I recently had the pleasure of attending the Insurance Disrupted conference in Palo Alto (put on by the Silicon Valley Innovation Center in partnership with Insurance Thought Leadership). This was the single best insurance conference I have ever attended. I was surrounded by hundreds of hopeful, smart, problem-solving professionals from disparate backgrounds and industries all trying to make a difference in insurance without money being the prime motivator.
I was so encouraged by what transpired at the conference, the connections that I made and what I believe would be the promise of a new future that I began to pen this article on my flight home. But something just did not sit right with me as I wrote. Three weeks have gone by, and I am beginning to understand why I felt the way I did; at the end of the day, insurance will NOT be disrupted.
For all the promise of big data, the Internet of Things, autonomous vehicles and peer-to-peer insurance, there was nothing presented at this conference that struck me as disruptive in the way the tech industry is generally thinking of the term today. When technologists think of disruption, they immediately point to Uber and Airbnb, which disrupted the taxi/livery and travel accommodations industries. The taxi industry is literally fighting for its survival. No, that will not be the fate of insurance. Insurance will be a lot more difficult to shake up or disrupt.
- At the core, insurance customers are leasing the potential to access capital. That capital is sitting in predominantly liquid assets. Not real estate, not taxi medallions. How do you make a big pile of money irrelevant?
- The modern form of the industry is 300 years old, and the math is pretty solid (that’s why they call it actuarial science). We sell a product whose costs are unknown at the time of purchase. That means scale and immense capital is required to cover worst-case scenarios, which rules out any new business model not having that potential. Peer-to-peer providers just won’t be able to get sufficient scale to efficiently use capital to cover risk. And if they aggressively get scale, then they just become another insurance company, so what’s the point?
- Getting a better glimpse into those unknown expenses can create massive competitive advantages. This is where big data and the IoT creators are looking to disrupt, as big data and IoT will generate incredibly large data sets to be used to accurately predict, avoid and mitigate future losses. I have no doubt that these new technologies will make an impact on the industry, but I am less convinced of their disruptive nature. Insurers have already established non-actuarial, big data departments where fraud detections and credit scoring are just a couple of many predictive models being created. IoT devices will slowly be adopted by most insurers as they look to get competitive edges, but the follow-the-leader paradigm of the industry will mean that any edge will disappear quickly, and we will all be running hard just to stay in place. These technologies are impressive. I would classify them as a solid innovations to the industry, but not disruptive. (Disclaimer: I bought a smart battery from Roost.)
- Autonomous vehicles represent the one area where some chaos can occur. But notice I use the word “chaos” and not “disruption.” If autonomous vehicles can live up to expectations, then they will be a great service to society, reducing deaths and increasing efficiency. Risk will transfer from a personal lines business to commercial lines, and that could be chaotic for heavy personal lines auto writers such as State Farm and Progressive. But will this be disruptive? Will State Farm or Progressive be fighting for their survival the way that medallion owners in the New York City taxi system are? Again, I doubt it. State Farm is sitting on about $70 billion in surplus capital, and it generally writes at a 100 combined ratio, working the float and cash flow model. I think State Farm and large auto insurers like them will be just fine, and technologies such as autonomous vehicles will be more of an annoyance than an existential threat. And like others, I don’t think autonomous cars are nearly as ready to take over our roads as many seem to think.
- For better or worse, state-by-state regulation of insurance is intense and nebulous. Ask Zenefits. The battlefield is already uncertain, and scrutiny by a regulator with political ambitions can kill your disruptive product quickly. Any technology that you think you can create that could potentially benefit the majority of buyers while subsequently raising the price for some other group, alone, would be grounds for a regulator to squash you, as that vocal minority raises their collective voices. In Florida, the state may even create a company to compete against you, writing business at a loss. Insurance regulation might be the ultimate disruption killer.
- There was not one presentation on natural catastrophes, which happen to be my area of expertise. How we underwrite, manage and think about natural catastrophe risk has changed quite a bit over the past 20 years. In fact, CAT models have been and may continue to be the most disruptive force in insurance, and yet there is little technology can do to disrupt that area of the industry. I would have been very excited if we had discussions about new business models to help customers with the problems the industry is currently facing with getting adequate flood or earthquake cover to homeowners. If someone had proposed a new product that removed the exclusions of flood and earthquake from the homeowners policy, now, THAT would be disruptive! Alas, nothing on NatCat, and so we will continue to have thousands of homeless families following big storms and earthquakes.
I don’t think insurance will be disrupted, not in the way folks from Silicon Valley are used to doing it. But the future of insurance will look very different than today. Very digital. Streamlined. Less clunky, more efficient. If “disruption” comes to insurance, it is likely going to require the replacement of the current set of leaders with new ones cultured in this digital age and influenced by the successes of technology to make change happen to their business models.
Paul Vandermarck from RMS (a CAT modeling vendor) perhaps summed it up best when he said that no matter how all of this change to the industry plays out, we know of one sure winner: the customer. And that’s how it should be.