Tag Archives: startups

COVID-19: Technology, Investment, Innovation

This is a companion article to “Why Work-From-Home Threatens Innovation,” published on Aug. 6.

As if our lives and the world in which we find ourselves aren’t confusing enough, for those of us working in the insurance industry ecosystem there are also less obvious threats that we should understand clearly.

There is a general perception that the insurance industry is doing surprisingly well in the face of a global pandemic. It’s true that the redeployment of thousands of employees from physical offices to work-from-home was accomplished very quickly and with minimal loss of productivity or gaps in customer service. It is also true that insurers, specifically auto insurers, have enjoyed an earnings windfall from the dramatic and sudden drop-off in vehicle use and the accompanying reduction in auto claims (even after premium reductions). So, one might also conclude that industry innovation and transformation continues apace – but that’s only partially correct. 

The Twin Realities

A closer examination of the evidence reveals that there are actually two extremely different states existing within the insurance ecosystem, essentially composed of the larger, high-profile, well-funded participants and then all the rest. The pervasive media coverage and general market buzz focused on acquisitions, IPOs, funding and consolidations involving the former group is obfuscating the deteriorating rate of progress among the more numerous and much smaller companies –  the very lifeblood of meaningful innovation and transformation, on which a very large number of Americans depend for their livelihoods. Compounding this dichotomy, and as explored more fully in my earlier piece, the longer-term costs of the new work-from-home model include increases in mental health issues and anxiety among this group. Overlaid on this is the large and growing talent and human resource drain from an industry now more focused than ever on cost reductions, primarily through staff cuts, hiring freezes and early retirement offers. Unfortunately, once the pandemic passes and workloads return to normal, this lost talent and expertise will not quickly or easily be repatriated. 

What the Latest Metrics Reveal

According to the Jacobson Group – the leading provider of talent to the insurance industry – in their July 2020 Pulse report, “As we enter the fifth month of the coronavirus pandemic, unemployment for insurance carriers and related activities rose to 4.6% in June – the highest unemployment rates the category has seen since 2013. The insurance industry historically lags behind the overall economy in terms of impact, and there are still predictions for a second wave of layoffs that will more directly impact white collar roles.”

In its August 2020 insurtech venture capital funding report, Crunchbase research reveals that, “from the beginning of 2020 through July 22, $2.6 billion had been raised for insurtech companies across 213 deals. That’s down from $4 billion across 315 deals during the same period in 2019,” a 35% year-over-year decrease in funding. 

See also: Why COVID-19 Must Accelerate Change

Willis Towers Watson states in its Q2 InsurTech Briefing that “we are in both pause mode and fast-forward mode. The strength and reliance on technology has never been greater, and yet poor market investment performances and focus on COVID-19-related priorities could see a downturn in technology investments from (re) insurance industry players over the next few years.”

Beyond these revealing investment activity metrics are the subjective observations from our own consulting practice. We are receiving a record number of personal outreaches and resumes from middle management up to executives from within the insurance industry. These inquiries reflect a large industry wide outflow of expertise and talent, which no amount of technology will replace anytime soon.

Signals Beyond Metrics

From the startup community itself, the outreaches for assistance with fund raising, go-to-market strategic advice and market entry are increasing weekly. Beyond the sudden challenge of raising early-stage capital, gaining access to insurers for presentations and discussions is a recurring theme. Hard-won POCs (proofs of concept), the lifeblood of startups, are being suspended or abandoned by carriers, presenting existential risks to these young companies. Consolidations between startups are on the increase, reflecting their need to create synergies, eliminate redundant overhead and conserve cash to survive.

To be sure, there are exceptions. Fueled by pandemic-driven demands, carriers are redoubling efforts to quickly implement telematics-enabled insurance programs, virtual and “touchless” claims inspection tools, AI-enabled photo and video estimating as well as fraud solutions along with digital claims payment capabilities. But the attention and energy required to investigate and adopt these valuable solutions is at the expense of the much greater number of worthy startups and innovations that have been put on hold.         

Other Looming Challenges and Risks

There are additional risks looming for insurers that will affect the broader ecosystem, and that will preoccupy insurers well beyond the end of the pandemic and continue to impair innovation and the health of the insurtech community for even longer. 

Business interruption lawsuits are mounting and will weigh on insurers of all sizes but particularly smaller, less-resourced carriers in defense costs, management distraction, negative public opinion and, in the worst-case scenario, costly settlements and possibly judgments.

Further, a tidal wave of deferred personal lines auto and property claims will surface once lockdowns are eased and will swamp claim departments whose staff has been depleted by layoffs and infrastructure reductions. While virtual and digital claims processes will help cover a portion of this claims volume, more complex or difficult claims will stretch already thin claims resources and expertise.

See also: What COVID and 43 Years Taught Me

And finally, even though new automotive technologies should gradually make transportation safer and reduce accident and claims frequency, those savings will be more than offset by rising complexity and costs associated with repairing these vehicles, driving auto severity to record heights.

The Future

However, I am not pessimistic about the future of insurance. In fact, I look forward to seeing and helping the industry regain and even accelerate the previous momentum gained by leveraging technology to fuel its inevitable and critical transformation. This quote serves us particularly well today – “opportunity and risk come in pairs” – Rwandan writer and blogger Bangambiki Habyarimana.

One of the surest ways to minimize risk is to recognize it and plan accordingly. Let the planning begin.

Agents Must Better Explain Their Value

If agencies can’t do a better job of explaining their value, better marketers will convince consumers they are more ethical than you.

A recent press release from an insurtech caught my attention and ire. What first caught my eye was how the startup measured success in coverage placed, i.e., total policy limits rather than premiums or commissions, to make themselves look successful. For people who don’t know the difference, it was impressive that a 12-person startup agency could place $2 billion in coverage in four years! The average 12-person agency only has $1.2 million to $1.6 million in revenue. This insurtech is outperforming the average agency by 1,430 times!

$2 billion in coverage at $1 million in liability only is just 2,000 policies. Assuming there is some auto and comp and whatever else in there, let’s say 1.5 policies per customer; that is only 1,333 customers; or, in other words, they basically wrote one account per day over four years. Those kinds of policies average around $500 commission each, which may be generous but I’ll use that figure. That amounts to $667,000 in revenue. Divide that by 12 people, and the result is $55,000 revenue per person.

Insurtech is supposed to be about scale. The definition of scale, in all directness, is doing more with fewer people. Scale is nothing else. $55,000 in revenue per person is not scale.

What next caught my attention was their statement that the traditional insurance model provides agents incentives to sell customers policies they don’t need or contain inflated coverage limits. I’d really like to see solid proof that this regularly occurs. I don’t know the captive agent world well, so maybe it happens there, but I doubt it. I know the independent agency world extremely well, and I have rarely seen this happen.

The system actually works the opposite of their statement. In the traditional agency model, for many complex and intertwined reasons, agents actually have more incentive to sell clients less coverage than they need even though they are threatened with E&O suits for doing so! I have seen a large number of agents sued for not selling adequate limits or the right coverages. In the COVID-19 world, has anyone seen an agent sued for selling too much business income insurance?

For 25 years, I have been cajoling, arguing, demanding, yelling and screaming at agents to use coverage checklists, and yet agents are no more likely to use coverage checklists today than 25 years ago. (I’m a failure!) It has been proven over and over in E&O studies that using coverage checklists to ensure clients are offered adequate coverages is the best solution for both clients and agents!

I have only seen one suit brought in the independent agency world for selling too much insurance, and the suit was aimed at the carrier because it was the carrier’s practices, not the agencies’ practices, that allegedly resulted in excessive and unnecessary limits. I’ve never even heard of an agent being sued for selling clients too much insurance.

This insurtech advised that their model works because they make up the difference with finance fees. Their story sounds great to a large proportion of consumers. Consumers do not know how much insurance they need because no agent has ever educated them on how much insurance they need. I teach a lot of insurance classes and have conducted a lot of E&O audits; few people ever discuss the importance of drop down UM coverage on an umbrella policy (in fact, many agents and customer services representatives don’t even talk about the importance of an umbrella policy). Selling unnecessary coverage is really, I mean really, really hard when most agents do not even offer necessary coverage. I was with a retired family member who had paid off his mortgage and wanted to drop his homeowners’ insurance. I explained he would lose his liability coverage. This is an extremely smart person and yet not one single agent in 40 years had ever explained the importance of liability coverage to him!

Professional agents will lose if they don’t educate their clients as to why they need more coverage. They will lose to agents who actually advise those same clients, who do not have enough insurance, that their incumbent agent has actually sold them too much coverage! Pay for what you need, they say, but the consumer has no idea what they need!

See also: 4 Post-COVID-19 Trends for Insurers

A huge proportion of producers exacerbate this problem when their client asks, “How much liability should I purchase?” The producer frequently answers, “As much as you can afford.” What is the difference between this “professional” advice and insurtechs’ advertising, “Buy as much as you can afford.” It’s the same advice! The correct response is to help your customer figure out what they can afford to lose and then recommend that they buy an appropriate limit.

The insurtech’s press release articulates so much of what I see as wrong and unfair in this industry. Yet, the failure of agents to educate their clients and offer the right coverages and their own lack of knowledge about coverages has opened the door wide for this kind of upside-down and sideways marketing pitch to actually make sense to consumers. A low down payment with significant finance fees has been a successful business model for a long, long time.

One other possibly dubious claim is that insureds will still save 35% because carriers are willing to reduce their price because the insurtech agent is so efficient. This claim may be true in some instances because reducing acquisition cost is a huge goal for carriers today. However, a 35% savings? Let’s do the math on this:

The industry average loss ratio has been 61% over the last five years. The average profit margin is around 10%, including investment income. Independent agents are paid an average of around 13%, including comp. So, no matter what an agent does, the most carriers can save is 13% by eliminating agency compensation. An argument may exist relative to some additional savings relative to frictional costs, but not enough. The carriers’ average total expense ratio is around 28% excluding LAE. If I remove the commission of 13%, that only leaves 15%. A 35% reduction in expenses is impossible.

Additionally, using a 61% loss ratio, and if the rate is 35% less, the loss ratio would be 96%, all else being equal. Even if all commissions are eliminated, the loss ratio is still 83%. An 83% loss ratio is not sustainable.

Now, maybe the quoted 35% savings is meant to mirror other disingenuous price saving advertising such as, “The average customer who switched saved $350!” That is an entirely pointless but quite effective ploy. Let’s say 1,000 people shopped that carrier’s site, and 990 stayed with their existing carrier. The remaining 10 saved an average of $350. The people who did not switch may have saved an average of $350 by not switching, so they did not switch! Only counting one side of a ledger is illegal in finance, and perhaps advertising rules should be revised along the same lines. Either way, advertising that carriers are offering lower rates when it is just a math gimmick is mixing and matching in a manner that is highly questionable.

A true 35% savings from the same carrier requires special filings by that carrier or the use of a special purpose PUP company with previously filed deviated rates. That is an awful lot of work for a startup agency that has so little commission they announce sales in total policy limits.

See also: 10 Tips for Moving Online in COVID World

Always check the math on claims like this startup’s. More importantly, sell the right coverages, educate your clients on how much coverage they actually need and show them you won’t sell coverages they do not need. Don’t let firms like this insurtech beat you.

You can find this article originally published here.

Why Work-From-Home Threatens Innovation

The world is entering month eight of the pandemic and the complete disruption of the personal and business lives of virtually every one of us. While the timing and response to COVID-19 may have varied by country, region and city, nobody is unaffected. And the timeline for a return to anything resembling pre-COVID-19 life remains elusive and unclear. But while we continue to live and work in a state that feels like some surreal form of suspended animation, there is still much we could and should be doing about conducting the business of insurance and the enormous number of people it employs, supports and protects.

Personal and Organizational Growth

Whether we realize it or not, work-from-home (WFH) is dramatically stunting our growth, both personally and organizationally. And even when the pandemic ends, it is now widely anticipated that a majority of workers will be offered, and most will eagerly accept, the option of continuing to work from home permanently or partially.

Though working from home may seem to make life somewhat easier initially, it can become detrimental to employees’ mental health; people are basically social creatures, and working from home can make employees feel disconnected and cause anxiety. An Accenture survey of insurance industry chief human resource officers conducted in June 2020 reveals that, while 80% agreed that workforce engagement and productivity is high, the combination of global pandemic and WFH may be taking a toll on workers’ mental health; 55% noted that employees were reporting an increased amount of anxiety and depression; and 73% said employees are feeling a greater degree of pressure due to the pandemic.

Furthermore, social interaction and interpersonal communications enable learning of all kinds: the value of teamwork, leadership styles, job skills, work styles, the art of communication, friendships, diversity and a sense of mutual purpose. WFH impedes organizations from developing and instilling their company culture, which is fostered, in large part, by employees coming together and engaging in team-building activities and company-wide meetings—so having disjointed teams makes this harder to accomplish. And when employees can clearly identify with a company’s values, they’re more likely to engage with their work.

We need to become more aware of these impediments to personal growth and develop strategies and procedures to replicate some of this personal growth and development. Employees highly value the flexibility of remote work, and the success of fully distributed companies has proven that the model can work. A personal touch is added by setting explicit expectations, conducting consistent and scheduled check-ins and promoting “show and tell” virtual sessions within work groups or even company-wide. Effective team building exercises, even “small talk,” can help create personal connections, build empathy and strengthen working relationships. The organizational chart will need to be redesigned and become more agile.

Partnerships, Alliances and Acquisitions

Prior to the arrival of COVID-19, the insurance industry was undergoing rapid change in the ways in which it viewed and conducted its products and its business. This included reinvention of all business processes to lower costs and increase agility, embracing and adopting emerging technologies and rewriting strategic thinking about everything from product development to distribution and, most importantly, its newfound fierce focus on customer experience and service excellence.

This transformation was being accomplished through a variety of means, both internal and external. Internal organic transformation resulted from corporate reorganization including the formation of officer-level business units responsible for innovation and data science, and the adoption of formal change management programs.

See also: How to Be Productive Working at Home

Externally, insurers sought out startups and early-stage entrepreneurial companies that could help them not only solve specific operational challenges but also accelerate innovation by stimulating, challenging and motivating legacy thinkers within the company to become more agile and act in new and different ways. Many top-tier carriers funded corporate venture capital units whose mandate included the identification and growth of startups whose people, technologies and solutions could benefit and accelerate insurance transformation across their own and other insurance enterprises.

However, effective identification of and engagement with startups and entrepreneurs is more of an art than a science. Attendance at industry conference such as InsurTech Connect, Insurance Nexus, Dig-In and others provided the best environment for this process. Inviting startups to corporate headquarters to present their solutions and vision to a diverse insurance company executive audience also helped broaden an insurers’ thinking in the “art of the possible.” But, in the age of COVID-19, these opportunities are limited to what can be accomplished virtually, which may be effective for delivering information but provide little in the way of developing personal relationships. The industry has already lost eight months of this valuable activity and will likely lose many more. A lost year of innovation and transformation and the momentum that had been building over the prior decade will be costly to the insurance industry. Non-insurance competitors such as Amazon, Google, Tesla, Comcast, General Motors and many others are not standing still, and neither should insurers. Creative new approaches to reignite corporate development, innovation and transformation need to be found and implemented now.

The Real Disruption of Insurance

I recently wrote about the disruption the insurance industry faced in the late 1990s and early 2000s as the internet became an increasingly regular part of business. The theme of disruption in that period was one of changing how we did business. The main target was distribution via agents and brokers, which was wrongly predicted to go the way of the dodo.

While disruption has not stopped, it has changed dramatically from what it was back then.

As discussed in my new book, The Future of Insurance: From Disruption to Evolution, the current disruption the industry faces is not just about enabling technologies and new approaches to how insurance products and services are delivered.

While there have continued to be new approaches to the existing industry being created by tech-enabled startups, technology is enabling something else – direct threats to carriers themselves, not just their partners and providers.

There have always been new carriers starting up, either with their own capital or via the MGA model with backing from existing players. Historically, though, these startup carriers looked and felt like traditional carriers, but were just newer.

A New Breed of Startup Carrier

Today, while we still have these traditional startup carriers, we also have a new breed of carrier that is built from the ground up to be fully digital, often started by people from outside the insurance industry. These founders generally have tech backgrounds and are often engineers.

Engineers like to solve problems and figure out better ways of doing things.

That is exactly what these startups are born out of – a view of the insurance industry and desire to find a better way to protect people using the flexibility, intelligence and customer-experience-friendly digital tools that abound today.

This is a very different kind of threat to incumbent or legacy carriers.

See also: Insurance Disruption? Evolution Is Better

The Implicit Disruptive Threat

The disruptive threat these new carriers pose is not necessarily existential for legacy carriers. The chance that any existing P&C player will go out of business because of a startup carrier is extremely small. That is not quite what’s at stake.

Instead, the threat is that the startups will respond to customer demands in a way the industry has struggled to do and capture market share.

Increasingly, insurance buyers are demanding a more modern experience of their carriers because they’re getting this in most other aspects of their lives (both personally and professionally). Buyers get help with flight reservations from airlines via Twitter, text to pay municipal taxes, watch their packages get delivered to their home from far away, have their schedule automatically adjusted based on traffic and more.

Then a carrier needs a document faxed or mailed to it. Or sends the insured some communication in all caps because the company can’t produce varied-capitalization in communications, and ends up seeming to yell at customers while looking dated. Or requires you to go get your car inspected at some certified inspection facility after binding coverage, or get canceled.

Enter the startup carriers. They sell a policy in minutes (at most), employing AI, third-party data, self-service tools and more to make being a customer easy, if not delightful.

Disruption, Destruction or Evolution?

So what does the future look like in the face of rapidly changing customer expectations and a new generation of carriers that are free from many of the constraints you face?

The key is to take the disruptive players as an impetus to evolve.

What does that mean?

It means holding your core ability to manage capital, transfer risk and deliver insurance service in a way that gets people’s lives back together again after a loss.

What needs to change, though, is how we do that. The tools we use, our willingness to kill sacred cows that tend to be identified by the phrase, “…because we’ve always done it that way.”

See also: The 5 Charts on Insurance Disruption

There are many areas where we as an industry can embrace the new approaches identified by the disruptors. Embracing digital distribution with simpler, faster application processes. Using self-service tools like those that allow self-inspection of property for underwriting or loss adjusting. Relying on the flexibility and extensibility of the new cloud-based solutions on the scene, which can facilitate experimenting on new approaches to how you deliver insurance products and services.

There are many specific answers to how to evolve that will depend greatly on your particular situation. One overarching piece of advice is not to ignore or write off new players simply because they’re new or because their underwriting results may not be attractive (few new carriers ever do have enviable combined ratios as they lack the scale to smooth losses and spread expense loads).

Look at the tools they’re using and where in the process they’re focusing their efforts, then ask what you can do in that area (or beyond). Ask your customers directly, empower your staff to make change and focus on making meaningful change, not just on being good enough.

How Startups Will Save Insurance

Digital disruption used to be seen by insurance industry watchers as an existential threat to the sector. That argument no longer applies. Today, there’s no argument that the insurance needs digitalization to secure its future. 

Across the financial services sector, companies are being re-defined by their clients’ needs.

It’s what happened with banks. They were driven to embrace fintech because of the speed of innovation required, and what their customers were experiencing elsewhere, particularly in the retail sphere. In the same way, insurers (and brokers) are looking to insurtech for answers.

Actually, the insurance industry doesn’t have a choice, with insurance spending as a percentage of GDP declining over the course of the last two decades. The industry’s share of GDP has declined from a high of 7.5% in 2002 to 6.1% in 2017 (source: Swiss Re Sigma Explorer Dataset 2019).

This is happening in part due to an increase in the world’s population and disproportional prosperity growth in emerging markets, creating more consumers who need to protect their property and families. Meanwhile, value is changing in the corporate rankings, where businesses with high-value intangible assets, like Google, Alibaba or Apple, have overtaken companies trading in more tangible products.

It all points to a need for risk management and for the insurance industry to drive innovation and its relevance – especially during a period of great change. Arguably, the incumbent market simply should be innovating at a quicker pace to meet the evolving needs of its client base and its stakeholders.

Many clients today have unmet risk transfer needs, related to intellectual property, the gig worker economy, cyber threats, pandemic or climate, for example. We as an industry need to acknowledge these differences across traditional and emerging markets, tangible and intangible assets, and deliver a differentiated approach in our increasingly connected world.

Meanwhile, the entire sector – brokers and insurers – has been making healthy profits. This combination of an inverted innovation curve and profit pool has proved to be irresistible to entrepreneurs.

See also: Will COVID-19 Disrupt Insurtech?  

Incumbents’ fears around digital disruption are misplaced, however. After all, when the fintech wave hit the banking sector, it didn’t knock out the big players like JPMorgan Chase, Bank of America and Citi. They retained their positions because they took the best of innovation and applied it.

In a similar way, the insurance industry can and will adapt to the direction of change in the use of technology-enabled platforms.

The insurance industry has to incorporate digital distribution and automation in underwriting, the intersection of data science and actuarial science, to design modern underwriting models and create larger pools of insurable risk in ways that insurers remain profitable covering them.

Common ground with clients

Our clients themselves are looking for innovative solutions, so we have common ground. For example, new technology in trucks now allows for user-based analysis of driving behavior. Aon Affinity partnered with CarrierHQ to roll out a new motor insurance program that applies third-party data, real-time driving analytics and a proprietary rating algorithm to score each driver in a fleet of 20 or fewer trucks. Premiums are adjusted monthly for each truck based on the driver scores. To power this behind the scenes, Aon partnered with Instec to enhance the customer experience for small fleet trucking while improving underwriting results for the insurers.

By using our data analytics and insight, we can design technology-enabled platforms for all kinds of business, big and small. It’s why Aon acquired Coverwallet, the leading digital insurance platform for small and medium-sized businesses. 

The evolution is unstoppable because innovation benefits both the insurance markets and the underlying consumer. 

Even pacesetters like Amazon and Uber continue to be defined by their clients and appreciation of the transparency and convenience these platforms afford them.

See also: Time to Retire the Term ‘Insurtech’?  

To meet the needs of a changing consumer, incumbent businesses – including insurers – need to be client-driven and data-centric to embrace innovation and better network among themselves.

But crucially, everyone needs to stay safe in a dynamic environment heightened by cyber risk, global pandemics and climate change, a problem that insurtech is helping resolve to the benefit of both insurers and insureds.