November 1, 2016
Why Disintermediation Is Overrated
by Matt Watson and Mike Furlong
Commercial insurance is simply too complicated, and the broker adds too much value to be easily replaced.
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:
- 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.
- 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.
- 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.
- 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.
- 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.