Hackers, malware, viruses, ransomware and phishing emails are becoming a normal part of increased connectivity, and their impact on everyday life is growing. The result is a profound increase in the demand for cyberinsurance. The downside? Cyberinsurance is hard to price as risk potential is not well understood, and losses can enter into the millions of dollars. Moreover, businesses with cyberinsurance may be lulled into complacency by their coverage. They shouldn’t be. Just reimbursing the costs of damage after a cyberattack isn’t smart business—smart businesses seek to prevent the cyberattack from occurring.
Enterprises do this at great expense, with costly, complex tools and teams beyond the reach of small and medium-sized enterprises (SME). SMEs need automated cybersecurity for cost-effective, full protection. That’s because cyberninsurance is insufficient to protect a business: It isn’t a substitute for good business practices that work in concert with cybersecurity. In short, cyber insurance and cybersecurity must complement each other to provide what businesses really want: peace of mind at predictable costs.
Cyber Safety Is as Essential as Fire Safety
Think of it like this: You wouldn’t protect a business from a fire simply by buying a fire insurance policy. Best practice fire safety includes smoke alarms, fire extinguishers, fire-retardant building materials, a designated gathering spot and regular fire drills. On the other side of the coin, governments have adopted fire safety building codes, and insurers don’t sell fire insurance without verifying fire safety compliance: Fire extinguishers, smoke detectors and sprinklers must be installed and properly maintained.
Similar businesses practices are necessary for cyber protection. But the technology has not caught up with business needs. Many cyber insurance policies are written without accurately measuring the risks that make a business vulnerable to a cyber attack. A one-time snapshot of the number and type of data records, or even a more full-fledged review of internal and external systems, is inadequate to assess risk. Technology evolves too quickly for these snapshots or scores to be valid over time. The moment a system needs upgrading, data may be at risk. The moment a new virus begins to spread, businesses are vulnerable. As long as a patch is not applied, systems and data are exposed. These big changes to risk affect the underwriting assumptions. It’s a shifting landscape, one that requires that businesses remain constantly vigilant. Automated cybersecurity technology is more effective than people at monitoring and addressing threats. In short, cyber insurance without automated cybersecurity is like fire insurance without smoke detectors.
Cyber Risk Models Need Much More Data
Automated cybersecurity platforms that detect and protect against cyber attacks are also useful to measure risk over time. Telematics let auto insurers such as Progressive and Metromile more accurately measure risk—and price accordingly. We need new “cyber-telematics” that allow underwriters to more accurately measure cyber risk. They provide risk insights about the insured, enabling the development of rich aggregate risk models. Cyber-telematics also helps underwriters develop risk models from the measurements correlated with cyber risk—and see the red herrings that aren’t. Cyber-telematics answers industry concerns noted in a March 2017 Property Casualty 360 article that “the insurance industry faces a rampant reporting bias that is hard to translate into policies.”
Without a thorough understanding of the profound risk being underwritten, losses are unpredictable—and potentially catastrophic. Insurers have long understood the impact of underestimating exposure aggregation with respect to natural disasters and other correlated losses like terrorism or asbestos claims. Of these, Towers Watson wrote, “The difference is that the terrorist attack is a single event and not a decades-long process, and the losses will be recognized and paid much more quickly.” The same, or worse, should be expected of large-scale single cyber events.
Technology is essential to collecting the data for, then understanding, mitigating and accurately modeling cyber risk.
Large enterprises have massive budgets, and most create a custom cybersecurity system using expensive experts and tools from multiple vendors. This has made it much harder to penetrate their defenses. As a result, hackers have moved down the food chain, making small and medium-sized businesses especially vulnerable. These businesses face the potential of a business-ending event in the face of a cyber attack.
Automation is the right answer when people and systems aren’t available or affordable. SMEs need automated cybersecurity to reduce risk and reduce cost. Current solutions are simply too expensive in terms of staffing and too complex in terms of tool integration. With automated cybersecurity, SMEs receive the benefit of robust machine learning coupled with economies of scale that take advantage of the cost efficiencies introduced by automation. For insurers, automation enables data gathering that informs robust risk management models, providing key insights to identify and mitigate loss potential.
According to Hiscox data, 60% of smaller companies in the U.S. reported one attack or more in the last 12 months—and 72% of larger companies. In the U.S., the average estimated cost of an organization’s largest cyber incident was $35,967 for 99 or fewer employees and $102,314 for 1,000 or more employees. However, a November 2017 Property Casualty 360 article reports that “in the aftermath of an incident, SMBs spent an average of $879,582 due to damage or theft of IT assets; additionally, disruption to normal operations cost an average of $955,429.” This wide variance in the reported cost of cyber incidents reflects uncertainty among insurers.
The Hiscox report further observes, “While big firms incur the highest costs in nominal terms, the financial impact of cyberattacks is disproportionately high for the very smallest companies.” Because these “smallest companies” can least afford effective cybersecurity, they need automated solutions. Let the machines do the work.
Peace of Mind
Cyberinsurance complemented by automated cybersecurity is key to modern business—neither is sufficient on its own. SMEs are better protected with the complement of these tools. A simple metaphor is the modern automobile. Today’s cars don’t simply provide airbags to react to accidents, they include technologies to avoid accidents: anti-lock braking systems (ABS), blind spot monitoring, lane departure warnings and more. Modern cybersecurity and cyber insurance are similar complements: Airbags cushion the blow, much as a rapid response can limit the losses from a cyberattack, and automated cybersecurity monitors networks and protects SMEs, much as accident prevention systems protect drivers.
Modern technology demands the next evolution of cyber insurance and cybersecurity measures, similar to the evolution of fire insurance and car safety technology. Effective, automated cybersecurity technologies, coupled with comprehensive cyber insurance, are needed for real peace of mind against cyber attacks.
Despite a generally soft market for traditional P&C products, the fact that so many industries and the businesses within them are being reshaped by technology is creating opportunities (and more challenges). Consider insurers with personal and commercial auto. Pundits are predicting a rapid decline in personal auto premiums and questioning the viability of both personal and commercial auto due to the emergence of autonomous technologies and driverless vehicles, as well as the increasing use of alternative options (ride-sharing, public transportation, etc.).
Finding alternative growth strategies is “top of mind” for CEOs. Opportunities can be captured from the change within commercial and specialty insurance. New risks, new markets, new customers and the demand for new products and services may fill the gaps for those who are prepared.
New technologies, demographics, behaviors and more will fuel the growth of new businesses and industries over the next 10 years. Commercial and specialty insurance provides a critical role to these businesses and the economy — protecting them from failure by assuming the risks inherent in their transformation.
Industry statistics for the “traditional” commercial marketplace don’t yet reflect the potential growth from these new markets. The Insurance Information Institute expects overall personal and commercial exposures to increase between 4% and 4.5% in 2017 but cautioned that continued soft rates in commercial lines could cause overall P&C premium growth to lag behind economic growth.
But a diverse group of customers will increasingly create narrow segments that will demand niche, personalized products and services. Many do not fit neatly within pre-defined categories of risk and products for insurance, creating opportunities for new products and services.
Small and medium businesses are at the forefront of this change and at the center of business creation, business transformation and growth in the economy.
By 2020, more than 60% of small businesses in the U.S. will be owned by millennials and Gen Xers — two groups that prefer to do as much as possible digitally. Furthermore, their views, behaviors and expectations are different than those of previous generations and will be influenced by their personal digital experiences.
The sharing/gig/on-demand economy is an example of the significant digitally enabled changes in people’s behaviors and expectations that are redefining the nature of work, business models and risk profiles.
The rapid emergence of technologies and the explosion of data are combining to create a magnified impact. Technology and data are making it easier and more profitable to reach, underwrite and service commercial and specialty market segments. In particular, insurers can narrow and specialize various segments into new niches. In addition, the combination of technology and data is disrupting other industries, changing existing business models and creating businesses and risks that need new types of insurance.
New products can be deployed on demand, and industry boundaries are blurring. Traditional insurance or new forms of insurance may be embedded in the purchase of products and services.
Insurtech is re-shaping this new digital world and disrupting the traditional insurance value chain for commercial and specialty insurance, leading to specialty protection for a new era of business. Consider insurtech startups like Embroker, Next Insurance, Ask Kodiak, CoverWallet, Splice and others. Not being left behind, traditional insurers are creating innovative business models for commercial and specialty insurance, like Berkshire Hathaway with biBERK for direct to small business owners; Hiscox, which offers small business insurance (SBI) products directly from its website; or American Family, which invested in AssureStart, now part of Homesite, a direct writer of SBI.
The Domino Effect
We all likely played with dominoes in our childhood, setting them up in a row and seeing how we could orchestrate a chain reaction. Now, as adults, we are seeing and playing with dominoes at a much higher level. Every business has been or likely will be affected by a domino effect.
What is different in today’s business era, as opposed to even a decade ago, is that disruption in one industry has a much broader ripple effect that disrupts the risk landscape of multiple other industries and creates additional risks. We are compelled to watch the chains created from inside and outside of insurance. Recognizing that this domino effect occurs is critical to developing appropriate new product plans that align to these shifts.
Just consider the following disrupted industries and then think about the disrupters and their casualties: taxis and ridesharing (Lyft, Uber), movie rentals (Blockbuster) and streaming video (NetFlix), traditional retail (Sears and Macy’s) and online retail, enterprise systems (Siebel, Oracle) and cloud platforms (Salesforce and Workday), and book stores (Borders) and Amazon. Consider the continuing impact of Amazon, with the announcement about acquiring Whole Foods and the significant drop in stock prices for traditional grocers. Many analysts noted that this is a game changer with massive innovative opportunities.
The transportation industry is at the front end of a massive domino-toppling event. A report from RethinkX, The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries, says that by 2030 (within 10 years of regulatory approval of autonomous vehicles (AVs)), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model called “transportation-as-a-service” (TaaS). The TaaS disruption will have enormous implications across the automotive industry, but also many other industries, including public transportation, oil, auto repair shops and gas stations. The result is that not just one industry could be disrupted … many could be affected by just one domino … autonomous vehicles. Auto insurance is in this chain of disruption.
And commercial insurance, because it is used by all businesses to provide risk protection, is also in the chain of all those businesses affected – a decline in number of businesses, decline in risk products needed and decline in revenue. The domino effect will decimate traditional business, product and revenue models, while creating growth opportunities for those bold enough to begin preparing for it today with different risk products.
Transformation + Creativity = Opportunity
Opportunity in insurance starts with transformation. New technologies will be enablers on the path to innovative ideas. As the new age of insurance unfolds, insurers must recommit to their business transformation journey and avoid falling into an operational trap or resorting to traditional thinking. In this changing insurance market, new competitors don’t play by the rules of the past. Insurers need to be a part of rewriting the rules for the future, because there is less risk when you write the new rules. One of those rules is diversification. Diversification is about building new products, exploring new markets and taking new risks. The cost of ignoring this can be brutal. Insurers that can see the change and opportunity for commercial and specialty lines will set themselves apart from those that do not.
The beginning of a new year is usually the time to predict key trends for the year to come, and so it goes with the insurtech sector as well. Most lists focus on the latest sexy technologies and applications. But, after a year, we find these have hardly gained any traction and so cannot really be considered “trends” in our view. To call something a key trend, new and innovative is not enough. It requires adoption at scale. We, therefore, decided to take a different approach, resulting in quite a different kind of list.
Being consultants for several blue chip insurers, speaking at conferences and attending boardroom meetings, we meet insurance executives on a daily basis. Consequently we have a fairly good idea about what’s at the top of their agenda as well as the pace in which change will take place, and in turn what insurtech solutions are most likely to fit into those plans. These insights resulted in our Top 10 Insurtech Trends for 2017, illustrated by some awesome insurtechs that joined us at the previous DIA event.
Trend 1. Massive cost savers in claims, operations and customer acquisition
Already a major trend, of course, but one that will gain even more importance in 2017. Quite a few insurers face combined ratios that are close to 100, or even exceed that number. Digitizing current processes is absolutely necessary, for operational excellence and to cut costs. Digital transformation of insurance carriers started in 2015, really took off in 2016 and will be mainstream by 2017 and beyond. Virtually every insurer, big or small, that takes itself seriously will continue to look for ways to operate more efficiently in every major part of the costs column: in claims expenses, costs of operations and customer acquisition costs. Technology purchases and investments by insurance carriers will further explode in these areas, as will the number and growth of insurtechs that cater to that need.
With OutShared’s CynoClaim solution more than 60% of all claims can be managed automatically, resulting in lower costs as well as increased customer satisfaction. Results of the first implementations: as much as 50% decrease in costs, 40% increase in customer satisfaction. The solution takes six to nine months to implement, whether it is from scratch or a migration of established operations to the platform, which is quite spectacular in the insurance industry. Check this out.
Trend 2. A new face on digital transformation: engagement innovation
At the end of the day, digitized processes and a lower cost base are table stakes. It is simply not enough to stay in sync with fast changing customer behavior, new market dynamics and increasing competitiveness. No insurer ever succeeded in turning operational excellence into a competitive advantage that is sustainable over the long term. More and more carriers realize that engagement innovation is the next level of digital transformation. From a customer point of view, this is not about a new lipstick or a nose job but about a real makeover. Engagement innovation not only includes customer experience, but customer-centric products, new added value services and new business models, as well. Insurtechs that really innovate customer engagement for incumbents have a great 2017 ahead.
Amodo connects insurance companies with the new generation of customers. With Amodo’s connected customer suite, insurers leverage on digital channels and connected devices such as smartphones, connected cars and wearables to acquire and engage new customers. Amodo collects data from smartphones and a number of different connected consumer devices to build holistic customer profiles, providing better insights into customer risk exposure and customer product needs. Following the analysis, risk prevention programs, individual pricing as well as personalized and “on the spot” insurance products can be placed on the market, increasing the customer’s loyalty and lifetime value.
Trend 3. Next-level data analytics capabilities and AI, to really unlock the potential of IoT
Many insurance carriers have started IoT initiatives in the last few years. In particular, in car insurance it is already becoming mainstream, with Italy leading the pack. Home insurance is lagging, and health and life insurance is even more behind. All pilots and experiments have taught insurers that they lack the right data management capabilities to cope with all these new data streams — not just to deal with the volume and new data sets, but more importantly to turn this data into new insights, and to turn these insights into relevant and distinctive value propositions and customer engagement. Insurtechs that operate in the advanced analytics space, machine learning and artificial intelligence hold the keys to unlock the potential of IoT.
2016 DIAmond Award winner BigML has built a machine-learning platform that democratizes advanced analytics for companies of all sizes. You don’t have to be a PhD to use its collection of scalable and proven algorithms thanks to an intuitive web interface and end-to-end automation. Check this out.
Trend 4. Addressing the privacy concerns
To many consumers, big data equals big brother, and insurers that think of using personal data are not immediately trusted. Quite understandable. Most data initiatives of insurers are about sophisticated pricing and risk reduction really. Cost savers for the insurer. However, the added value of current initiatives for customers is limited. A chance on a lower premium, that’s it. To really reap the benefits of connected devices and the data that comes with it, insurers need to tackle these data privacy concerns. On the one hand, insurers need to give more than they take. Much more added value, relative to the personal data used. On the other hand, insurers need to empower customers to manage their own data. Because at the end of the day, it is their data. Expect fast growth of insurtechs that help insurers to cope with privacy issues.
Traity (another 2016 DIAmond Award winner) enables consumers to own their own reputation. Traity uses all sorts of new data sources, such as Facebook, AirBnB and Linkedin, to help customers to prove their trustworthiness. Munich Re’s legal protection brand DAS has partnered with Traity to offer new kinds of services. Check this out.
Markets have shifted from push to pull. But so far most insurers have made hardly any adjustments to their customer engagement strategies and required capabilities. In 2017, we will see the shift to pull platforms, as part of the shift to engagement innovation. Whereas push is about force-feeding products to the customer, pull is about understanding and solving the need behind the insurance solution and being present in that context. Risk considerations made by customers usually don’t take place at the office of an insurance broker. Insurers need to be present in the context of daily life, specific life events and decisions, and offer new services on top of the traditional products. Insurtechs that provide a platform or give access to these broader contexts and ecosystems help insurers to become much more a part of customers’ lives, be part of the ecosystem in that context and add much more value to customers.
VitalHealth Software, founded among others by Mayo Clinic, has developed e-health solutions, in particular for people with chronic diseases such as diabetes, cancer and Alzheimer’s. Features include all sorts of remote services for patients, insurers and care providers collaborating in health networks, access to protocol-driven disease management support. All seamlessly integrated with electronic health records. VitalHealth Software is used by insurers that are looking to improve care as well as reduce costs. Among other OSDE, the largest health insurer in Argentina and Chunyu Yisheng Mobile Health, a fast-growing Chinese eHealth pioneer with around 100 million registered users that is closely linked to People’s Insurance Company of China (PICC).
Trend 6. The marketplace model will find its way to insurance
Marketplaces: We already see the model emerging in banking, and insurance will follow fast. Virtually every insurer offers a suite of its own products. Everything is developed in-house. More and more carriers realize that you simply cannot be the best at everything, and that resources are too scarce to keep up with every new development or cater to each specific segment. In the marketplace model, the insurers basically give their customers access to third parties with the best products, the most pleasant customer experience and the lowest costs. The marketplace business model cuts both ways. Customers get continuous access to the best products and services in the market. And costs can be kept at a minimum through connecting (or disconnecting) parties almost in real time to key in on new customer wishes and anticipate other market developments. In 2017, we will witness all sorts of partnerships between insurtechs and incumbents that fit the marketplace model.
AXA teamed up with the much-praised 2016 DIAmond Award winner Trōv to target U.K. millennials. Trōv offers customized home insurances by allowing coverage of individual key items rather than a one-size-fits-all coverage set with average amounts. Check this out.
Trend 7. Open architecture
A new ecosystem emerges, with parties that capture data (think connected devices suppliers) and parties that develop new value propositions based on the data. Insurers will have to cooperate even more than they are currently doing with other companies that are part of the ecosystem. When an insurer wants to seize these opportunities in a structural way, it is no longer only about efficiently and effectively organizing business processes, but it is also about easy ways to facilitate interactions between possibly very different users who are dealing with each other in one way or another. Again, banking is ahead of insurance. For our new book, “Reinventing Customer Engagement: The next level of digital transformation for banks and insurers,” we spoke to many executives in banking, as well. German Fidor Bank has set up an open API architecture called fidorOS, enabling fintechs to develop financial services themselves on top of an existing legacy system. Citi says that “any financial institution that doesn’t want to rapidly lose market share needs to start working in a more open architecture structure.”
The Backbase omnichannel platform is based on open architecture principles. It leverages existing policy administration systems capabilities and adds a modern customer experience layer on top, creating direct-to-consumer portals and giving the opportunity to integrate best-of-breed apps as well as improving agent and employee portals. Swiss Re, Hiscox and Legal & General are some of the insurers that use the Backbase platform. Check this out.
Trend 8. Blockchain will come out of the experimentation stage
When Goldman Sachs, Morgan Stanley and Banco Santander decided to leave the R3 Blockchain Group many thought this was proof that blockchain technology apparently was not as promising as initially expected. The contrary is true. It is not uncommon to join a consortium to speed up the learning curve, and then drop out and use the newly acquired knowledge to build your own plans and gain some competitive advantage, especially with a technology as powerful as blockchain. We believe a similar scenario will not take place in the B3i initiative launched by AEGON, Allianz, Munich Re, Swiss Re and Zurich. Thinking cooperation and ecosystems are just much more in the veins of the insurance industry. Plus there are plenty of use cases that cut both ways: improve operational excellence and cost efficiency as well as customer engagement. That is good news for the insurtech forerunners in blockchain technology.
Everledger tackles the diamond industry’s expensive fraud and theft problem. The company provides an immutable ledger for diamond ownership and related transaction history verification for insurance companies, and uses blockchain technology to continuously track objects. Everledger has partnered with all institutions across the diamond value chain, including insurers, law enforcement agencies and diamond certification houses across the world. Through Everledger’s API, each of them can access and supply data around the status of a stone, including police reports and insurance claims. Check this out.
A worker inspects a 5.46 carat diamond before certification at the HRD Antwerp Institute of Gemmology, December 3, 2012. HRD Antwerp analyses diamonds with specially designed machinery, as even for experts it is impossible to visually tell the difference between a synthetic stone and a naturally grown one. Picture taken December 3, 2012. REUTERS/Francois Lenoir (BELGIUM – Tags: BUSINESS SOCIETY SCIENCE TECHNOLOGY) – RTR3B8HW
Trend 9. Use of algorithms for front-liner empowerment
Algorithms that are displacing human advisers generate headlines. Robo advice will for sure affect the labor market’s landscape. For a costs perspective, this may seem attractive. But from a customer engagement perspective this may be different. To relate to their customers, financial institutions need to build in emotion. Humans inject emotion, empathy, passion and creativity and can deviate from procedure, if needed. Banks and insurers need to create a similar connection digitally. With so many people working at financial institutions, there is also an opportunity to create the best of both worlds. We see the first insurers that deploy robo advice to empower human front-liners. This is resulting in better conversations, higher conversion and, finally, greater solutions for customers.
AdviceRobo provides insurers with preventive solutions combining data from structured and unstructured sources and machine learning to score and predict risk behavior of consumers — for instance, predictions on default, bad debt, prepayments and customer churn. Predictions are actionable, because they’re on an individual customer level and support front-liners while speaking to customers.
Trend 10. Symbiotic relationship with insurtechs
Relationships between insurers and insurtechs will become much more intense. All the examples included in the previous nine trends make this quite clear. Insurers will also look for ways to learn much more from the insurtechs they are investing in — whether it is about specific capabilities or concrete instruments they can use in the incumbent organization, or whether it is about the culture at insurtechs and the way of working. We see an increasing number of insurers that are now using lean startup methodologies and that have created in-house accelerators and incubators to accelerate innovation in the mothership.
The Aviva Digital Garages in London and Singapore are perfect examples. They are not idea labs, but the place where Aviva runs its digital businesses, varying from MyAviva to some of the startups Aviva Ventures invests in – all under one roof to build an ecosystem and create synergies on multiple levels.
This Top 10 of Insurtech trends that we will witness in 2017 sets the stage for the Digital Insurance Agenda. It reinforces the need to connect insurance executives with insurtech leaders, which is basically our mission. It helps us to create an agenda for DIA 2017 Amsterdam that is in sync with what insurers need and what the latest technologies can provide. Check Digital Insurance Agenda for more info.
American entrepreneurship is alive and well and growing! There are countless rags-to-riches stories of how people with a good idea, boundless energy and infectious optimism have made it big, or simply made a rewarding livelihood and legacy for themselves and their families. Today’s fintech and insurtech movements are testament to this in spades! And while most national news stories focus on big business, and national cultural events like Black Friday tend to overshadow small businesses, there’s a growing movement embracing these vital contributors to our communities and economy.
The Rise of Small Businesses and the Shop Small Movement
On Nov. 26, 2016, the 7th annual Small Business Saturday event sponsored by American Express and the National Federation of Independent Businesses (NFIB) was held to encourage shopping and patronage of local small business merchants – in the wake of the preceding day’s big box store Black Friday shopping hysteria. According to research done by these organizations after last year’s Small Business Saturday, more than 95 million consumers shopped at small retailer businesses, spending $16.2 billion, up 8% from 2014. Interestingly, the event garnered support from many corporate sponsors – many of which count small businesses as their customers.
Millennials show strong support for local small businesses, indicating they want to be “connected” to the products and businesses they buy from. A study by Edelman Digital showed that 40% of millennials preferred to buy goods and services from local small business retailers, even if doing so cost more.
While Small Business Saturday and Buy Local have a decidedly retail focus to them, the importance of all types of small businesses cannot be overlooked. U.S. Census Bureau figures from 2014 showed that businesses with fewer than 10 employees make up nearly 80% of all firms in the U.S. This is a huge market with enormous needs for products and services, including insurance to keep them running, protected and competitive.
Where’s the Love?
The Rise of the Small-Medium Business Customer research sought to understand small-medium business decision makers’ perceptions and views of those who support and supply them, including insurance. Four hundred business owners were surveyed using the Census Bureau’s definitions of very small to medium-sized businesses (SMBs), which we grouped into three segments (1-9 employees, 10-99 employees and 100-499 employees). The survey provided insights to evaluate perceptions on SMB customer views of insurance as compared with other businesses
The results were enlightening. Interestingly, fair price was more important than lowest price across all of the business segments. However, the ability to create a custom product from a range of options is more important than both lowest price and the ability to pick from a set of “pre-packaged” options. This finding reflects the increasing demand for personalization rather than price-driven mass production of insurance products.
Even more revealing were the results among the smallest (1-9 employees) businesses. The survey highlights that the traditional insurance business model has not been built with the capability to adequately meet the unique needs and expectations of SMBs. The industry has, instead, pursued a “one size fits all” approach. The consequences are that this segment of smallest SMBs (though with the largest number of such businesses) is uninterested in insurance, sees little value in insurance and considers insurance a necessary commodity or “necessary evil” required for their businesses.
All three segments of SMBs, regardless of size, did not rate insurance as being particularly easy to do business with, in terms of researching, buying and servicing products, compared with the other types of businesses we asked about in the survey. Among the 1-9-employee segment, P&C, life and employee benefits ranked in the bottom half on all three of these aspects.
Much more telling, however, this segment gave the lowest Net Promoter Scores (NPS) to insurance, showing a gap of as much as 60 points between insurance and the top business. (Net Promoter Scores measure the likelihood that a customer will make a recommendation to a prospective customer.)
Adding fuel to the fire, these small businesses were the least likely to say insurance was responsive, innovative, had easy to understand products and provided good value for the money. This is not a pretty picture for traditional insurance — but a great opportunity for innovative “greenfields” and startups.
Going Small Requires Big Thinking
Increasingly, small business customers are demanding a personalized and digital experience, representing the shift from mass standardization of insurance to the micro-personalization of insurance, requiring broader data and sophisticated analytics to truly understand and respond to small businesses as well as a digital experience via a multi-channel approach.
The rapid emergence of digital direct-to-SMB insurers and MGAs such as Assurestart (now part of Homesite/American Family), Cover Your Business.Com (a Berkshire Hathaway company), Hiscox, Insureon, Bolt, Slice and others are leveraging these ideas to reach the small business market. They are providing innovative products, streamlined and simple processes and digitally engaging capabilities that are extending the direct business model to SMB customers. In addition, aggregators, comparison sites or new distribution channels like Ask Kodiak help small businesses find the insurance products they need more easily.
Our research identified gaps between many industry-held perceptions and customer-defined realities, which expose an insurance industry steeped in tradition — its business models, business processes, channels and products that are difficult to find, buy and service — and opens the door to new competitors. We have seen this play out before with personal lines over the last 10 to 15 years. The difference is that the pace of change and adoption of a digital play is unfolding more rapidly this time in commercial insurance, demanding that insurers respond, because the window of opportunity is smaller.
Each company serving the SMB market must itself strategic questions, such as: “How do we bridge between the past, today and the future? How do we keep current customers loyal and engaged as we redefine our business to meet the needs of the vastly underserved and growing small business market? How do we get on par with other digital businesses that are setting new expectations for the SMB market?” If traditional insurers don’t ask these questions and respond, others will – taking current and future market share.
Small businesses today are at the forefront of building new, technology-enabled, digitally first, innovative businesses that operate in a multi-channel world … like what we are seeing in insurtech. These businesses are increasingly led by millennials who have “grown up” digital and, as a result, seek fresh alternatives to age-old formulas … especially for insurance needs and offerings, helping them effectively meet their unique needs and expectations. It’s time for the insurance industry to translate the good will from the Buy Local and Shop Small movements into big thinking and innovative solutions.
A new generation of small business insurance buyers with new needs and expectations create both a challenge and an opportunity. There is no clear path or destination. The time for plans, preparation, and execution is now — recognizing that the SMB customer is in control. Those who recognize and rapidly respond to this shift will thrive in an increasingly competitive industry to become the new leaders of a re-imagined insurance business that aligns to a rapidly growing, millennial-owned, innovative SMB marketplace. Insurance companies must stop talking about the opportunities and being digital, and start doing something about it by using the disruption and change as a catalyst for “real change.”
Everything-as-a service is transforming the economics of establishing and running a company. Product-as-a-service will fundamentally change insurance product design and delivery.
Before recently joining insurance fintech start-up Instanda, I spent the last 15 years working within the insurance industry for U.K. FTSE 250 companies — such as Hiscox, Capita and, most recently, Xchanging. For the up-and-coming executive, there is something very comforting about working for a big, established company during the early part of your career. You are able to immediately plug in to a brand, revenue flow and customer base that is already well-established. There are lots of people with well-defined roles to support you, and you will undoubtedly benefit from a significant investment in physical infrastructure (whether that be a branch network of offices around the globe or big, heavy IT infrastructure sitting in your own data centers).
But that level of comfort comes at a price for the big corporation. There is an enormous amount of capital in the business tied up in “stuff” (office furniture, leases, servers, etc.), and there is an inevitable restriction in the ability to move quickly to respond to changing customer needs. We all know, when a company gets bigger, it becomes more unwieldly and bureaucratic. What has really struck me since joining Instanda is how technology and service provision have moved on to such an extent that you can gain access to the same benefits and capabilities of the infrastructure of big companies at a fraction of the cost — and without losing your agility and flexibility to respond to the needs of the business.
As a business, Instanda is a firm believer in consuming “everything-as-a-service.” We are a technology company that does not own a server; all of our IT infrastructure is procured from Microsoft Azure, which gives us access to almost instantaneous unlimited storage and processing power from our desktop dashboard. For office and email suite, we use Microsoft 365, where are able to tap into the many years and millions of dollars of Microsoft’s investment for a small monthly sum per employee.
“As-a-service” is often thought of as being a software service provided out of the cloud, but, of course, it can just as easily be physical infrastructure. The sharing economy is full of examples where physical infrastructure is available to be purchased at a fractional cost. Uber is “transport-as-a-service,”and through the good offices of property services firm wework, we are able to procure very high quality workspace as “property-as-a-service.” Our newly built offices are sitting on the edge of London, close to our customer base and fitted out to the highest standards.
In the past, for a small company like Instanda, these offices would have simply been beyond our means, but in the new “as-a-service” economy, we can purchase as many (or as few) desks as we like — with only a monthly notice period required to add seats or to exit the space, all while still benefiting from the full range of office facilities of a multimillion-pound company.
Similarly, our accounting, payroll and CRM systems are all consumed as cloud-based services where we only pay for what we consume. Yet it was not long ago when the idea of placing your key customer data on a system and servers you didn’t own or control would have been seen as a crazy business risk. Imagine going to your CEO today and saying, “I want to build our own bespoke CRM system, buy some physical servers and store them in our own operated data center.” You would soon be shown the door. So, what was considered risky and unthinkable in the past can very quickly move to business-as-usual when the competitive advantages become undeniable.
So what all this means is that a relatively new business like Instanda can purchase all the key services it needs to operate as a business on-demand with “everything-as-a-service” and, most importantly, at an incremental cost completely aligned to the size of the business. The ability to buy all these capabilities “as-a-service” fundamentally shifts the cost dynamics of operating a business and allows a much smaller business to effectively compete with much bigger, longer-established businesses on equal footing. In fact, it gives you a strong competitive advantage because you can operate at a price point and with a degree of flexibility that bigger companies cannot match because of their past significant investment in physical infrastructure.
In the insurance industry, capital is becoming increasingly commoditized as surplus capital seeks better returns in this sector. Underwriting and insurance products have become harder to differentiate because of increasing competition, so the battleground is now in distribution. Whether you are a reinsurer moving into insurance, an insurer opening new global offices or trying to dis-intermediate your broker channel by going direct, a broker establishing your own branded products or an MGA reaching into new markets, the overriding business challenge is: “How do I get my products out to my customer quickly and cost effectively?”
So what we have done at Instanda is to take all the benefits and advantages of “everything-as-a-service” and applied the same concepts to “products-as-a-service,” establishing a platform to facilitate the manufacture and global distribution of insurance products. The benefit of this approach is that we can get our customers to market anywhere in the world — 10 times quicker and 10 times cheaper than the traditional approach of building products within an installed back office software system. Our configurable toolkit allows our customers to quickly assemble any type of insurance product and completely control the look and feel of the online and mobile product. Our customers can build their products themselves without the need to code or deploy IT staff — combined with a commercial model completely aligned with the success of the products on our platform.
By fundamentally changing the cost dynamics of insurance product manufacture and distribution, “product-as-service” opens up new sales opportunities that simply were not possible or justifiable before.
Do you want to create a different look and feel for the same product for each of your agents or distribution channels? Do you want to launch a micro-insurance site for single items that are bought by the hour? Do you want to offer a short-term insurance product for a single event? Do you want to test the attractiveness of a new product before investing in worldwide distribution? All these become simple and cheap when utilizing a “product-as-a-service” platform.
Of course, the real test is whether this “product-as-a-service” approach delivers the tangible benefits promised to the customer. Already, large insurance organizations such as Sompo Canopius and U.K. retail insurer LV, are utilizing the benefits of “product-as-a-service” to shorten time and costs to get to market. The approach also works for smaller organizations like Compass Underwriting.