Tag Archives: incumbent

Game Theory and Insurtech

One of the hottest topics in insurance industry forums, the news and many prognosticators/speakers’ commentary is that there could be a threat to the insurance industry because of insurtech — that the insurance industry will be revolutionized and that incumbents should be in defense mode to retain their business.

That threat carries some credibility, but there is some issue with many of the forecasts out there.

I think the thought process is somewhat flawed, for two reasons:

  1. Rarely is anyone putting a time-frame on their predictions. Anyone can predict something with no time-frame and, hence, have no accountability if they are wrong. This is like the fortune teller stating, “You will die in the future.” Although that fortune is accurate, you might feel ripped off if you paid for it.
  2. The predictions seem to be coming from a vacuum and don’t include thoughts on game theory. Some predictions rarely account for or think about incumbents; the incumbent insurer advantage and reaction; and how long the insurtech investor can realistically wait for outcomes/results.

Let’s focus on No. 2.

Game Theory

Game theory is the branch of mathematics concerned with the analysis of strategies for dealing with competitive situations where the outcome of a participant’s choice of action depends critically on the actions of other participants. Game theory has been applied to war, business and biology.

But this art/science isn’t discussed when predictions about the industry are presented.

A basic thought is, if insurtech is going to threaten incumbent insurers, how do we think the incumbents will react?

Incumbent Insurer Options

Incumbents have a few options regarding insurtech:

  • Imitate — recapture market position once insurtech has revealed that an approach works. Each company can develop new technologies to improve operating efficiencies, source risk quicker, understand exposures better, etc.
  • Wait Longer– for the success of an approach to be revealed. If customers don’t react to a new technology or the advantage is not apparent in results, no resources were wasted. If you’ve read Good to Great in insurance or “Good to Great,” the book, think about the flywheel or the Walgreens example. The ability to wait is greater for incumbents in insurances, as insurance markets are not a winner-takes-all.

See also: Complexity Theory Offers Insights (Part 1)  

Incumbent Advantage

Incumbents have a huge advantage; they have customers, capital, track record for sourcing risk, systems, platforms, regulatory framework aligned, etc. Newcomers have to take riskier strategies to move into the ranks of the incumbents.

If incumbent insurers use simple game theory strategies, they have a lot of benefit.

A defensive position by incumbent insurers can affect timing, forecasted results, market share, etc., ultimately delaying insurtech investors from seeing the gains or traction they were hoping for or predicted at the time of the investment. This delay could change exit strategies for investors.

Venture Capitalist business model

Many of the funds coming into the insurtech space are from venture capital firms. An investment from a venture capitalist typically is a form of equity financing — the VC investor supplies funding in exchange for taking an equity position in the company.

According to Harvard Business Review, “Venture money is not long-term money. The idea is to invest in a company’s balance sheet and infrastructure until it reaches a sufficient size and credibility so that it can be sold to a corporation or so that the institutional public-equity markets can step in and provide liquidity. In essence, the venture capitalist buys a stake in an entrepreneur’s idea, nurtures it for a short period of time and then exits with the help of an investment banker.”

The investors in VC funds expect a return of between 25% and 35% per year over the lifetime of the investment. This is because of the nature of the risk.

For every deal that doesn’t go as planned, VC firms need those with great hockey-stick-returns to meet this expectation from investors.

Insurtech investors/Market Cap

Other questions would be around the market multiple given to an insurance company versus a technology company. Are those companies that are positioning themselves as the “future of insurance companies” taking a prudent approach in trying to unseat incumbents? Is it better to be a servicing company over a disruption startup? Given the timing and investor strategy, would insurtech companies be better off positioning themselves as technology services companies for the insurance industry versus insurance companies with great technology? At least it’s safer for the investor at the time of sale…

If an investor is looking for an exit strategy, would it prefer a multiple of earnings similar to an insurance company or a publicly traded tech company?

Capital Into Insurtech

Despite the influx of capital into insurtech recently, funding to this sector may be flattening in 2017. (There are a few articles written about this at Insurance thought Leadership and others.)

Based on funding patterns, it appears at least $2-3 billion a year is now going into “Series B” and “Series D” funding — meaning into existing companies that have been around for at least a couple of years.

Margin Compression

Who is better suited for margin compression to be removed from the system?

If you look at Uber, transportation services companies were loaded with debt (NYC medallions cost around $1 million) and insulated by a regulatory framework that supported that debt. In addition, the downward pressure on the cost of a ride to the airport was immediate and seen in real time by both the consumer and the seller. So, transportation was ripe for disruption driven by consumer demand

With insurance companies, the pressure will take time to shake out. Because the cost of goods sold (or losses) is unknown at the time of sale, the ability to decrease costs is somewhat limited to expense savings.

Again, advantage incumbent — at least until you can prove that technology works and has passed savings to the customer through enhanced loss-cost prediction and risk selection.

With incumbent insurers sitting on mountains of cash/bond portfolios as insulation to the margin compression, some companies can achieve low single digit ROEs just on their investment portfolio alone, even before underwriting results. So, who is better suited for the decrease in margin? Where should investors be putting their capital for the long term?

See also: Einstein’s Theory on Work Comp Outcomes  


Incumbents are going to react and defend their positions and acquire teams or technology that have proven to help (lower expenses, acquire customers, etc.). VC investors are going to push for exit strategies or sales to incumbent insurers over the next five to six years and will look for new investment opportunities.

This article isn’t intended to make incumbents feel warm and cozy about the state of the market. There definitely will be some disruptions of certain sectors of the industry. However, if you’re looking to compare the disruption of Uber to the insurance industry, I believe it will be an uphill battle to disrupt insurance in a similar fashion. (Thanks, McCann-Ferguson).

But anything is possible. Don’t get complacent and disregard the consumer.

The insurance industry is in need of a technology shakeup — and one would benefit the customer, the insurers, the insurance incumbent investors and many of the insurtech founders/VC firms.

What Incumbents Can Teach Insurtechs

If insurtech disruptors have one thing going for them, it’s their digital savvy.

They have made it as easy for consumers to research, quote and buy coverage online as it is to make a retail purchase through e-commerce channels. “It took me 60 seconds to buy a policy,” a customer of one disruptor said.

Still, insurtech disruptors have a lot to learn about the industry, and some leading incumbents could be the ones to teach them.

The Disruptor’s Downward Spiral

To understand this better, let’s follow Judy, a quintessential customer as she excitedly makes the decision to purchase insurance from a typical disruptor.

First, she enters the site. It’s sleek and beautiful, and everything is easy to locate. Within seconds, she has selected the option to get a quote for her auto insurance, has entered her information and received a price she can live with. Hooray! But wait. Where is the coverage for her home, motorcycle and pet?

She searches the site but can’t find other insurance products. She clicks the help button, but all she can do is send an email with her question. Where is the personal touch? And how will she contact someone later when she has a question about her coverage or, worse, a claim?

See also: What’s Your Game Plan for Insurtech?  

The Lessons

The first thing disruptors need to learn is that the quick, convenient online service they are peddling is only the baseline model of what consumers expect from their carriers. Comments from other customers echo Judy’s feelings about the personal touch: “They do not have a phone number, so you are stuck dealing with bots and sending messages through their app.”

Hmmmm. Sounds like someone needs an agent.

Greg Hoeg, vice president of U.S. insurance operations at J.D. Power, concurs, “While many consumers want to shop online, they often still want to talk to someone when they buy their insurance to make sure they are getting the right coverage or have questions about their policy answered.”

J.D. Power also confirms the importance of digital channels in the buying process, reporting that incumbents with leading digital capabilities also lead in premium growth. And this is where incumbents come in to teach the disruptors a thing or two.

Following a Better Example

Top digital insurers are setting the best example of how to thrive in the changing market. They have continuously improved their capabilities to meet consumer demands for online buying and product choice and have empowered agents with top-grade digital tools.

Here is what Judy’s purchasing journey looks like with a traditional insurer imbued with the right digital capabilities and product selection:

Judy enters the site and begins the application process. After providing a few bits of personal data, a smart application process begins to draw information from verified third-party sources, auto-filling her application along the way.

Throughout the process, she is asked if she would like to add other types of coverage she is eligible for, such as home, jewelry or pet insurance. She clicks “yes” and is soon provided with quotes on multiple options. She has a question about one of the offerings, so she dials the number prominently displayed at the top of the screen.

Soon, she is talking with an agent who answers her questions and, without having to gather more information, quickly and seamlessly binds and issues all of the coverage types she wants to buy, in a single transaction.

Experiences like these are not the future of insurance. The capabilities exist today, without making extensive changes to current systems. A top-five insurer is already setting the example. It now meet the needs of 95% of current and future customers contacting the agency and has doubled year-over year growth through direct and agent channels.

Insurers like these have a message for insurtech disruptors and incumbents alike. It’s time to implement digital solutions and start meeting consumer needs for channel and product choice.

See also: Insurtech Checklist: 10 Differentiators  

To learn more about outcompeting in a changing industry, download our thought leadership piece, The Changing P&C Insurance Industry: What’s It Costing You?

Incumbents, Insurtechs Must Collaborate

Insurtech has finally come of age in 2016. The segment has seen a year-on-year doubling of global investment for the past two years, with 2016 appearing to continue the trend. While it’s still a fraction of the broader fintech wave that has swept the globe since 2013, insurtetch is rapidly catching up. Insurtech is officially the next hot thing.

Asia, with the exception of China’s outliers (Zhong Ang, Huise, Joyowo and Xishan), has lagged in terms of investment and the volume of startups. That said, the region has seen a surge of interest since mid-2015.

Much has been said about the need for the insurance industry to innovate to remove various frictions that exist throughout the insurance product experience – from buying, owning, to claiming. Innovation is critical to help regain consumer trust and ultimately help the industry remain relevant in the digital age of on-demand everything.

Furthermore, little doubt remains that with a tidal wave of bright and unbiased people enabled by financial and tech resources injected in the industry, all the frictions will eventually be eliminated.

We live in a world in which traditional models of investment in captive innovation have largely been proven ineffective and inflexible in an environment of rapid, technologically driven change. R&D departments with large budgets and armies of researchers couldn’t stand up to the agility of startups, which tap into customer proximity, high tolerance of failure and technological sophistication to nail solutions to relevant problems and scale fast.

See also: Unified Communications and Collaboration are Increasingly Important for Insurers

The value that has been created through entrepreneurship during the past decade has been disproportionate versus corporate innovation.

Where do startups and corporate entities meet?

Against that backdrop, major corporations around the world are increasingly waking up to the fact that startups are becoming the key source of innovation for them. There’s even a new acronym for it: CSE (Corporate Startup Engagement). Call it what you may: it’s delivering rapid iterative customer-centric R&D to quite a few of the largest global players. According to an INSEAD report, “262 of the world’s 500 largest corporations are actively partnering with startup companies.” 

There’s clearly a set of complementary strengths that exists between corporate and startup entities. Rather than trying to fit the square peg of startup innovation into the round hole of corporate structure, corporate leaders are choosing to actively collaborate with startups to explore ways of combining the best of both worlds.

This trend, not to be underestimated, creates an opportunity for the peg to round off, and for the hole to become sharper-edged, thus learning from each others’ strengths and each thus increasing their competitiveness.

Corporate innovation in Asia: from attempts at ownership to collaboration

Contrary to the co-innovation trend, in 2015 we saw a number of insurers rushing to create in-house innovation centers, labs and garages in an all-out arms race to become digital innovation leaders. Driven by a legacy mindset that dictated that money can solve any problem, we saw the rise of fancy innovation centers full of PhDs, entrepreneurs, data scientists and so on.

The trend reinforced the fear of missing out and of being left behind: More and more insurers piled in, justifying the act to their boards by saying that everyone else is doing it, and so must we.

After two years since the innovation arms race began in Asia, I’m happy to report that it has largely proven itself ineffective in generating any meaningful value beyond PR. It’s not unsurprising, considering the innovation evolution in other industries: from aiming to own innovation to collaborative cultivation with startups.

See also: 4 Benefits From Data Centralization

What started off as the insurance industry’s attempts at protecting itself by replicating rapid innovation internally is evolving into something more powerful: collaboration magnets and cultural transformation catalysts.

Startup innovation enablers

What smart insurance corporates have discovered is that some startups have magic in them that makes them fly. That magic is a combination of awesome teams, purpose-driven cultures, completely different constraints, tech savviness and customer proximity, among other things. It’s also pretty apparent that while you can try replicating all these factors in-house as a corporate, it doesn’t make any more sense than keeping your grown-up kids housebound.

If you can’t own them (… yet), embrace them!

Understand what’s driving them: The mission of creating an efficient risk transfer, which is as easy as grabbing an Uber, is a big and hairy ambition. Nonetheless, it’s an exciting one. And it’s drawing droves of bright entrepreneurs, developers and data and behavioral scientists. Undeniably, for some, “get rich fast” is the primary driver. But for a lot of entrepreneurs, the ambition of making a dent in the universe is a powerful motivator, and money is an outcome rather than the objective.

Be open: As much as innovation is about nailing the brilliant idea, it’s also about many other controllable (team, execution, supportive ecosystem) and uncontrollable (timing, network, partners) factors. Taken together, these factors translate to a meagerly low probability of a startup making it big.

Openness to failure and the ability to quickly bounce back are important entrepreneurial traits. As insurance leaders, we should keep an open mind to different ideas, entrepreneurs who have failed and even our best employees who are itching to join a startup.

Be nimble: Startups are very different; that’s what also makes them powerful. They sprint around the clock; a week might as well be a lifetime in the startup world. It’s all about developing and refining tech solutions based on customer feedback.

Bootstrapping with limited resources and finding creative ways of overcoming obstacles are important. “Just do it” and “fail fast” are persistent mottos that drive progress.

If you come across a startup solving a relevant problem, please don’t drag it through endless rounds of meetings with legal, compliance, distribution, senior management, then regional management and so on. Figure out a way to do a limited pilot within a month to test how the startup concept resonates, and secure the next, bigger step.

Most legal and compliance folks are not prepared to assess startup risk; To stay on the safe side, they’ll advocate the status quo – which, as we know, is not an option. Senior management will need to figure out how to insulate the pilots from the status quo folks, at least in the early stages.

Cultivating a startup ecosystem

It will take a large number of startups trying various idea/team/location combinations to help us find the next revolutionary model for insurance. That said, chances of success can be improved through two factors: improving the controllable and increasing the number of attempts to overcome the uncontrollable.

The idea of InsurTechAsia was born to act as that very catalyst for insurance innovation and collaboration. The aim was to:

  • Connect startups with the best resources and partners for them to succeed, do that transparently and without friction, rather than trying to skim the value;
  • Work with various stakeholders to remove any roadblocks, regulatory and otherwise;
  • Bring together a community that will actively collaborate, share and help its members to make it much bigger than a collection of its individual members; and
  • Encourage more startups to join the mission by building visibility around the opportunity while focusing the energy on the highest-potential areas to maximize the impact.

Our community has grown rapidly across Singapore, Hong Kong and most recently Ho Chi Minh and Bangkok. Right from the start, we’ve encouraged insurance leaders to be part of the community to experience and learn from the startup world first-hand. Being part of the community also means paying it forward by helping to mentor startup founders and connect them to potential opportunities in the market.

See also: FinTech: Epicenter of Disruption (Part 4)  

It’s been really encouraging to have a growing number of corporate leaders actively participate in our meetups and use those as opportunities to mingle with startups, entrepreneurs, regulators and investors and looking at ways to help the community grow. It is truly a beginning of a new era in the insurance industry, that of collaborative innovation and building an awesome future of insurance together.

This article originally appeared in the October 2016 issue of the Asia Insurance Review.