When start-ups jumped into insurance, many focused on the personal auto industry. Not surprising, considering it is arguably the least complex line of insurance and is often the first to be disrupted (going back to Progressive in the ‘90s). Now that InsurTech investment is at an all-time high, more start-ups are entering the market and have become increasingly confident in their ability to tackle complex lines of business. If recent start-ups like CoverWallet and Next Insurance are any indication, small commercial business is the next line to face aggressive disruption. If carriers want to stay competitive and grab profitable market share, they will have to adapt to today’s standards for the customer experience.
Small Commercial an Obvious Move for Startups
Targeting the small commercial business market makes sense, given a recent McKinsey study that calls the line “one of the few bright spots in P/C insurance.” The study points out that, since the 2008 recession, the number of small businesses has grown, and 40% of sole proprietorships don’t have insurance.
Unfortunately for the traditional carrier, the majority of small businesses are also open to purchasing policies online. But remember that saying you’re open to purchasing online and actually purchasing online are two very different things – especially if we use the recent past as an indicator.
Google Compare terminated operations after sluggish growth across the U.S., with many of their leads failing to purchase. This is not atypical for this insurance shopping method. Several years ago, Overstock also tried selling insurance online outside of personal auto – including commercial business – and that closed down quickly.
That two business giants failed doesn’t mean online purchasing won’t eventually catch on. Start-up culture is largely a test-and-learn environment.
But these initial growing pains do indicate that traditional insurance still has a chance to stay alive amid disruption if they provide an efficient, engaging consumer experience.
Consumers Want Both Confidence and Efficiency
It’s not that consumers don’t want to work with carriers and agents, it’s that the customer efficiency of 30 years ago is no longer an appropriate benchmark. Of course small business owners are open to purchasing online, because traditional insurance has not yet given them the experience they desire. According to a PIA study from last year, small commercial businesses would much prefer the personal attention from agents (and by extension the carriers they work with) as long as they do a better job of adapting to technologies and the Internet. From the customer’s perspective, an experience with an insurance carrier isn’t compared only with other carriers – but to other companies they do business with regardless of industry. Whether it’s Amazon, Apple, Google, etc., your customer experience will be rated against the companies leading in the modern, digital world.
This explains many of the start-ups entering the space now and why they have the potential to gain the upper hand.
To achieve better communication, carriers need to think more broadly about their usage of data and predictive analytics. You have to gain an incredibly detailed view of your customers, their behaviors and their responses to your communication and product offerings. We always recommend an incremental rollout of analytics to get your feet wet before diving in. At the same time, it’s critically important to be ready to build off that early momentum and develop an overall predictive analytics strategy that seamlessly merges with business goals. Recognize that this evolution to becoming more data-driven is as much about organizational change as it is about technology.
When carriers understand how predictive analytics benefits them, they can confidently make data-driven decisions that improve every aspect of their business – including the customer experience. For example, using underwriting analytics to achieve real-time insights into pricing policies doesn’t just help a carrier’s bottom line – it also greatly streamlines and expedites the communication chain between consumers, agents and carriers.
At the recent Dig In insurance conference, a panel of InsurTech CEOs discussed how start-ups dissect insurance data – in ways that differ from traditional insurers and agents. A member of the audience asked, “Why are start-ups so combative in their approach?” It was an intriguing question that highlights the digital divide in terms of how the industry thinks about evolving versus how technology and Internet entrepreneurs think about playing in industries ripe for disruption. What feels “combative” to the incumbent is often seen as “customer-centric” to the new entrant.
It’s important that carriers understand that there is a way to co-exist, but counting on new entrants to accept the status quo is a bad bet. Think of start-ups as an advocate for a better customer experience, and see those that fit your business as innovation partners. Adopt the mantra that the customer always wins, and you’ll remain relevant in the customer value chain.
Transparent reinsurance programs could emerge as significant opportunities for healthcare providers, issuers, reinsurers, technology innovators and regulators to address health insurance.
The message is clear. Having to factor in higher costs associated with new entrants to the healthcare system gives insurance firms license to charge higher rates. If these new people were put into a reinsurance pot for three to five years with costs spread over all insurers, no one insurer would be unnecessarily burdened. After this period, costs for these entrants could be reexamined and a decision could be made on how to proceed with them, depending upon the deviation from the remaining population.
Several factors are coming into play.
United Health Group indicates it will be leaving all but a few of the 34 states where it is offering health insurance under Obamacare.
A fresh Blue Cross Blue Shield study finds recent Obamacare entrants have higher rates of specific illnesses and used more medical services than early entrants. “Medical costs of care for the new individual market members were, on average, 19% higher than employer-based group members in 2014 and 22% higher in 2015. For example, the average monthly medical spending per member was $559 for individual enrollees versus $457 for group members in 2015,” the study found.
What emerges in conversations with economists, regulators and healthcare actuaries is a sense that properly designed, fair and transparent reinsurance could—and would—advance industry and public policy goals to continue insurance for all at affordable prices. This approach would represent tangible improvements over inefficient, incumbent systems. Information would be used by insurers and reinsurers, providers and regulators and, crucially, insureds to establish best performances for healthcare outcomes and expenses. Virtually everyone knows that state or regional reinsurance would have to be mandated, as voluntary systems could be gamed.
“The implementation of new policies, the availability of research funding, payment reform and consumer- and patient-led efforts to improve healthcare together have created an environment suitable for the successful implementation of patient-reported outcome measures in clinical practice,” fresh research in Health Affairs also indicates.
Risk analysis technologies could help issuers, reinsurers, healthcare institutions and citizens rein in the healthcare system’s enormous costs. Earlier this year, the Congressional Budget Office and Joint Committee on Taxation projected that, “in 2016, the federal subsidies, taxes and penalties associated with health insurance coverage will result in a net subsidy from the federal government of $660 billion, or 3.6% of gross domestic product (GDP). That amount is projected to rise at an average annual rate of 5.4%, reaching $1.1 trillion (or 4.1% of GDP) in 2026. For the entire 2017–2026 period, the projected net subsidy is $8.9 trillion.”
CBO/JCT published this stunning projection amid consensus that $750 billion to $1 trillion of wasted spending occurs in healthcare in the U.S. “Approximately one in three health care dollars is waste,” Consumer Reports says.
Key metrics should focus on estimates of risk using demographics and diagnoses; risk model descriptions; calculation of plan average actuarial risk; user-specified risk revealing and detailing information; drill-down capabilities clarifying research; monitoring and control; and calculation and comparison measures to address reinsurance validation.
Several major refinements yielding and relying upon granular, risk-revealing data and metrics would support more efficient reinsurance. All would, and could, update reinsurance information and address customer experience, trust and privacy concerns.
“Advanced analytics are the key,” remarked John Wisniewski, associate vice president of actuary services at UPMC Health Plan. “Predictive capability that looks at the likelihood a patient admission may be coming is the information that we can give to doctors to deal with the matter. … Whoever develops algorithms for people who will be at risk—so providers can develop plans to mitigate risk—will create value for issuers, providers and members alike.”
Available technologies support the connecting of risk assessments with incentives for risk information.
Michael Erlanger, the founder and managing principal of Marketcore, said,“We cannot know what we cannot see. We cannot see what we cannot measure. These available technologies provide clarity for more efficient health insurance and reinsurance.”
Context: Three Rs: Reinsurance, Risk Corridors and Risk Adjustment
When Congress enacted the ACA, the legislation created reinsurance and risk corridors through 2016 and established risk adjustment transfer as a permanent element of health insurance. These three Rs—reinsurance, risk corridors and risk adjustment—were designed to moderate insurance industry risks, making the transition to ACA coverage and responsibilities. The Centers for Medicare and Medicaid Services (CMS) within the Department of Health and Human Services (HHS) administers the programs. All address adverse selection—that is, instances when insurers experience higher probabilities of losses due to risks not factored in at the times policies are issued. All also address risk selection, or industry preferences to insure healthier individuals and to avoid less healthy ones.
With the expiration of ACA reinsurance and risk corridors, along with mandatory reporting requirements this December, healthcare providers, issuers, reinsurers, technology innovators and regulators can now evaluate their futures, separate from CMS reporting.
Virtually all sources commend reinsurance and risk adjustment transfer as consistently as they deride risk corridors. Reinsurance has paid out well, while risk corridors have not. Risk adjustment transfer remains squarely with CMS.
While House Republican initiatives try and fail to repeal the ACA, and some news programs and pundits say it is unsustainable, approximately 20 million subscribers are enrolled in Obamacare: with 12.7 million as marketplace insureds, with others through Medicaid and as young adults on parent plans. President Obama, in March, remarked: “Last summer we learned that, for the first time ever, America’s uninsured rate has fallen below 10%. This is the lowest rate of uninsured that we’ve seen since we started keeping these records.” Subscription ratios are off the charts. Premium increases have been modest, approximately 6% for 2016, experts find. “I see no risk to the fundamental stability of the exchanges,” MIT economist Jonathan Gruber observed, noting “a big enough market for many insurers to remain in the fold.”
Transitional Reinsurance 2014-16: Vehicle for Innovation
One of the great benefits of the ACA is eliminating pre-existing conditions and premium or coverage variables based on individual underwriting across the board. Citizens are no longer excluded from receiving adequate healthcare, whether directly or indirectly through high premiums. Prices for various plan designs go up as coverage benefits increase and as co-pays and deductibles decrease, but the relative prices of the various plans are calculated to be actuarially equivalent.
To help issuers make the transition from an era when they prided themselves on reducing or eliminating less healthy lives from the insureds they covered, to an era where all insureds are offered similar ratings, the ACA introduced reinsurance and risk corridors to cover the first three years (2014 through 2016), in addition to risk adjustment transfer, which will remain in force.
The concept is relatively simple: Require all issuers to charge a flat per-dollar, per-month, per-“qualified” insured and create a pot of money with these “reinsurance premiums” that reimburses issuers for excess claims on unhealthy lives. Issuers would be reimbursed based on established terms outlined in the ACA.
Reinsurance reimburses issuers for individual claims in excess of the attachment point, up to a limit where existing reinsurance coverage would kick in. Individuals involved with these large claims may or may not be identified in advance as high-risk. The reimbursed claim may be an acute (non-chronic) condition or an accident. The individual may otherwise be low-risk.
The important aspect is that all health insurance issuers and self-insured plans contribute. By spreading the cost over a large number of individuals, the cost per individual of this reinsurance program is small to negligible. Non-grandfathered individual market plans are eligible for payments. A state can operate a reinsurance program, or CMS does on its behalf through this year.
As a backstop, the federal government put some money in the pot through 2016—just in case the pot proved inadequate to provide full reimbursement to the issuers. In a worst-case scenario, the sum of the reinsurance premiums and the federal contribution could still be inadequate, in which case the coinsurance refund rate would be set at less than 100%.
As it turned out, 2014 reinsurance premiums proved to be more than adequate, so the refund rate was 100%, and the excess funds in the pot after reimbursement were set aside and added to the pot for 2015, just in case that proves inadequate.
Reinsurance functions on this timetable through this year:
CMS transferred approximately $7.9 billion among 437 issuers—or 100% of filed claims for 2014, as claims were lower than expected— and it has yet to release 2015 payments. The results for 2015 are coming this summer.
From the outset, states could, and would, elect to continue reinsurance, the CMS contemplated. In 2012, the CMS indicated that “states are not prohibited from continuing a reinsurance program but may not use reinsurance contribution funds collected under the reinsurance program in calendar years 2014 through 2016 to fund the program in years after 2018.”
Subsequent clarification in 2013 did not disturb state discretion. Current regulation specifies that “a state must ensure that the applicable reinsurance entity completes all reinsurance-related activities for benefit years 2014 through 2016 and any activities required to be undertaken in subsequent periods.”
One course of action going forward from 2017 and varying from state-to-state could be mandatory reinsurance enacted through state laws. Healthcare providers, issuers, reinsurers, regulators and legislators could define the health reinsurance best suited to each state’s citizens.
Reinsurers could design and manage administration of these programs possibly at a percentage of premium cost that is less than what is charged by the federal government today. While these reinsurance programs would be mandated, they could include a component of private reinsurance. For example, reinsurers could guarantee the adequacy of per-month reinsurance premiums with provisos that if these actuarially calculated rates turned out to be inadequate in any given year or month, there will be an adjustment to account for the loss in the following year. Conversely, if those rates turn out to be too high, 90% or more is set aside in an account for use in the following year. This way, reinsurers could participate by providing a private sourced solution to adverse claims.
Risk corridors apply to issuers with Qualified Health Plans (exchange certified plans) and facilitate transfer payments. The CMS noted: “Issuers whose premiums exceed claims and other costs by more than a certain amount pay into the program, and insurers whose claims exceed premiums by a certain amount receive payments for their shortfall.” Technically, “risk corridors mean any payment adjustment system based on the ratio of allowable costs of a plan to the plan’s target amount,” as the CMS designated.
Risk corridors are politically contentious. Sen. Marco Rubio (R-Florida) likened risk corridors to bailouts. The HHS acknowledged it will “explore other sources of funding for risk corridors payments, subject to the availability of appropriations… includ[ing] working with Congress on the necessary funding for outstanding risk corridors payments.” And, a knowledgeable analyst, Dr. David Blumenthal, noted that risk corridors are not bailouts.
Going forward, evaluations of risk corridors will demand due diligence. Several health exchanges failed from any number of factors—from too little capital for growth experienced, inadequate pricing, mismanagement or risk corridor payments.
Whether innovation can yield effective risk corridors or whether risk corridors will simply fade out as transitional 2014-2016 regulation will depend on institutional and industry participants. Risk corridors did not score unalloyed approbation among sources.
Risk Adjustment: Permanent Element of ACA
Risk adjustment remains in force and impels issuers with healthier enrollees to offset some costs of issuers with sicker ones in specific states and markets and of markets as a means toward promoting affordable health care choices by discouraging cherry picking healthier enrollees.
The HHS transferred approximately $4.6 billion for risk adjustment among issuers for 2014.
At first blush, one might postulate that risk adjustment does the job and that reinsurance and risk corridors could just as reasonably fade out. There is some logic to that argument.
On the other hand, state or regional level reinsurance could make up for risk adjustment shortfalls. In some instances, risk adjustment seems to be less friendly to issuers that take on higher-risk individuals, rather than rewarding high tech issuers and providers with back office capabilities coding claims in such a way as to tactically game risk adjustment.
Evaluating and cultivating these opportunities are timely amid the uncertainties of the presidential and congressional elections that may yield executive and legislative lawmakers intent on undoing ACA provisions, starting with risk corridors. Such legislation could produce losses for issuers and reinsurers.
Nelson A. Rockefeller Precedent
In 1954, then-Undersecretary of Health Education and Welfare Nelson A. Rockefeller proposed reinsurance as an incentive for insurers to offer more health insurance. S 3114, A Bill to Improve the Public Health by Encouraging More Extensive Use of the Voluntary Prepayment Method in the Provision of Personal Health Services, emerged in the first Eisenhower administration to enact a federally funded health reinsurance pool. Rockefeller intended the reinsurance as a means toward an end, what would eventually be dubbed a “third way” among proponents of national health insurance. President Truman and organized labor championed the approach into the mid-’50s. So did the Chamber of Commerce and congressional Republican adversaries of the New Deal and Fair Deal, who were chaffing to undo Social Security as quickly as they could. The American Medical Association also supported this third way because it opposed federal healthcare reinsurance as an opening wedge for socialized medicine. Despite limiting risk and offering new products, insurers demurred because of comfort zones with state regulators and trepidation about a federal role.
Nelson A. Rockefeller, then-undersecretary of the Department of Health, Education and Welfare, presenting a federally funded health reinsurance plan, 1954.
Source: Department of Health Education and Welfare—now Health and Human Services
Rockefeller’s health reinsurance plan would “achieve a better understanding of the nation’s medical care problem, of the techniques for meeting it through voluntary means, and of the actuarial risks involved,” HEW Secretary Oveta Culp Hobby testified to a Senate subcommittee in 1954.
Rockefeller’s health reinsurance plan did not make it through the House. Organized labor decried it as too little, the AMA said it was too intrusive. Upon hearing news of the House vote, a frustrated Dwight Eisenhower blistered to reporters, “The people that voted against this bill just don’t understand what are the facts of American life,” according to Cary Reich in The Life of Nelson A. Rockefeller 1908-1958. “Ingenuity was no match for inertia,” Rockefeller biographer Richard Norton Smith remarked of industry and labor interests in those hard-wired, central-switched, mainframe times.
“’It’s déjà vu all over again’ like Yogi Berra,” said one insurance commissioner immersed in the ACA on hearing Ike’s quote.
The idea of national health insurance went nowhere despite initiatives by Sen. Edward M. Kennedy (D-Massachusetts) in the late ’70s and President Bill and First Lady Hillary Clinton roughly 20 years ago, until Congress legislated Obamacare.
Innovative, Transparent Technologies Can Deliver Results
Nowadays, more than 60 years after Rockefeller’s attempt, innovative information technologies can get beyond these legislative and regulatory hurdles. Much of the data and networking is at hand. Enrollee actuarial risks, coverage actuarial values, utilization, local area costs of business and cost-sharing impacts on utilization are knowable in current systems. Broadband deployment and information technology innovations drive customer acquisition and information management costs ever lower each succeeding day. Long-term efficiencies for reinsurers, insurers, carriers, regulators, technology innovators and state regulators await evaluation and development.
Reinsurance Going Forward From 2017
So, if state reinsurance programs can provide benefits, what should they look like, and how should they be delivered?
For issuers, state-of-the-art transparent solutions improve the current system by enabling issuers to offer more products and services and becalm more ferocious industry adversaries while lowering risks and extending markets. Smaller, nimbler issuers may provide more innovative solutions and gain market share by providing the dual objectives of better health outcomes with lower costs.
For regulators, innovative, timely information sustains the indispensability of state regulators ensuring financial soundness and legal compliance—while allowing innovators to upgrade marketplace and regulatory systems, key regulatory goals that Iowa’s insurance commissioner, Nick Gerhart, pointed out recently. Commissioner Gerhart envisions regulators as orchestra conductors, acknowledging that most insurance regulatory entities are woefully understaffed to design or operate such reinsurance programs themselves, but they will, and they can lead if the participants can provide turnkey capabilities.
Think of health insurance and reinsurance as generational opportunities for significant innovation rather like the Internet and email. When the Department of Defense permitted the Internet and email to evolve to civilian markets from military capabilities in the 1980s, the DOD initially approached the U.S. Postal Service. Senior Post Office management said it welcomed the opportunity to support email: All users need do is email correspondence to recipients’ local post offices by nine p.m. for printing, enveloping, sorting and letter-carrier delivery the following day.
Similarly, considerable opportunities chart innovative pathways for state and regional health reinsurance for 2017 and beyond.
One path, emulating the post office in the ’80s, keeps on coding and bemoans a zero sum; it would allow the existing programs to fade away and will respond to whatever the president and Congress might do.
Another path lumps issuer health reinsurance as an incumbent reinsurer service without addressing the sustainability of state health exchanges or, indeed, any private health insurers in the absences of risk spreading with readily available information technologies.
The approach suggested here—mandated state health reinsurance—innovates to build sustainable futures. Enabling technologies empower all stakeholders to advance private and public interests through industry solutions advancing affordable healthcare.
It’s a common thread in nearly every industry: Innovation occurs when consumers’ growing needs and expectations converge with intense competition. It’s no surprise, then, that insurance — not exactly known for being on the forefront of technology — is one of the last remaining industries to innovate and fully embrace data, analytics and customer communication technologies.
Insurance is a complex purchase business with a convoluted ecosystem and ever-changing regulatory requirements that has kept the industry in a well-protected bubble from external competition for decades. Now in 2015, the announcement of Google Compare for auto insurance pushes the industry to innovate from a technology standpoint, but most importantly from a structural standpoint, by changing the way insurance companies interact with their customers. The reasons below outline why Google has the greatest chance to succeed where others have not.
A Lesson From Other Industries
Google has previously disrupted numerous industries to great success — think health, travel and navigation — mostly because of its dominance in search. Many of Google’s consumer-facing businesses have followed as logical next steps in the Google search process. For example, do you want to use Google to search for the best insurance company, or would you prefer to find the best insurance company with the cheapest policy? Do you want to use Google to find the route for your road trip, or would you prefer to have Google find you the best route? Google’s constant innovation stems from a simple but effective idea: Eliminate an unnecessary extra step (or steps) in the process, and give the consumer what they desire most — ease and simplicity.
There are some who believe that the tech giant may not be doing anything noticeably different from other aggregators in the auto insurance space. However, if its accomplishments in other industries tell us anything, Google will find a way to engage the consumer better than incumbent insurers do. Rather than writing its own business and determining individual risks, Google has teamed up with carriers of all sizes to reach customers efficiently, allowing them to quickly search, get rates and compare policies “pound for pound.” Already, this platform has helped shift the insurance industry’s emphasis on the customer by allowing peer-to-peer ratings and allowing consumers to openly disclose any negative or positive experiences, which will breed superior customer service and experience.
Millennials Trust Google
It is highly unlikely that Google will ever become a full insurance company with its own agents and underwriters, but Google brings a brand name that elicits trust and familiarity. This is especially true of Millennials, who are set to overtake Baby Boomers as the largest consumer demographic, at 75.3 million in 2015. When Strategy Meets Action reported in early 2014 that two-thirds of insurance customers would consider purchasing products from organizations other than an insurer — including 23% from online service providers like Google — it created tension in the insurance industry. These findings are largely a reflection of consumer discontent with insurance companies and their seeming lack of transparency.
Millennials do not trust insurance companies, but they do trust Google with just about every engagement they have with the Internet. And consumers trust other consumers: Google Compare’s user feedback platform brings transparency to consumers and requires the insurance industry to reevaluate how to effectively engage customers in a tech-driven environment. Pushed by Google’s unique insight into Millennials, traditional insurance companies must acquaint themselves with their new consumers, who are often considered impatient, demanding and savvy about social media.
Establishing a Preferred Consumer Platform
An eye-opening Celent study recently found that less than 10% of North American consumers actually choose financial service products based on better results. Instead, a vast majority places higher importance on ease (26%) and convenience (26%). Based on these findings, Google is using a business model that embodies the preferred consumer experience, a notion that is being reinforced by initial pilot results in California.
According to Stephanie Cuthbertson, group product manager of Google Compare, millions of people have used Google to find quotes since its launch in March, and more than half received a quote cheaper than their existing policy. Other new entrants, like Overstock, have reported issues with completion of purchase because consumers will browse offerings but still hesitate to complete their purchase online in a single visit to a website. Google’s platform is attempting to avoid this issue by announcing agency support through its partnership with Insurance Technologies, allowing consumers peace of mind by speaking to an agent before purchasing a policy — but maintaining the online price quote throughout the buying experience.
Potential for Future Growth
While Google Compare is beginning with auto insurance, work with CoverHound gives a glimpse into where it may be looking to expand. CoverHound’s platform specializes in homeowners’ and renters’ insurance, the latter of which is growing exponentially with the Millennial generation, who prefer to rent rather than buy. According to a recent TransUnion study, seven out of 10 Millennials prefer to conduct research online with their laptop, computer or mobile device when searching for a new home or apartment to rent.
Google Compare has also already shown momentum by recently announcing its expansion of services to Texas, Illinois and Pennsylvania, while adding a ratings system for each company it works with — much like the insurance version of TripAdvisor or Expedia.
The Bottom Line
Nearly every industry undergoes disruption when consumer expectations shift and businesses are forced to adapt and keep up. For decades, insurance didn’t have the kind of pressure from outside entrants that it is currently facing. Whether Google fails or succeeds early on makes little difference: Its entrance is a wake-up call. The more tech companies enter the space, the more traditional insurance must struggle to play catch-up.
These new entrants are helping to not only force innovation from a technology standpoint but also to bring an innovation culture to the industry so insurers can stay ahead of consumers demands around buying and customer service. Agents and insurance carriers have a level of expertise that is unmatched by the Googles of the world, but it will be wasted if insurers can’t figure out a way to integrate that expertise in a modern way and connect to consumers through different social channels.
The writing is on the wall, and how traditional insurance reacts will ultimately decide its relevance in the industry of the future.
Retailers do it. Auto dealers do it. From wholesale parts suppliers to craigslist sellers and kids with lemonade stands, everyone knows that if you are going to take the trouble to sell something you should sell it for its full value. Many insurers, however, are stuck within semi-fixed pricing models that don’t allow them to capture the most profit they can from each policy.
Today, insurers can change that because they have the ideal vehicle to help them optimize pricing and improve their margin — quote data. Quote data, when analyzed and tested on a continual basis and kept within the boundaries of the rate filing, can yield dramatic insights into purchase patterns and price tolerance. Plus, optimizing price with quote data is an analytics concept that will excite nearly everyone in the organization.
Why should insurers consider using quote data to modify pricing or products?
Insurers have actuarial models and underwriters who understand the market, plus they have rate plans that have already been filed for specific products. Quote data is ripe with excellent, relevant insights. The reason we see Google, Overstock and Amazon dipping into insurance quoting is because they grasp the potential in marrying purchase pattern data with price testing. For insurers, quote data tested against purchase patterns is a gold mine waiting to be tapped. What do insurers have to gain?
New data yields new insights and can result in new decisions. (The ability to analyze multiple risk factors, even at the quote stage, is improving.)
Insurers can decide to charge more based on what they learn.
Insurers can decide to go after lower-margin, high-quality business.
They can go after low-margin, high-efficiency business.
They can identify business that they don’t really want.
They can answer the competitive threats of new entrants that are poised to capture an increasing share of the market.
Is optimization the right way to make decisions?
For the most part, the days of “from the gut” decisions are over. Human brains are predictable enough that they can be mined for decision data and yield well-patterned insights across similar individuals with similar decision patterns. Amazon, Pandora and Google can effortlessly predict a consumer’s next areas of interest and likely purchases without the individual ever telling them anything. The messages we receive from nearly everywhere are “optimized” because they are proven to most likely produce a positive reaction from us. Optimization is data science that works. Pricing is the second step of optimization; it concerns itself with how much a certain type of prospect will pay at that point in time through that particular channel.
As an example, consider a couple purchasing a boat two days before Memorial Day weekend. They are in the showroom using a quote aggregator on her mobile phone. They may be willing to pay more for insurance because of the need to move through underwriting quickly. Quote data over time may also prove that two boater certification questions need to be added to the quote process for first-time boat purchasers to keep the product profitable, either through adjusting price or filtering out applicants.
Insurers have a leg up on traditional online retailers because prospects do tell us something about themselves before they purchase, to get an accurate price. This kind of pricing optimization isn’t limited to online purchases. It can be done through agency channels and even through traditional direct mail. But the best data accessibility and ability to test is through website and mobile channel metadata.
How insurers optimize price — finding opportunities among the limits.
There are several areas for insurers to consider when optimizing through quote metrics. First, insurers should be tracking every bit of data and metadata surrounding the application. Every submission document has the bits of a consumer story to tell. For example, how many days is it until renewal? Is a client making a last-ditch effort to get better auto pricing with you before turning elsewhere? Is a prospect shopping around in the last week before her home policy auto-renews? How many apps are coming through a particular channel in a particular day? All of these questions and many more could lead to pricing revisions based upon consumer behavior in the application process.
Next, insurers should become highly adept at A/B testing. Consider variables as levers and raise and lower them to reach their limits, then continue monitoring and adapting. For example, begin with quote take-up rates on all submissions. Insurers should consider testing the limits available to the market. Do take-up rates improve when limits are raised?
Website metadata can be informative in this regard, as well. What pages do consumers visit and when? Is there a standard path for the person who seems to rush through shopping, quoting and purchasing? Can the insurer raise the price for those who seem to decide quickly in their first visit and lower it for someone who has come back to the site repeatedly, conceivably price shopping?
There are hurdles, however. Price testing must be done within the boundaries of the filing and the specific products. Some pricing changes may be able to be implemented immediately, but many will need to go back through the filing process. Pricing always has to happen within the regulatory box, so what is possible in testing may not always be feasible in pricing.
But pricing optimization is only one part of the A/B testing equation when it comes to quoting. Quoting data can also be used to more finely tune risk factors and their relationship to take-up rates and claims. This kind of profit optimization is just as critical as pricing optimization, and it requires no regulatory refiling. It is data that can be fed back into actuarial models and may ultimately be useful when used in conjunction with mobile telematics data and a host of other data sources. Even if an insurer planned no immediate repricing of products, the ability to understand price tolerance based upon other quote factors (e.g. age, income, take-up rates, property value) would be helpful in the development of new products.
The nuts and bolts of pricing optimization will vary with each insurer’s unique quote process and current market. But the promise it holds is not only a better overall margin per policy, but also the potential to grow volume through unexplored insights and the opportunities to deeply understand individuals, groups and their motivations to purchase insurance.
Consumer data analytics is here to stay. The value in quote data is continuing to grow.
The recent speculation about Google entering the U.S. insurance market adds to the growing list of non-traditional competitors turning their attention to insurance — a list that already includes Overstock, Facebook, IKEA and Walmart. While personal auto remains the popular entry point for these outside competitors, the impact is more far-reaching for property and casualty insurers. The question is no longer “if” outside competition will affect the insurance industry, but rather “how” agents and insurers can maintain a competitive edge and protect their businesses.
Agents need to adjust their customer service approach to reflect the reality that younger consumers are not as loyal as their predecessors, while at the same time facing the increased threat of a direct sales channel. Insurers must grapple with the reality that tech companies will be relentless in finding ways to lower costs for consumers and circumvent agents.
Insurers like Progressive, Geico and State Farm are already playing in the digital arena and are better positioned than mid-sized and small insurers, because they understand how the online game is played. The same is true for large national agents vs. regional or local agents. The big question is: Will the industry as a whole take a step back, identify its distinct advantages in today’s rapidly changing insurance market and start a wave of unprecedented innovation? Or, will the industry go the way of those that have come before (i.e., Blockbuster, credit card lenders in the ’80s, travel agents, Yellow Pages, taxicabs, etc.)?
The New-Entrant Advantage
Before we discuss agents, let’s look at the advantages of the non-traditional competitor. It should come as no surprise that major tech companies and e-commerce giants have an interest in insurance. It’s one of the last remaining industries to not reach full digitization and root the business in analytics — a weakness that can be exploited by the data-rich competitors with deep pockets. Additionally, with the lack of customer loyalty, the struggle will boil down to who will win the customer: the agent or a company like Google.
At the forefront of customers willing to jump ship are Millennials, who have surpassed the Baby Boomers to become the largest population in the country at 76.6 million strong. If insurance doesn’t take the extra steps to innovate and entice this generation, Millennials will more than likely gravitate toward a well-known tech company that already understands what they are searching for and what they are buying. Most Millennials were raised on Google — whether it be for research, directions or email — so why wouldn’t they feel more comfortable purchasing insurance from Google?
For this reason, it’s no surprise that the top three priority areas for agents this year are found in retaining and servicing customers, as opposed to growing their business. The opportunity for agents is that this disruption from new competitors is forcing an urgency to evolve the customer engagement model to better serve Millennials, who have grown up using technology. This needed to happen regardless, and the sooner the industry modernizes its customer acquisition and retention strategies, the better.
The Agent Advantage
Though there is increased pressure for agents to stay relevant in this quickly evolving insurance industry, agents who leverage their distinct advantages for both customers and insurers will thrive. According to an Accenture consumer survey, customers value the insights they gain from face-to-face interactions with their insurance agent more than any other method, yet agents themselves often downplay the importance of their expertise as a competitive advantage. This is a mistake.
When you consider that insurance enters our lives at times of personal turmoil, agents serve as a trusted adviser during critical moments. Agents help both the consumer and the insurer navigate the process of making the consumers’ lives whole again when tragedy strikes. Agents who adopt digital technologies and analytics will gain greater customer insights and will bring insurers the right business at the right price.
According to a recent Applied Systems survey, 48% of participants listed competition as a top factor driving agency technology investments. Agents who allow a disparity in analytically driven risk management between themselves and their insurers will begin to lose their foothold in the industry.
The Insurer Advantage
There’s only one place where mass adoption of data-driven decision making, product innovation and modern customer engagement strategies can all take off at the same time. Insurers alone yield the largest ability to transform the industry in better service of their customers and fight back against the pure commoditization of insurance. There’s likely no stopping this trend, but there is a lot of opportunity to provide innovative solutions so that traditional insurance players maintain ownership of the customer.
There is no time to waste, however. Just because the early focus is on personal auto, it should not drive a “wait and see” mentality for the property and casualty industry. Learn from industries that have gone before us in the digital revolution and suffered from technology disruption. Once the trend takes hold, the ripple effect of change industry-wide happens very quickly.
The Bottom Line
The best chance for agents to stay competitive and relevant is to work together with insurers, utilize data-driven strategies and engage consumers on a more personal level using technology as an enabler. The face-to-face interaction with clients is still extremely important, and analytics can effectively collect and store invaluable insights so you can make the best connection between insurer and consumer. Remaining a relevant and trusted adviser is the name of the customer relationship game.