The End of Insurance As We Know It
How Millennials, Insurtech, and Venture Capital Will Disrupt the Ecosystem
by Rob Galbraith, CPCU, CLU, ChFC
COPYRIGHT
Copyright 2018 by Rob Galbraith. All rights reserved.
Published by InsNerds, LLC
Introduction
1CHAPTER 1 - DRIVING P&C INSURANCE INTO THE 21ST CENTURY
PART 1 - THE SEVEN FATAL FLAWS OF PROPERTY & CASUALTY INSURANCE
11CHAPTER 2 - WE NEED TO TALK...ABOUT YOUR INSURANCE POLICY
20CHAPTER 3 - HIGHWAY ROBBERY
40CHAPTER 4 - IT’S COMPLICATED
56CHAPTER 5 - (NOT) TAKING A BITE OUT OF FRAUD
68CHAPTER 6 - DRAINING THE (CASH) SWAMP
79CHAPTER 7 - IN THE RED ZONE
91CHAPTER 8 - GLASS HALF EMPTY
100CHAPTER 9 - A WORLD WITHOUT INSURANCE
PART 2 - THE ARROGANCE OF SILICON VALLEY: WHY CONQUERING THE INSURANCE SECTOR REMAINS ELUSIVE
113CHAPTER 10 - WHY HASN'T INSURANCE BEEN UBER-IZED YET?
121CHAPTER 11 - IF YOU CAN'T BEAT THEM, JOIN THEM (AND HOPEFULLY GET RICH)
133CHAPTER 12 - INSURANCE SERVED WITH A SIDE OF INNOVATION
134GET YOUR PRIORITIES STRAIGHT
146CHAPTER 13 - INNOVATOR'S DILEMMA REDUX
PART 3 - SHAKEN, NOT STIRRED: HOW INSURTECH CAN RE-MIX INSURANCE AS A FULLY DIGITAL RISK TRANSFER PRODUCT
160CHAPTER 14 - THE MARAUDER'S TECHNOLOGY MAP FOR INSURANCE
168CHAPTER 15 - INTELLIGENCE SQUARED
184CHAPTER 16 - STOP AND GO: THE CASE FOR AND AGAINST TELEMATICS
197CHAPTER 17 - OUTSMARTING THE HOME (INSURANCE)
205CHAPTER 18 - THE INSURANCE OF THINGS AND THE GIG ECONOMY
215CHAPTER 19 - THE POTENTIAL AND PERIL OF BLOCKCHAIN
226CHAPTER 20 - SEND IN THE ROBOTS: PUSHING PAPER IN THE MODERN ERA
238CHAPTER 21 - INNOVATION ENGINES: APIs, VCs, MGAs AND ACCELERATING CHANGE
PART 4 - PLACING BETS IN THE RISK CASINO: THOUGHTS ON THE ROAD AHEAD
252CHAPTER 22 - CHOOSE YOUR OWN RISKPOOL: THE DECENTRALIZATION OF INSURANCE
264CHAPTER 23 - PLACING BETS IN THE INSURTECH CASINO: A GUIDE
270CHAPTER 24 - INSURING TOMORROW
279EPILOGUE - PARALLEL LIVES: OLD INSURANCE AND NEW INSURTECH
282Glossary
316ACKNOWLEDGEMENTS
319ABOUT THE AUTHOR
Introduction
CHAPTER 1 - DRIVING P&C INSURANCE INTO THE 21ST CENTURY
CHARTING A COURSE
As an only child growing up in Saline, Michigan, I fondly remember some of the epic road trips that Mom, Dad, and I took growing up. My parents were not big on flying, so almost every summer we loaded up in the family station wagon and went on a road trip somewhere. Often, it was to see family in upstate New York, northern Michigan, or southwest Missouri, but we had ventured as far as Arizona, Utah, and Colorado from my hometown of Saline, Michigan. At the young age of four, I would draw copies of the road maps that my Dad would get from the American Automobile Association (AAA). The maps were the best guide on the roads to take to make the ride as quick as possible based on mileage and the type of road (e.g., freeway, divided highway, two-lane road, etc.) I dutifully followed along on the map as we passed by landmarks, proceeded on our journey, and occasionally broke a stalemate between my parents when they disagreed on the route. Maps fascinated me as a child; the level of detail and endless paths. I still have some saved - they are souvenirs of cherished memories that I now share with my children.
In fact, those maps that my family relied upon were not so different from those used by ship captains to navigate across oceans to faraway places Accuracy was key: a good map helped ships avoid serious danger of running ashore or running into treacherous waters. One wrong turn could result in a sinking ship. When finding themselves in a new land, explorers worked hard to survey their surroundings and capture key information. These detailed notes, pictures and descriptions were often used to make maps. These maps provided a way for other explorers to find their way back to different locations and held the potential to lead settlers to new resources for food, water, shelter, agriculture, and industry. In short, the maps that were created and used by settlers sometimes led to larger settlements which led to villages, towns and ultimately cities - population centers that generated a large amount of business and a thriving local economy that could support a large number of people.
Mapmaking itself is a centuries old specialized discipline - cartography - that requires special skills to accurately represent the 3-dimensional world of land and sea in a 2-dimensional space represented by concepts such as scale, distance, direction, elevation and orientation. Maps have a lot of features that have made them an invaluable resource for centuries. They are compact, easy to transport and take with you on your voyage. They express complexity in a simplified format: they exclude a lot of extraneous information, yet have enough detail that they can capture the richness of a location’s topography or the prevailing trade winds when crossing an ever-churning ocean. Maps provide alternatives: they show all possible routes that can be selected and provide information that informs better decision-making. Maps can be brought together to broaden their reach to cover an entire nation and they can also be zoomed in to focus on an individual city. In short, maps are a superior product that have been ubiquitous and reliably served humanity well for centuries.
GLOBAL TAKEOVER
I recently took a road trip with my Dad again, this time from San Antonio, Texas to see his sister and brother-in-law (my aunt and uncle) at the family farm outside Syracuse, New York. Dad is much older now and has some mobility challenges, but it’s been 10 years since he’s visited the farm. Given his age and declining overall health, along with his strong aversion to flying on an airplane, I told Dad I would drive him for the 3-day one-way trip from San Antonio to Syracuse to visit. I also told Dad I’d happily make stops along the way as this will be the last time he can make a trip of this distance.
When I came to pick Dad up, he was carrying an armful of AAA maps he had recently picked up from their local office (yes, they still give out maps!). I wasn’t sure why he had bothered since his Mercedes has a built-in navigation system. Having made essentially the same trip last year on a road trip with my family to New York City, I knew that we didn’t need maps or an in-car navigation system thanks to mobile GPS apps. We started our drive, and Dad opened all of his maps and followed along as we progressed on the trip, providing directions from his perch in the front passenger seat. Traditionally, family road trips have required a front-seat navigator role to assist the driver with staying on course. However, in the modern era we live in today, my family and I have come to totally rely on GPS apps such as Apple Maps, Waze or Google Maps. On this trip, I let Dad follow his tradition of advising me on the best route to take. I wasn’t always convinced that Dad’s directions were the best, and at rest breaks, I’d sneak out my phone to check. The app confirmed that we weren’t travelling the most efficient way possible, but we were not particularly in a rush to make it up to the farm so I was happy to let him guide us on a more scenic route.
We had a great visit at the family farm where I had spent many summer months as a boy. The views in this part of New York are picturesque - the rolling hills of the area, the peaceful tranquility of winds rustling through the trees, the birds singing from the trees - are always a refreshing change of pace from the paved surfaces, crowded streets and hectic life of the city. The farm had changed quite a bit from what I remembered as a child: the barn roof is now made of metal, not wood and asphalt shingles. Solar panels on the main house roof help provide enough
electricity to cool the home in the summer and heat it in the winter (along with a wood burning stove). The well system takes water from the local streams that are perpetually filled from snow melt and seasonal rains to support household activities. A sauna was added in the back yard, complete with a game room with pool table. A fresh coat of green paint and light green trim made the old farmhouse look like a modern hideaway; a low-impact eco-friendly abode that was a perfect blend of historical architecture blended with modern technology.
After a stop to see my cousin and her husband in Rochester, New York, we had less than three days to make the long trek back home before I needed to be back at work. While it was great to spend the time with my Dad and see my relatives, I missed my wife and three children back in San Antonio. I pulled out the phone to find the fastest route possible home. Dad still had the maps out and was following our progress, and trouble began in Columbus, Ohio. The GPS suggested heading southwest to Cincinnati, through Kentucky to Nashville followed by passing through Memphis, Little Rock, and Dallas before heading south to reach San Antonio. Dad had other plans: he asked for the Indiana map. Indiana? It wasn’t a state included on the GPS route. I did see an alternate path on my GPS app heading due east through Dayton and Indianapolis before reaching Memphis that was only 30 minutes longer. Dad insisted on going through Dayton, and while I mentioned there was a faster route via Cincinnati, I did not press the issue.
After reaching Missouri, Dad asked to pull over so we could plan the rest of the trip. I quickly pulled up the GPS app that showed the route through Memphis to be far superior to others, a 12-hour drive home versus a 15-hour one. Dad said that his preferred route through Missouri was more picturesque and less stressful because it had less semi-truck traffic than passing through Little Rock. Looking at the AAA maps together, the route through Little Rock appeared to be a bit shorter, but if the traffic was bad, it could add hours to the trip. The problem was, the GPS algorithm had not only considered the distance and speed limit for route, but it also factored in known construction and traffic congestion based on real-time information sent from mobile phones in use on each route.[1] The maps could only suggest which routes were most promising based on road miles alone; the GPS could ensure which route was most efficient.
Nevertheless, Dad insisting on going his way; he described the route suggested by the GPS app as “nasty” in his experience. I was livid: while there would be undoubtedly more truck traffic on the GPS-recommended route, it was a tradeoff I was willing to make to gain three hours on our last leg of driving. Those three hours meant seeing my family on Sunday afternoon and unwinding a bit before starting the work week. I reluctantly agreed to take the route Dad insisted upon, unable to convince him of the obsolescence of his maps relative to the superior technology of a GPS-based app. We barely spoke ten words to each other the rest of the way home. Needless to say, it was an exceedingly quiet and painful 15-hour drive.
CRITICAL NEED OR CRITICAL CONDITION?
Maps were a critical product for centuries - until they weren’t. The multiple of advantages of GPS (traffic notification, time estimation) led to mass convergence and abandonment of maps for navigation. These GPS-enabled apps have directly led to the rise of ride sharing, which in turn have made taxis, previously a critical need particularly in densely-packed urban places like New York City, less ubiquitous.[2] Today’s changing consumer preferences enabled by the rapid pace of technological change harkens back to the time where horse and buggies met a critical need for personal transportation - until the automobile came along. Landlines for telephones were a critical technology - until cell phones came along. There are innumerable examples of a popular product that enjoyed widespread use by the general public - until a new, better product (often made possible due to technological advancement) replaced it.
We are currently living through a remarkable period of technological change. It has greatly impacted all aspects of our lives, and the repercussions of these new technologies in the age of the Internet have yet to be fully realized. Maps were relied upon for centuries yet replaced by GPS in less than a decade. My field of expertise, property and casualty (P&C) insurance, a product that has remained relatively unchanged for decades, is not immune to these changes. Similar to the longevity of maps, P&C insurance has a long and rich history as a unique financial product that provides tremendous societal benefits today, as it has for centuries. Recently, rapid technological changes are leading to new innovation in the space, commonly referred to collectively as insurtech. The fast rise of insurtech over the past 3-5 years is providing a glimpse of a radically different future for risk transfer that promises the benefits of traditional insurance without its many drawbacks.
This book will explore where current P&C insurance products fall short, where opportunities for major improvement lies and some of the recent technological advances that may be capitalized upon to rethink the current insurance paradigm. I’ll also explore the question of why this hasn’t happened sooner, such in the taxi industry that was quickly overtaken by ride-sharing in terms of popularity after decades of a regulation-protected niche market. I’ll also examine which groups are best positioned to lead the change in our industry - traditional incumbents such as primary and reinsurance carriers, venture-capital backed technology and insurtech startups, third party providers with a history of serving the insurance industry, or some blend of all of these.
At its fundamental level, insurance is all about “pooling” risk together so that each individual member of the pool pays a relatively small amount in premium to be eligible to receive a large amount if they suffer a loss that has an economic impact. By taking advantage of the law of large numbers, insurance carriers can collect premiums and pay losses while maintaining a “house edge” to make a reasonable profit while providing a societal benefit by reducing downside risk to individuals. This new era of technological change will create fundamental change to the current insurance ecosystem in ways that are not yet evident and cannot be fully anticipated today. In fact, future risk transfer paradigms may not even be referred to as “insurance.” Perhaps technological change will enable new business models such as “risk sharing” that will become the new dominant paradigm for risk transfer.
THE BOLD AND THE BRAVE
Many of the recent insurtech startups and similar ventures will fail. In fact, it is highly likely that the vast majority of them will go bankrupt if history is any guide. But it would be foolish to bet that all of them will fail, and there is a fair likelihood that one or more will succeed wildly in the way that Uber has in the ride-sharing industry and Airbnb has in the home-sharing space. Those players - whether traditional incumbents, insurtech startups, third-party technology providers, venture capital firms or others - who are brave and courageous enough to attempt to disrupt a centuries-old insurance industry will discover that a handful of them will be smart, savvy, and fortunate enough to thrive in the 21st century.
Who are these people who seek to disrupt the insurance industry? It is a wide mix of individuals from all backgrounds. While traditional incumbents tend to have an outsized number of older, white males in top leadership positions, these upstarts are characterized by a more diverse mix of leaders - young and old, male and female, a variety of countries of origin and sexual orientation as well as educational and work experiences. Some have spent decades within the insurance industry while others have little to no knowledge of insurance. All have comfort with changing technology and new ways of doing business. Many individuals seek to enhance the current insurance ecosystem in some way to make it better for consumers, while a smaller number seek to fundamentally disrupt insurance altogether. Whether they are looking to cooperate with incumbents or compete with them, all new ventures are acting on ideas that the P&C insurance does not fully meet the needs of consumers today and can be improved upon.
A ROADMAP
There are a ton of articles, blogs, podcasts, presentation slides and social media posts that all touch on the them
es I’ve laid out here in Chapter 1. Many of them are excellent, and I do not attempt to replace those pieces in this book. Rather, I hope that readers will find this book provides a roadmap to serve as a reference guide for our tumultuous times, one that can be referred back to on a regular basis and often reviewed and reflected upon. I have intentionally sought to target this book to a wide audience, or at least as wide as audience as possible given that the topic of P&C insurance and the ways that people and technology are seeking to radically change the fundamental ecosystem can hope to find.
•For traditional incumbents, everyone from C-suite executives to risk management and insurance (RMI) students seeking to get starting in the industry can benefit by reflecting on where the opportunities within our industry lie and finding ways to address those needs through new technologies such as blockchain, artificial intelligence, telematics, the Internet of Things (IoT) and more.
•For insurtech startups seeking to either collaborate or compete with incumbents, this book provides a crash course on insurance terminology and concepts as well as identifying the areas where new solutions can gain the most widespread adoption.
•For venture capital firms and other investors, this book will provide a summary of insurance concepts for those not as familiar with the industry, as well as provide frameworks for thinking about the potential disruptive power of emerging technologies and how to adjust the time horizons over which firms are evaluated as rewards will likely be far greater to those who are willing to play the long game.
•For board directors and anyone else who cares about leadership, this book will touch on the impact that millennials are having on shaping disruption in the P&C industry and the premium that should be placed on fostering a diverse and inclusive workforce at all levels in an industry that is rapidly aging and in need of fresh talent.[3]
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