word “hypocrite.” Not because of what it means, but because of where it came from.
One of my hobbies is etymologies, which is exploring word origins and the way their meanings have changed over time. I especially enjoy word origins that have a vivid picture behind them, and “hypocrite” has a fascinating historical word origin and picture.
“Hypocrite” comes to us from the Greek word hupokrités (ὑποκριτής) and was commonly used of actors on the stage. Because Greek actors performed behind a mask, the word came to mean two-faced, someone whose profession does not match his practice, one who says one thing but does another, whose words and actions don’t agree.
While the comparison may sound outlandish, isn’t hypocrisy what we do when we send out a certificate of insurance?
In our desire to simplify and summarize policy information, we are inserting a filter that potentially hides and distorts the truth. Rather than directly show data from the policy, we put something in between, resulting in cost, delays and confusion.
At least three independent studies indicate that 40% to 50% of all certificates that indicate additional insured status are incorrect. Would you knowingly allow an insurance document with your name, and that of your organization, on it to go out with errors? At best, what happens with certificates deserves a D- grade and a stinging, costly indictment of the industry as a whole.
Today, the bulk of the certificate burden falls on the agent/broker. But with carriers desiring to directly enter the small commercial insurance marketplace, the effort, cost and potential liability of certificates will now transfer directly to carriers.
Certificates are not harmless or benign; they are expensive, ticking time bombs creating confusion and cost at best, soiled reputation and financial ruin at worst. Certificates also open up a Pandora’s Box to add wording in conflict to the policy, implying that coverage is in place when it actually is not.
Let me give you a real life example:
An insured received a certificate for a rodeo. After the event ended, some bulls got loose, sending several people to the hospital. An average professional bull is about the size of a small car, weighing in at between 1,600 and 1,700 pounds. Not until the injured patrons sued was it discovered that the special events policy excluded coverage for bodily injury or property damage caused by animals. It sure sounds like someone dropped the ball: a policy to cover a rodeo that excluded losses caused by animals?
Issuing certificates is looked down on as a clerical, workflow or technology issue by many. Get a request, merge the data, email it out, done.
But issuing a certificate is more than just clicking on a web site button to mindlessly generate a PDF. It’s more than a limit amount; it’s understanding and explaining what is covered and excluded.
Insurance is oh so much more than technology or workflow. It’s a promise to understand needs, matching coverage and protection. It’s a promise to help and restore in time of trouble or loss.
A next-generation solution to replace certificates is needed to continually verify coverage and compliance. The solution must also understand policy language, alerting all stakeholders to what is and is not covered.
It’s time to take off the hypocrite mask of certificates. Marketplace conditions and technology are now available to replace the hypocrite certificate with information directly from the policy!
A little while ago, my 92-year-old mom said that she was tired most of the time and was taking more and more naps. After several doctor visits and tests, the diagnosis was that her pulse was around 40 beats per minute, as opposed to a normal rate of 60. Her cardiologist recommended a pacemaker to improve her heart function and quality of life.
When she checked into the hospital, it had all her records, history, blood work, EKG printouts, etc. Everything was correctly recorded on physical and digital paper.
The staff still hooked her up to an EKG and blood pressure cuff to get moment-by-moment readings.
You see, some things are just too important for paper.
Before she went into surgery, her pulse was 42, and her blood pressure was very high. The staff gave her two courses of blood pressure meds, which brought it back into range so the surgery could take place. When they wheeled her back into her room after surgery, her pulse was 60. Her blood pressure was starting to creep back up, so they continued with some additional meds that brought it back into range. They kept her on the EKG and blood pressure cuff until she was discharged.
I am so thankful that she went home and is back to her old self; out of the house at least five days a week, playing bingo three of those days. My 95-year-old dad still drives them to doctor appointments and worship on the weekends, followed by McDonald’s. To celebrate special occasions, my dad drives them to Chick-fil-A or the Olive Garden.
While having all documentation, forms and information available in paper or electronic image is helpful to a point, it’s just not good enough. The hospital staff needed something more. They needed to continually monitor my mom, checking her pulse, watching her blood pressure and other vital signs.
Now that she’s back to living a full and active life, a technician has come to her home to set up a device that communicates with her pacemaker. It monitors information on her, the pacemaker and her vitals. On a daily basis, this information is collected and forwarded to her doctor via a secure website.
The insurance industry has invested untold billions in technology, and who knows where hand-held devices, wearables, wireless high-speed communications, etc. will eventually take us? But there is one boat anchor of a technology that is dragging down speed, accuracy and efficiency while adding cost and waste.
That technology is the ubiquitous paper form.
Like any form, certificates of insurance are D.O.A. (dead on arrival). Now this might sound harsh, but the reality is that forms are created with information as of a point of time. Because the form is cut off from any possible changes or updates, the cert is potentially out of date by the time it’s delivered.
A host of possible changes and informational updates can invalidate the cert. Mid-term endorsement, renewal, changes in limits or forms, cancellation for non-payment and AM Best rating downgrades are but a few of the possible changes that can nullify the cert.
It makes absolutely no difference how the form was created (agency, company or third-party software and service providers), everyone creates D.O.A. forms. The delivered method is also irrelevant: Paper, fax, web address link, mobile phone, table, PDF and other digital images all have exactly the same problem.
The fact that forms are not plugged into and alive with information pronounces them D.O.A. There is no continuing re-verification of the policy status in conjunction with the needs of the insured and the third-party that needs verification of coverage.
Islands of Misinformation
There are four stakeholders involved in any proof of insurance, and they are isolated on individual information islands. The carrier, agent, insured and third party are involved with the certificate, yet no one can monitor or have control over the entire process. Each organization has its own needs and desires and its own email system. There are also no controls, follow-ups or monitoring of the process. Everyone hits the ubiquitous “reply all” email command, creating an unintelligible spaghetti string of text that is unmanageable and unintelligible.
Business and insurance islands are not known or documented at the beginning of the process. Requirements normally leak out during the process, wasting precious time and money while raising frustration.
I’m familiar with an agency that diligently and professionally worked to get a cert out for a client. Everyone was happy when the process was finished — then the third party sent out yet one more notification, saying the use of “N/A” for “Not Applicable” was not acceptable and needed to be changed to “N.A.” Time and good manners do not permit me to retell the loud and colorful commentary that was heard throughout the agency for a good 15 minutes.
It will take significantly more than a smart mobile device or cloud-based system to solve the systemic problems once-and-for-all. There needs to be a fundamental shift in the way the industry thinks about proof of insurance.
We need to declare the certificate D.O.A. and move toward a data-driven digital solution of the sort we have developed at GAPro: a single source where insurance information is automatically housed, updated on a daily basis and integrated with data from all stakeholders in the insurance ecosystem. Carriers send electronic versions of policy transaction data and attached forms for new, renewal, mid-term change, cancellation, reinstatement and billing status to GAPro. GAPro stores and matches policy and form information with data from other insurance-related resources, including AM Best, agency licensing and other sources. Risk profile information describing the insurance business and content needs of agents, insureds and third parties is collected and integrated on a per-policy basis.