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Insurtech: Mo’ Premiums, Mo’ Losses

Our three U.S. venture-backed nsurtech carriers have mo’ money, mo premiums’ and mo’ losses. Around the time their losses became notorious, there were some signs of improvement, but not enough to prove viable business models. It’s still early. No 2Pacalypse is imminent, as the startups have tons of cash. But forget about East Coast/West Coast feuds: It’s still insurtechs against the world.

  1. Premiums and losses grow at venture-backed startups
  2. Industry-backed startups stay focused on underwriting
  3. Gross or net – which matters?
  4. Correcting rookie mistakes, experimenting and still underpricing?
  5. Can anyone beat Progressive and Geico?

Context

This is the fourth installment of our review of U.S. insurtech startup financials. Here are the 2017 edition, the first quarter 2018 edition, which generated many social media discussions, and the second quarter 2018 edition. For more information on where our data come from and important disclaimers and limitations, see the 2017 edition. As we have said since the start, we think all three companies have solid management teams who will figure out a solid business, but it will take time.

1. Premium and losses grow at venture-backed startups

As we have said before, it’s early days. Growth is rapid. But all three startup carriers are a long way from profitability and need to continue to raise prices substantially (and thus potentially churn customers), tighten underwriting (which could also materially affect growth) or improve operational aspects that drive losses such as claims performance.

In insurance, product-market fit is only demonstrated when selling a product that makes money.

Here is the summary of the 3Q18 details of the three venture-backed U.S. insurers that we’ve been tracking. The fourth venture-backed insurer, Next Insurance, did not write premium in 3Q18.

On expenses, it is important to note that Lemonade received permission from New York State to hide some expenses in an affiliated entity effective at the start of this year, so Lemonade’s expenses aren’t comparable to the others. (Lemonade’s CEO told us that the State of New York requested the change.) Root has followed suit and will now start to hide expenses in an affiliated agency, effective Oct. 1, 2018.

Unfortunately, with less transparency, it is harder to verify whether the overall business model actually adds up. Lemonade, for example, makes a big deal about the power of an insurer built on a “digital substrate.” We’re inclined to agree, and we hope they’re right, but we won’t know from their statutory results whether a better expense ratio is really possible.

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The third quarter’s “most improved” award goes to Lemonade, which grew premium by 57% over the prior quarter to $15.5 milliion (perhaps helped by seasonal effects in the rental market) AND turned in a 96% gross & LAE loss ratio, its best ever. The company’s reserves developed slightly adversely in the quarter, with YTD unfavorable development standing at $254,000, modestly worse from $245,000 the prior quarter.

Lemonade has a ways to go — its reinsurers continue to subsidize the loss ratio (but now paying “only” $2.44 of losses per dollar of premium), the average net loss & LAE ratio is still well above the 40% at which charities receive a giveback, and the company is far from profitability. But re-underwriting and higher rates — which we discussed in our last post — may be paying off. There are other explanations, too — shifting to cat-exposed risk, for example, lowers the loss ratio but raises the cost of capital.

See also: Insurtech: Revolution, Evolution or Hype?  

The company has written $33 million in the first nine months of 2018, which is well behind some exponential expectations published last year. Management also says that they will take out 60 loss ratio points: “A similar progression in the year ahead will get us to where we need to be.” Good luck. (Despite the good quarter.) Taking out loss ratio points gets harder for every point you get closer to the industry average. The breeziness of management’s comments makes us wonder how much focus will be placed on the hard spadework of loss ratio improvement vs. embarking on a glamorous European Grand Tour.

Respected industry analyst V.J. Dowling, whose IBNR Weekly publication (subscription only) was cited in a Lemonade transparency blog supposedly praising Lemonade, recently published a tear-down of Lemonade’s strategy. IBNR called the giveback “a joke,” the company’s marketing “overly simplistic, constantly changing and borderline dishonest” and “B.S. On Lemonade’s ‘Transparency’ & Model.”

We have long taken issue with Lemonade’s definition of “transparency,” which (as with many startups) is transparent only insofar as the company wishes to tell a story, which is just another form of marketing. (We are working on a longer article about ways startups bend numbers and welcome your ideas). We also agree with IBNR that a giveback at 1.6% of premium seems cynical. Middle-class insurance agents are some of the biggest charitable donors and sponsors in many towns, and it’s hard to see the social benefit in Lemonade’s spending the advertising budget enriching amoral tech bros at GAFA rather than sponsoring the town’s Little League uniforms as an agent might do. Even insurance veterans don’t seem to realize that all of Lemonade’s entities are for-profit. Don’t be fooled: B-Corps are still for-profit corporations. And railing against gun violence is easy, but social consciousness is messy in reality.

Metromile grew at a steady and respectable 21% from the prior quarter to $24.5 million of gross premium but ran a 98% gross loss & LAE ratio (not improved from 2017). Among the three players, it has been the ant: slower growth and rather steady results. After seven years in business, the company is barely generating an underwriting profit and is showing little improvement. The company has been taking rate, but not as much as the actuaries say is needed. The company’s latest California indication, for example, is rates up 38%, but the company only took 15 points of rate, effective July 1, 2018, which will work through its book over the next couple of months.

Matteo recently published a discussion of why its PAYD (the pay-as-you-drive) approach confirms its niche nature.

If Metromile is an ant, Root is a grasshopper. Root again grew extremely rapidly through its TBYB (Try-Before-You-Buy) mobile approach, as one probably would expect of a company with a $1 billion valuation (as we discussed in our previous article). Root doubled the volumes underwritten by Lemonade. But Root continues to struggle with rookie mistakes that drove losses — discussed more below. Root grew premium by 120% vs. the prior quarter to $33 million for the third quarter but turned in 128% gross loss & LAE ratio – its worst of the year and the worst of the three U.S. insurtech carriers.

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With the three carriers resuming rapid growth after a slow 2Q, the 2Q slowdown that we observed in our prior article may have been seasonal or a one-time coincidental slowdown.

2. Industry-backed startups stay focused on underwriting

We first pointed out in the prior quarter’s analysis that companies run/led by well-known underwriters were growing slowly but were far more profitable than those with venture capital backing. That hasn’t changed.

Here are the four subsidiaries of big companies that are selling direct or have a claim on being an insurtech. These companies often depend on parents for reinsurance and infrastructure, so we show mainly the gross figures.

3. Gross or net – which matters?

One well-regarded venture capitalist challenged us on why gross premiums and loss ratio matter when net is what actually sticks to current investors. The difference between gross and net is reinsured premium and loss.

The gross loss ratio is provides an unbiased view of the profitability of the book of business, while the net loss ratio may benefit from savvy reinsurance buying, as in the case of Lemonade.

See also: How Insurtech Helps Build Trust  

What matters most is for startups probably the higher of the two loss ratios. If reinsurance reduces the loss ratio, this is only sustainable over time if reinsurers make an adequate return. Reinsurers, like all businesses, tend to demand higher prices when customers lose them money, which in time makes the net loss ratio look more like the gross.

In the case of the two auto startups, they are paying reinsurers to take away their biggest losses, so this “cost of reinsurance” needs to be reflected, and the net numbers matter more.

4. Correcting rookie mistakes, experimenting and still underpricing?

At the Nov. 30 plenary session of the U.S. IoT Insurance Observatory, Denese Ross of DRC Consulting shared an in-depth 50-page review of Root’s filings, which total over 130,000 pages. Our opinions, based on her factual/non-opinion analysis, is that Root is experimenting aggressively, correcting some rookie mistakes and still underpricing some business.

The following is Matteo & Adrian’s interpretation and analysis:

  • Raising rates, but is it enough? Root has begun correcting its early underpricing by raising rates substantially in several states, but not as much as the actuaries indicate is needed. The company has filed rate increases in seven of its 20 states since late summer, ranging from +5.5% to +34%. The highest is in Texas, where the filing is pending, and where Root now writes 1/3 of its premium (whereas Ohio was the largest state last year). The indication in Texas was +200%. An indication is the change to the overall rate “indicated” by an actuarial analysis to achieve a specified pricing target based on analysis and adjustments to historic trends. For many reasons, the rate level chosen could be less than the indication, but a big gap between rate taken and indication suggests management may still be oriented toward growth even if it is at a loss. Indeed, Root recently put up a blog post claiming to be up to 52% cheaper. Further, Root also added or changed discounts, which are not part of the headline rate. In other states, per-policy rate caps limit the actual amount of rate taken on renewal business, possibly to avoid churning existing customers, since the acquisition cost of a renewal customer acquired via a direct channel is quite small. These rate-making decisions illustrate the fine line a company like Root has to walk when balancing growth, profitability, retention and acquisition cost. Similarly, investors should be wary of individual numbers presented in isolation — it can be good to churn underpriced customers.
  • Technology that isn’t as predictive as expected: Root collects telematic data via a smartphone and scores a driver once he or she has tracked 500 miles, using features such as hard braking, acceleration, turning, time of day, mileage, consistency and distractions. The company started with a third party’s telematics model that apparently gave excessive discounts to drivers in better tiers – see the steep blue curve below, which is from a Root filing. Root then developed its own model and is giving more modest discounts to better drivers (gray line). Telematics contributes information and allows more granular clustering, but the law of large numbers and class rating variables (e.g. demographics) still matters more than perhaps anyone would like. Good drivers get hit by uninsured bad drivers. Bad drivers can drive well for 500 miles when they’re being watched. Good drivers’ cars get stuck in hail storms and hurricanes. Nonetheless, Root is the first insurer around the world to acquire large numbers of customers through a TBYB (Try-Before-You-Buy) app, something many incumbents have tried in the past few years.

  • Me-too is harder than it looks. Root has filed several modifications to its rates to correct mistakes, such as correcting household structure data, moving from ISO vehicle symbols to factors assigned directly by VIN and correcting for “double-discounting” and “double-surcharging.”
  • Claims difficulties. Most startups lack a high-quality claims infrastructure, which is one of the hardest aspects of an insurer to build, but it appears that Root is now taking more claims activity in-house instead of using a third party claims administrator (TPA). To date, Root’s customer claims experience hasn’t been as easy as the company says. The 15 Better Business Bureau complaints are mostly claims-related, and only 1/3 of Clearsurance users were satisfied with the claims experience. On the same website, Progressive and Geico are around 80%, and Metromile is at 70% claims satisfaction. As one Clearsurance review of Root reads: “I was in an accident back in July, and it’s now November, and my simple simple claim has not been paid on or closed out. It was originally with an adjuster at Crawford & Co. but without my knowledge that changed hands to some other adjuster actually within Root. The original adjuster back in September said that she would get back to me within the week….Months later and I’m still here with an open claim.”

It will take time for the corrections Root has made to show through in results. And particularly on pricing, they may be too little. Thus, the question remains: Is Root’s growth simply the result of selling something far too cheaply, or is it quietly experimenting its way to becoming the next Progressive?

5. Can a startup compete with Progressive and Geico?

The most common refrain of startups is that insurance is broken, and their solution will fix it. Oui, c’est vrai. But two companies have their act together more than almost any other insurers: Geico and Progressive, the #2 and #3 auto insurers in the U.S. Geico is famous for its lean expenses, while Progressive runs a loss ratio about six points below the industry average of 69%.

It wasn’t always this way. Back in 1996, Progressive was #7, and Geico was #9. There are few other examples in insurance of companies so steadily and regularly gaining market share across decades. In our first article, we showed how startups historically have only won where incumbents leave the door open. Progressive and Geico are not leaving the door open, at least in personal auto as a stand-alone line. Progressive, in particular, has been quite experimental throughout its life, pioneering telematics in the U.S. and experimenting with various ways of paying for auto insurance and using telematics, as some startups are now doing, but with none of Progressive’s advantages.

So why do startups try to compete with such well-run companies? We think there are several beliefs (or hopes):

  • A belief that the startup can duplicate public filings to set rates. As noted above, it’s harder than it looks. Even professional comparison rating websites have trouble estimating a person’s actual premium, and, in a thin-margin business, small differences matter. This is not a new story – eSurance’s first me-too nearly 20 years ago didn’t work particularly well. Progressive, having outperformed the market for decades, knows that its filings are scrutinized. Like a game of cat and mouse, the company has become expert at fooling competitors that try to replicate filings, which run thousands of pages and are deliberately obscured and complicated. And rate filings are only one aspect of underwriting. Credit models, underwriting rules and marketing plans for attracting the best customers may not be public and may be difficult to replicate. The result is that unwary and inexperienced competitors may grow by unknowingly writing the risks that their competitors didn’t want. There is no CAC at which an underpriced customer is a desirable customer

See also: Insurtech’s Act 2: About to Start  

  • A belief that there are profitable untapped segments that incumbents won’t cannibalize. Progressive and Geico are very intelligent companies with a long history of innovation and extremely detailed customer segmentations. It defies all logic to suggest that there is a large segment of customers in a fragmented and highly competitive market that are being greatly overcharged simply because these companies refuse to offer them good rates to avoid cannibalization.
  • A belief that the startups can easily acquire customers through direct channels. Direct distribution is not new in U.S. auto – Geico and Progressive both spend billions of dollars a year in advertising and have extremely sophisticated digital marketing. To this end, one of Root’s interesting innovations is its referral program, which we showed in our last article to be quite powerful. (And we probably underestimated its power, because we didn’t account for multi-car policies.)
  • A belief that the startups can be “good enough” at claims. Scale matters in handling claims, whether it is hiring and managing high-quality defense counsel, detecting fraud patterns or negotiating with vendors such as garages and roadside assistance services. Further, incentives for third party administrators must be carefully set to avoid excessive claims cost and customer dissatisfaction. For example, when a TPA is paid per open claim, speed of settlement may suffer, which can lead to regulatory fines or bad faith judgments – not to mention customer annoyance. In an industry where 96% is considered a best-in-class combined ratio, even a little bit of claims leakage can be quite hurtful. Metromile is exploring the reinvention of the claims process through the usage of telematics data. Considering the international best practices of doing this, the size of the portfolio might not allow the company to have enough claims yet to train an algorithm for a reliable crash kinematic reconstruction.
  • A belief that “we only need 1% of a $220 billion market to be huge.” So 1999…

This analysis isn’t to suggest that it’s impossible for a startup to win in auto insurance, but that the moat around Geico and Progressive in personal auto is wide and deep.

Conclusion

The annual figures that are published in March contain a wealth of additional information. To be notified when these numbers are available, please follow the authors on LinkedIn.

4 Insurers’ Great Customer Experiences

McKinsey research has found that insurance companies with better customer experiences grow faster and more profitably. In 2016, 85% of insurers reported customer engagement and experience as a top strategic initiative for their companies. Yet the insurance industry continues to lag behind other industries when it comes to meeting customer expectations, inhibited by complicated regulatory requirements and deeply entrenched cultures of “business as usual.”

Some companies–many of them startups–are setting the gold standard when it comes to customer experience in insurance, and are paving the way for the industry’s biggest insurers to either fall in line, or risk losing out to smaller competitors with better experiences. Through a combination of new business models, clever uses of emerging technology and deep understanding of customer journeys, these four companies are leading the pack when it comes to delivering on fantastic experiences:

1. Slice – Creating insurance products for new realities.

Slice launched earlier this year and is currently operating in 13 states. The business model is based on the understanding that, in the new sharing economy, the needs of the insured have changed dramatically and that traditional homeowners’ or renters’ insurance policies don’t suffice for people using sites like AirBnB or HomeAway to rent out their homes.

According to Emily Kosick, Slice’s managing director of marketing, many home-share hosts don’t realize that, when renting out their homes, traditional insurance policies don’t cover them. When something happens, they are frustrated, angry and despondent when they realize they are not covered. Slice’s MO is to create awareness around this issue, then offer a simple solution. In doing so, Slice can establish trust with consumers while giving them something they want and need.

Slice provides home-share hosts the ability to easily purchase insurance for their property, as they need it. Policies run as little as $4 a night! The on-demand model allows hosts renting out their homes on AirBnB or elsewhere to automatically (or at the tap of a button) add an insurance policy to the rental that will cover the length of time–up to the minute–that their home is being rented. The policy is paid for once Slice receives payment from the renter, ensuring a frictionless transaction that requires very little effort on the part of the customer.

See also: Who Controls Your Customer Experience?  

Slice’s approach to insurance provides an excellent example of how insurers can strive to become more agile and develop capacities to launch unique products that rapidly respond to changes in the market and in customer behavior. Had large insurance companies that were already providing homeowners’ and renters’ insurance been more agile and customer-focused, paying attention to this need and responding rapidly with a new product, the need for companies like Slice to emerge would have never have arisen in the first place.

2. Lemonade – Practicing the golden rule.

In a recent interview, Lemonade’s Chief Behavior Officer Dan Ariely remarked that, “If you tried to create a system to bring about the worst in humans, it would look a lot like the insurance of today.”

Lemonade wants to fix the insurance industry, and in doing so has built a business model on a behavioral premise supported by scientific research: that if people feel as if they are trusted, they are more like to behave honestly. In an industry where 24% of people say it’s okay to pad an insurance claim, this premise is revolutionary.

So how does Lemonade get its customers to trust it? First, by offering low premiums–as little as $5 a month–and providing complete transparency around how those premiums are generated. Lemonade can also bind a policy for a customer in less than a minute. Furthermore, Lemonade has a policy of paying claims quickly–in as little as three seconds–a far cry from how most insurance companies operate today. When claims are not resolved immediately, they can typically be resolved easily via the company’s chatbot, Maya, or through a customer service representative. But perhaps the most significant way that Lemonade is generating trust with its customers is through its business model. Unlike other insurance companies, which keep the difference between premiums and claims for themselves, Lemonade takes any money that is not used for claims (after taking 20% of the premium for expenses and profit) is donated to a charity of the customer’s choosing. Lemonade just made its first donation of $53,174.

Lemonade’s approach to insurance is, unlike so many insurers out there, fundamentally customer-centric. But CEO Daniel Schreiber is also quick to point out that, although Lemonade donates a portion of its revenues to charities, its giveback is not about generosity, it is about business. If Lemonade has anything to teach the industry, it is this: that the golden rule of treating others as you want to be treated, holds true, even in business.

3. State Farm – Anticipating trends and investing in cutting-edge technology.

The auto insurance industry has been one of the fastest to adapt to the new customer experience landscape, being early adopters of IoT (internet of things), using telematics to pave the path toward usage-based insurance (UBI) models that we now see startups like Metromile taking advantage of. While Progressive was the first to launch a wireless telematics device, State Farm is now the leading auto insurer, its telematics device being tied to monetary rewards that give drivers financial incentives to drive more safely. The company also has a driver feedback app, which, as the name suggests, provides drivers feedback on their driving performance, with the intent of helping drivers become safer drivers, which for State  Farm, equals money.

By anticipating a trend, and understanding the importance of the connected car and IoT early on, State Farm has been able to keep pace with startups and has reserved a seat at the top–above popular auto insurers like Progressive and Geico–at least for now. If nothing else, unlike most traditional insurers, auto insurance companies like State Farm and Progressive have been paving the way for the startups when it comes to innovation, rather than the other way around. For now, this investment in customer experience is paying off. J.D Powers 2017 U.S Auto Insurance Study shows that, even as premiums increased for customers in 2017, overall customer satisfaction has skyrocketed.

4. Next Insurance – Automating for people, and for profit.

Next Insurance believes that a disconnect between the carrier and the customer is at the heart of the insurance industry’s digital transformation problem. In essence, it’s a communication problem, according to Sofya Pogreb, Next Insurance CEO. The people making decisions in insurance don’t have contact with the end customer. So while they are smart, experienced people, they are not necessarily making decisions based on the actual customer needs.

Next Insurance sells insurance policies to small-business owners, and the goal is to do something that Next believes no other insurer is doing–using AI and machine learning to create “nuanced” and “targeted” policies to meet specific needs.

An important aspect of what makes the approach unusual is that, instead of trying to replace agents altogether, Next is more interested in automating certain aspects of what agents do, to free their expertise to be put to better use:

“I would love to see agents leveraged for their expertise rather than as manual workers,” Pogreb told Insurance Business Magazine. “Today, in many cases, the agent is passing paperwork around. There are other ways to do that – let’s do that online, let’s do that in an automated way. And then where expertise is truly wanted by the customer, let’s make an agent available.”

See also: Smart Things and the Customer Experience  

While innovative business models and cutting-edge technology will both be important to the insurance industry of the future, creating fantastic customer experiences ultimately requires one thing: the ability for insurance companies–executives, agents and everyone in between–to put themselves in their customers’ shoes. It’s is a simple solution, but accomplishing it is easier said than done. For larger companies, to do so requires both cultural and structural change that can be difficult to implement on a large scale, but will be absolutely necessary to their success in the future. Paying attention to how innovative companies are already doing so is a first step; finding ways to bring about this kind of change from within is an ambitious next step but should be the aim of every insurance company looking to advance into the industry of the future.

This article first appeared on the Cake & Arrow website, here. To learn more about how you can bring about the kind of cultural and institutional change needed to deliver true value to your customers, download our recent white paper: A Step-by-Step Guide to Transforming Digital Culture and Making Your Organization Truly Customer Focused.

New Era of Commercial Insurance

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.

Our new research, A New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption, highlights how changing trends in demographics, customer behaviors, technology, data and market boundaries are creating a dramatic shift from traditional commercial and specialty products to the new, post-digital age products redefining the market of the future.

See also: Insurtechs Are Pushing for Transparency

Growth Opportunities

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.

See also: Leveraging AI in Commercial Insurance  

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.

For a greater in-depth look at the implications of commercial insurance shifts, be sure to downloadA New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption.

Can You Leapfrog the Competition?

In business, the gap between “knowing what to do” and “doing it” is of increasing concern. Why? Because in a world of rapid change, the gap between leaders and fast followers or laggards will at some point become insurmountable. The forces of change are shifting the status quo. New competitors are rising within and outside the insurance industry.

Last month, Majesco published a research report, Strategic Priorities 2017 — Knowing vs. Doing, that highlighted how insurers are responding to changes in the marketplace. We followed that up with two blogs ­explaining the Knowing — Planning — Doing Gap, and how Habits Stifle Strategy. Today we are focusing on what’s really important…catching up or even leapfrogging! How do we close the gap between where we are and where we need to be to stay competitive?

Recognize the gap. Seize the opportunity.

Insurers are, at their core, risk averse. With today’s pace of change, however, the path of least risk will include taking some risks. The risk to invest in new business models, new products, new markets and new channels can, at minimum, keep insurers competitive. Even better, taking these risks could allow insurers to leapfrog the competition. Because the new competition does not play by the traditional rules of the past, insurers need to be a part of rewriting the rules for the future. There is less risk in a game where you write the rules. Are we acting upon our knowledge of the insurance industry, regulatory requirements and market trends to create a game that plays to our strengths in meeting changing customer and market needs? Or, are we simply educated observers waiting to see if it works, then follow?

See also: A Manufacturing Risk: the Talent Gap  

“Fail fast” is more than a technology, product, service or business model development mantra — it’s a directive to do ANYTHING that will place the organization out on the edge of change. A position of knowledgeable risk — risk with an opportunity for differentiation and growth — is the new normal for insurers. Ask your organization…is it riskier to jump into the gap with uncertainty about the potential of new ideas, or to sit still and accept the certainty of dramatic changes to the insurance industry as we know it?

Bridge the gap in logical phases.

To move from thinking to doing requires a new business paradigm in how we define and think about insurance in the digital age. Most organizations can’t simply flip off one switch (traditional business model and products administered on traditional systems) and flip another on (new business model and products on modern, flexible systems that will handle digital integration and better data acquisition and analysis). The shift is separating the insurance business models of the past 50-plus years that have been based on the business assumptions, products, processes, channels of the Silent and Baby Boomer generations from those of the next generation, the Millennials and Gen Z, as well as many in Gen X.  So, the shift will require steps that provide a bridge across a growing gap of pre- and post-digital age between leaders, fast followers and laggards.

A paradigm shift in phases makes sense, so that business streams overlap each other. For example, we expect to see existing insurers and reinsurers increasingly looking for paths to create the business of the future and revenue growth, by capturing the next generation of customers with new engagement models, products and services. But while doing that, they must fund the future by transforming and optimizing today’s business and the current customers that they have grown over the past decade.

As they rethink their business models and realign them with the customer needs and expectations of those who will be their customers for the next 10 to 20 years, they will logically still be catering to their loyal customers from the past 50-plus years. This will require insurers to know, plan and execute across these three paths:

  1. Keep and grow the existing business, while transforming and building the new business.
  2. Optimize the existing business while building the new business.
  3. Develop a new business model for a new generation of buyers.

These three focal points are critical steps in a world of change and disruption. A new generation of insur­ance buyers with new needs and expectations creates both a challenge and an opportunity. 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.

Act. Right now. Close the gap.

Not every insurance company will be successful in this new world of new customer risks and expectations, ever-advancing technology, data and analytics capabilities and expanding and blurring market boundaries. But if you are determined that your company will succeed, you must act now to start closing the most critical gaps between what your company knows and what it is doing in response to that knowledge.

See also: A Gap That Could Lead to Irrelevance  

Insurance companies must stop talking and start doing. We are entering a new age of insurance underpinned by a seismic shift creating leaps in innovation and disruption, challenging the traditional business assumptions, operations, processes and products of the last 30 to 50 years. The challengers, such as Lemonade, Splice, TROV, Haven Life, Root, Next Insurance and others, are bucking the status quo and introducing new business models, products, processes, channels and experiences for the future. Will they all succeed? Maybe not. But they will alter the landscape, just as others have in the past or in other industries, leaving companies who did not change in their wake. The implications for insurers are enormous. The gap between knowing and doing is putting insurers at significant risk. It is allowing them to fall further behind, making them irrelevant … and potentially extinct.

On the flip side, once your organization jumps the gap, you’ll be in the enviable position of putting distance between your organization and those that didn’t act on their knowledge. Following a road map (similar to the one outlined in the three steps above) will bring your organization to a place where it will be prepared to capture growth and gain the agility to move in new markets.

Closing the gap is a journey that begins with a first step of action. Take that step now!

Why Disintermediation Is Overrated

Venture capital money has poured into insurance technology to the tune of more than $3 billion in the last 18 months. Much of this capital has financed companies founded under ambitious missions and goals:

“It’s a digital-first, direct-to-consumer agency — we’ll be a carrier in 18 months.”

“We’re a mobile-first, full-suite personal insurance shopper.”

“We’re leveraging IoT and blockchain to completely redefine underwriting — in a way that makes sense to consumers.”

Wow, sounds disruptive.

Anyone close to the insurance industry has heard some variation of these assertions countless times over the past 18 months as entrepreneurs have identified the antiquated insurance industry as one ripe for disruption. There’s no arguing that insurance is a relative laggard in a financial services industry that has seen material innovation over the past decade. Advancements in payments, investment management and lending have permanently altered the way consumers think about banking and the movement of capital, while insurance has remained relatively underserved by technology.

See also: Find Your Voice as an Insurance Agent  

Technological innovation across industries has typically come in two ways: through uprooting incumbents or through empowering the existing system. In industries and business lines that are largely commoditized, the former approach has historically created lasting value — with Uber being a prime example. Meanwhile, industries that require expertise or personal touch have generally innovated incrementally by enabling existing channels — Charles Schwab or Sabre are examples.

Most agree technology will improve the user experience in insurance. Most agree technology will provide new access to data sources to improve underwriting. But will technology actually displace the incumbents and existing institutions? Is that the approach that will work in insurance? In some cases, yes. In the case of the commercial insurance, we generally think not.

Disintermediation? We see empowerment.

At first glance, commercial insurance may seem like an ideal candidate for meaningful disruption. It is a substantial market with more than $240 billion in premiums written annually; it has a brick-and-mortar, aging distribution channel (39,000-plus retail agents with an average age over 50); it primarily operates with pen and paper communication; and it largely functions in a data vacuum. In addition to these structural features, many small commercial policies can now be quoted, rated and bound instantly (they don’t need human review). This seems like a startup opportunity in a box.

With these market fundamentals in hand, a host of direct-to- consumer digital insurance brokers or companies (MGAs) are entering the market with the intent of disintermediating existing channels and delivering instant policies to small commercial insureds. Examples of some of these are Next Insurance, Embroker, Coverwallet, Trym — and the list goes on. For some business owners, purchasing coverage in this manner may in fact be the best way to transfer their business’ risks. Though it is quite likely the amount of premium placed through digital channels will increase from its current number (around 4%), we see the incumbent brick-and-mortar retail brokers, who command 96% of placed premium, as incredibly entrenched for a host of reasons:

  1. Commercial insurance is complex. Each business has unique risks that business owners struggle to understand. The alphabet soup that is commercial insurance and discussions of CGL, EPLI, E&O, coverage limits and deductibles are often met with blank stares. So, even if business owners understood their risks and could purchase coverage directly, they often are not familiar with what they are buying.
  2. Brokers actually acquire customers quite efficiently, and it may be difficult (or impossible) to acquire customers online at the same cost that brokers do through more traditional means. Acquisition of small and medium-sized business (SMB) clients generally works best when done vertically or locally — most brokers, local to their area and experts in specific products, fit that mold.
  3. Commercial insurance policies are not commodities. Each policy is unique and has its own specific set of coverages, endorsements and exceptions. An experienced agent has immense value to the insured navigating potential coverages.
  4. There is no cost savings by going around a traditional broker. Brokers are free insurance consultants to the client, and there is no cost difference between going through a digital channel vs. a traditional one.
  5. In commercial insurance, the buyer is insuring against certain things that could put her entire business at risk. A trusted adviser is, therefore, incredibly important in understanding various policies and insurable risks.

Unless there are significant advancements in artificial intelligence and reductions in marketing costs, we don’t see the possibility for meaningful disruption or displacement of the broker in the near term. We do, however, believe in a massive network of digitally empowered brokers.

The digital broker

Imagine a world where a technology platform gives a network of brokers the same digital tools that are being produced by the technology startups trying to replace them. The broker now has a digital interface that services insureds quickly while simultaneously providing expert advice that takes years to amass.

See also: 3 Ways to Improve Agent/Insurer Links  

Moreover, there is meaningful precedent for industries with the above dynamics to become empowered, not disrupted, by technology. Charles Schwab became a household name largely because it allowed wealth managers to break away from banks, freeing them from the operational overhead of having to build trading, reporting or portfolio management systems. Schwab enabled wealth managers to focus on being a high-quality consultant to its clientele. This has also been exhibited in real estate, where startups have empowered real estate agents with infrastructure and data science to provide a level of service and expertise on par with companies like Amazon and Google.

Both of these examples illustrate the transformative effect of empowering existing, experienced distributors of complicated and operationally intensive products. We see this same future for commercial insurance brokers.