Tag Archives: Global Insurance Symposium

The Myth of the Protection Gap

A friend and colleague, Chunka Mui, once said, “Marketing is when a company lies to its customers. Market research is when a company lies to itself.”

In the insurance industry, talk of the protection gap manages to combine both problems: It’s something of a lie to customers and is an even bigger lie to ourselves.

People routinely talk about the protection gap — the difference between losses incurred and the amount that are covered by insurance — as though the number shows how much more insurance people and organizations should be buying. We comfort ourselves with the size of that number, because we think it represents opportunity for us. We also, frankly, get a little condescending about the people and organizations that aren’t bright enough to buy our product to cover their losses.

But if you look at it from the customer standpoint, there isn’t a gap. We’re just kidding ourselves.

To make the math simple, let’s pick a country at random and make up some numbers out of whole cloth. Let’s imagine we’re Gabon, and we, as a nation, incur $1.5 billion of losses a year, while only $500 million is covered by insurance. We’re told we have a protection gap of $1 billion. We should buy $1 billion of additional coverage.

It’ll only cost us $1.3 billion.

That’s because — again, in very rough numbers — the insurer has to tack on 20% on top of the losses to cover expenses and needs its 10% profit margin to keep shareholders happy.

But why would Gabon decide to overpay by $300 million a year? The insurer’s employees and shareholders are surely nice people who could use the money, but shouldn’t Gabon take care of its citizens?

I understand about peace of mind and surely believe that insurance plays a crucial role in the world economy, but, from a certain perspective (one that many customers take), I’d be better off going to a casino and playing the slot machines rather than buy insurance. The casino might even throw in free drinks and a show.

Insurance needs some new math to replace the protection gap, and we need to stop acting as though it’s a real thing that a customer might care about.

The first step is to cut expenses radically — perhaps 50%. I use that number because a famous consultant/author with whom I have worked is going to argue in a book soon that every business needs to cut operating expenses by 50% within five years. I also see enough innovation happening around the edges in insurance that I think radical cost cuts are possible. For instance, at the Global Insurance Symposium in Des Moines last week, I met the founder of RiskGenius, whose artificial intelligence could automate the work of whole swaths of people at brokerages who review the constant stream of changes in policies.

But even that new math only shrinks the problem. Add half the previous expenses onto that $1 billion of insurance for Gabon, stir in the required profit, and you’re still asking the country to pay $1.2 billion to cover $1 billion of losses.

The real change can only happen when insurance gets out of its product mindset and shifts to a service mentality. Then someone could go to Gabon and say, “Our insurance company knows an awful lot about how losses occur. How about if we advise your government, your companies and your citizens and help you prevent as many as we can?”

Then, perhaps, you shrink those losses by a third — and keep some of that difference as profit. If you still take that whack at expenses, you could tell Gabon: “We’ll take responsibility for your $1.5 billion of losses (both the insured and the uninsured), and it’ll only cost you $1.25 billion. You’ll come out $250 million ahead, while we cover all our expenses and earn $100 million profit.”

That $250 million gain is the kind of gap a customer will believe in.

What Is Right Balance for Regulators?

As Iowa’s insurance commissioner, I meet with many innovators whose work affects the insurance industry. A major topic we discuss is the continual debate of innovation vs. regulatory oversight. This debate will be front and center during the Global Insurance Symposium in Des Moines when federal regulators, state regulators, industry leaders and leading innovators come together for discussions on the “right” way to bring innovation into the insurance industry.

I see three schools of thought in the debate:

  • Those who want nothing changed because insurance regulation has worked for more than 150 years
  • Those who suggest oversight by insurance regulators isn’t needed because innovations and market forces don’t require the same type of scrutiny that regulators have performed in the past
  • Those who feel that regulations and oversight are needed but that regulators should move quickly to keep up with emerging technological developments

Innovation is happening, and regulators realize it. No one, including regulators, can stop technological advances. Luckily, I have found that my colleagues who regulate the insurance industry desire to see innovation succeed because it will, generally, enhance the consumer experience. The focus of regulators is to enforce the laws in our states and to protect our consumers. It is that constant focus that ensures a healthy and robust market. And it is that focus that allows the market to work during an insolvency of a carrier, as Iowa witnessed recently during the liquidation of CoOportunity Health.

But wanting to work with innovators doesn’t mean insurance regulators are going to turn a blind eye to how innovations and new technologies within the industry are affecting consumers. I do not believe the fundamentals of the insurance business need to be disrupted. Innovations within an industry that is highly regulated, complex and vital to our economy and nation need to occur within the confines of our regulatory structure. Innovators who are attempting to disrupt the insurance industry outside the bounds of our regulatory structure and who are not following state regulations will likely face significant problems.

So, just as Goldilocks finally found the perfect fit at the home of the three bears, insurance regulators are working diligently to find the perfect fit of the proper regulation to protect consumers for innovations and the technology affecting the insurance industry.   Regulators want the insurance business to continue to innovate and adapt to meet customer needs and expectations. Improving the customer experience through technology, quicker underwriting and increasing efficiency adds to the value of insurance for consumers. I know many smart people are working on creative projects to do these types of things and much more.

The insurance business is arguably becoming less complex because technology simplifies and evens out that complexity. Many existing insurance companies will face challenges as data continues to be harvested and as digital opportunities become more obvious. The continuous innovation in the industry is both positive and exciting.

However, insurance carriers face incredible issues, and, therefore, the regulators who supervise these firms must clearly understand the complexity of the industry and the external factors that weigh upon the industry.

A few issues industry participants must deal with:

  • Perpetual low interest rates that make it difficult for insurers’ investment yields to match up with liabilities;
  • Catastrophic storms that may wipe out an entire year’s underwriting profit in a matter of hours;
  • Increasing technological demands within numerous legacy systems;
  • International regulators working toward capital standards that may not align with the business of insurance in the U.S.

I believe regulators, insurance carriers and innovators can work together to harmonize and streamline regulations in an effort to keep up with market demands. However, the heart of insurance regulation beats to protect consumers. Compromising on financial oversight and strong consumer protections is not up for negotiation. Ensuring companies are properly licensed and producers are trained and licensed is critical, and ensuring companies maintain a strong financial position is equally critical.

Innovators who wish to bear risk for a fee or distribute products to consumers will need to comply with insurance law. Additionally, innovators looking to launch a vertical play into the industry through a creative service, model or underwriting tool need to make sure they do not run afoul of legal rules and provisions that deal with discriminatory pricing and use of data. It is a lot to absorb for an entrepreneur, but it is not impossible, and the upside may very well be worth it.

I absolutely encourage companies looking to innovate in the insurance industry to proceed, but I urge them to do so both with the understanding of insurance law and the role of the regulator and with strong internal compliance and controls. Innovators and entrepreneurs who proceed down the right path are the most likely to have regulators excited to see them succeed.

Insurance is still a complex industry. Can and should it be made simpler? Yes. I believe that, through innovation and continued digital evolution, it will. Should the industry focus on how to continue to enhance consumer experience and put the consumer in the center of everything? Yes, and I know that is occurring within many new ideas and businesses that are beginning and evolving.

Insurance, at its core, is a business of promises. It is an industry that has passed the test of time, and I believe, through innovation and continual improvement, it will remain strong and vibrant for the next 100 years.

If you are an innovator or entrepreneur and are looking for a program to learn about how to address insurance regulatory issues within your business as well as the role of a state insurance regulator, I would again encourage you to attend our 3rd Global Insurance Symposium in Des Moines, Iowa. This is the first conference where innovation and regulatory issues truly converge. This is your opportunity to learn from state insurance regulators, the Federal Reserve, the U.S. Department of Commerce, seasoned insurance executives, start-up entrepreneurs (the second class of the Global Insurance Accelerator will have a demo day for the 2016 class), venture capital investors and leading innovative thought leaders. No other meeting has assembled a group like this.

Everyone will benefit from the unique learning experiences, and, more importantly, relationships will emerge. Register here today!

What I Learned at Google

As a regulator, I am often told I thwart innovation. To the contrary, I am very open-minded and excited by many of the innovative ideas I see and read about. Recently, I participated in an event at the Google campus with insurance experts from around the globe for a day of collaboration and learning. It was an experience I will not soon forget.

We spent the day discussing Google Compare, Waze and autonomous vehicles. Ideas were freely shared, discussed and challenged. What most impressed me was the great excitement the group showed about insurance evolving with new technologies. Oftentimes, the regulators in the room were asked our opinions on these technologies and the inherent regulatory issues. The regulators did a nice job articulating our need to protect insurance consumers and to adequately supervise carriers to ensure financial soundness and legal compliance, while allowing for innovations that work within our regulatory system.

It was a robust discussion, and I learned a number of key things about Google and its view of innovation and, in particular, insurance innovation.

  • Google works to fix problems. The Google employees were clearly driven to fix problems, and that desire took precedence over job titles. This was refreshing to witness first-hand.
  • Google thinks big picture. With a number of insurance regulators and insurance company executives in the room, it was eye-opening to hear a Google employee discuss statistics or numbers when solving problems only to admit the statistics or numbers were not precise. The Google employee considered best estimates that were “probably close enough” to a true statistic or number to be good enough to keep the ball rolling. Insurance company executives generally would only rely on exact figures to prove a business point, which requires actuaries to pound through data for weeks to get the correct number. Unfortunately, during the lengthy look at the data, innovation likely sits idle.  Google’s ability to not think in a vacuum or silo appears to be critical to moving innovation and ideas forward without being totally entrenched in analysis paralysis.
  • Google focuses on the customer. Repeatedly, Google employees drilled home how they view their relationships with their customers and their desires to constantly improve the lives of those customers.
  • Google wants to work with insurance regulators and policy makers. Google understands, respects and embraces the important role regulators play in protecting consumers. The fact that invited me to participate demonstrates this commitment.
  • Google is incredibly mission-focused. All the people I met from Google discussed the mission they had for their particular projects over everything else. Whether the missions were saving lives, improving buying experiences or lessening traffic and use of fossil fuels, these employees know the mission of the projects they are working on and how they relate back to the overall mission of Google.
  • Google could be a powerful force in the insurance space. Google has smart people who understand customers and the demands of the customers. Combining this with a desire to improve customers’ experiences and the immense technological and mobile resources Google possesses likely makes it a strong source of innovation in insurance.
  • Google employees are powerful brand ambassadors. How employees act says more about an organization than any activities the employer does. Every Google employee I met was a true Google ambassador. From the individual who welcomed us, to the person who showed us around, to the staff in the cafeteria, to the executives. Google’s employees understand Google’s mission and, more importantly, have bought into the vision.

I have spent a lot of time working with innovative ideas and new companies. These experiences assist me in my role as commissioner in fulfilling the mission of the Iowa Insurance Division. As a leading insurance state, we focus on insurance innovation, and I’m excited to invite you to register for the third annual Global Insurance Symposium in Des Moines on April 26-28, 2016.

During this symposium, renowned industry keynote and panel speakers will engage in dialogue on regulatory trends and issues that are affecting the industry, as well as focus on innovations in insurance across the globe.

Don’t miss your chance to participate, ask questions and learn from some of the brightest minds from around the world. Visit www.globalinsurancesymposium.com for more information.