Uber is a classic example of a disruptive firm that rose from a simple, basic idea: to allow anyone to summon a car whenever they need a ride. Over the course of a decade, Uber and Lyft developed an entirely new way for people to get from point A to point B that did not exist before.[78] In doing so, there was a major impact to many other traditional industries: taxis, rental cars and car manufacturers among others. This chapter explores the reasons that a company similar to Uber has not yet had the same impact on P&C insurance: a startup that quickly ascends to be a dominant player by fundamentally altering the market forever and disrupting incumbents along the way.
DID I MENTION IT’S COMPLICATED?
Part 1 highlighted in some depth how many factors that make insurance a challenging industry. Of course, many other industries have made the same claim: they are different than all others, unique and immune to change (or at least the kind that comes from the outside). What makes insurance different from other industries? And in what ways is insurance similar?
Here is a quick recap:
•Insurance has elements of both a product and a service.
•The cost to provide the product is not known until well after it is sold.
•Most insurance is sold, not bought unless it is compulsory.
•Insurance is traditionally a “set it and forget it” product that consumers do not actively shop unless they have a large price increase and/or poor claims experience.
•Insurance is mostly an intangible product that consumers rarely interact with.
•Insurance involves specialized concepts and terminology such as coverages, deductibles, limits, exclusions, etc. that are confusing and require a significant amount of consumer education by specially trained and licensed insurance professionals.
•Insurance involved legally binding contracts backed up by decades of case law.
•The regulatory environment is quite varied by jurisdiction and often complex.
•Starting a new insurer requires a large amount of capital initially to cover losses until premiums can be collected to build sufficient loss reserves.
Many other industries that have been disrupted are fairly straightforward for consumers to make the transition from the old way of doing business to the new way and/or have frequent and repeated transactions that allow consumers to gain experience and confidence in the new way of doing business. In the financial space, it took some time for customers to gain confidence conducting banking transactions and stock trading using websites and mobile apps. Since checking bank account balances or gains and losses in an investment portfolio tend to be frequent transactions, the new ways of accomplishing these tasks without bank tellers or stockbrokers became routine over time. Additionally, the purchase of other products that used to be through agents such as airplane tickets required a small and well understood number of variables to complete successfully. If you know where you want to fly over what dates and which times worked best, along with whether you prefer a window or aisle seat, you can quickly get a list of available options from competing companies and purchase the choice that works best.
Compare these products and services to insurance coverages with different limits and deductibles, all covering risks that are not well understood by consumers. It is easy to be intimidated without a human to guide you through the dense terminology, options, forms, and more. Even in today’s world where people commonly start their insurance shopping online, they often end up calling to talk to someone or visiting a local agent to gain confidence and ultimately finalize their purchase. If you want further evidence of how challenging it is to fundamentally disrupt the P&C insurance industry, look no further than the length of time each of the top 10 carriers in the United States has been in existence.
Rank (2017)
Company
Direct written premium ($B)
Market
share
Year
founded
1
State Farm
$64.9
10.1%
1922
2
GEICO
(Berkshire Hathaway)
$38.4
6.0%
1936
3
LIberty Mutual
$33.8
5.3%
1912
4
Allstate
$31.5
4.9%
1931
5
Progressive
$27.9
4.3%
1937
6
Travelers
$24.9
3.9%
1853
7
Chubb
$21.3
3.3%
1882
8
USAA
$20.1
3.1%
1922
9
Farmers
$19.9
3.1%
1928
10
Nationwide
$19.2
3.0%
1926
Sources: NAIC data, S&P Global Market Intelligence, Insurance Information Institute, Google.[79]
The above table makes it plainly evident that most disruption comes from within the P&C insurance industry through mergers and acquisitions (which many of these firms have been involved with over their histories) as opposed to brand new entrants in the marketplace. It is quite remarkable that the “youngest” company in this list was founded over 80 years ago!
IN THE SHADOWS
One industry that can offer some clues for where the P&C insurance industry is heading is banking. Insurtech is part of a more broader set of technological change called fintech that is revolutionizing the way money is stored, transmitted, converted and accounted for. Along with rapid changes in these technologies, the competitive landscape for banking has shifted notably since 2008 and the Great Financial Crisis (GFC). Microlending, peer-to-peer lending, payday lending, mobile payments and a huge explosion in cryptocurrencies are used by millions of people around the globe. In the United States alone, the Federal Deposit Insurance Corporation (FDIC) estimates that in 2017, 8.4 million households (6.5%) are unbanked and another 24.2 million households (18.7%) are underbanked[80] (meaning the household had only a checking or savings account but other financial products were outside of the banking system). Globally, an estimated 2 billion adults and 160 million businesses are unbanked according to Global Findex, representing a large market opportunity for financial services.[81]
The rise in financial technology (fintech) and shadow banking over the past decade points to three fundamental truths that have relevance for the P&C insurance industry. These new non-traditional banking financial products and services highlight:
1.areas that traditional banks are not serving well
2.areas where technology has enable new capabilities for consumers
3.an erosion of trust in large financial institutions in favor of non-traditional players
A similar trend has been occurring in the retail space where Amazon has grown immensely over the past 10 years along with small batch, handmade craft items sold on forums such as Etsy from individual artists and craft makers rather than large manufacturers.
TIMING IS EVERYTHING
I posed this question about why an “Uber moment” has not occurred yet in P&C insurance to my connections on social media. The capital intensity of a full stack carrier and state-based regulatory environment in the United States were two of the main reasons cited. A third one was shared by the team at Ask Kodiak: timing. For disruption to occur, it is often the case that a series of converging events come together. One example is the rise of the gig economy: a combination of the Great Financial Crisis of 2008, the rise of social media to make people more interconnected, and the ubiquitous use of smart phones and apps as a platform all happen to coincidentally blend at the same time to light the fire. So while insurance is a unique industry dominated by large, traditional players p
rotected by a large and complex legal and regulatory environment, it should not be taken as a given that the industry is insulated from fundamental forces in technology and society that are driving disruption in many other parts of our daily lives. On top of the dizzying pace of technological change, the large amounts of venture capital (VC) from investors, including primary carriers and reinsurers who had stood up VC arms, adds a volatile fuel to the inferno. The team at Ask Kodiak shared this thought as well: "true disruption is rare and seldom comes from marketing material or a sales pitch."
Often it is what we do not see coming that is the most interesting and can quickly go from the fringes to mainstream, catching incumbents by surprise. Perhaps, according to Christoph Maile, co-founder at Optisure, insurance will not have an “Uber moment,” but instead, it may simply become less relevant as crash avoidance and smart home technology radically reduce losses over the next two decades, most losses are prevented, and people no longer need to purchase coverage.
Is the timing right today to declare that we are seeing The End Of Insurance As We Know It? In the rest of Part 2, we’ll focus on some broader trends that are playing out in the P&C insurance sector. We’ll also examine whether startups or traditional players have the upper edge in shaping the future of the industry as well as whether it is better to collaborate or compete with each other. Part 3 goes a step farther and summarizes some key technologies that hold great promise for true disruption. Part 4 examines how these ingredients could blend together to create a volatile mix that creates lasting change and fundamentally transform insurance forever.
1
CHAPTER 11 - IF YOU CAN'T BEAT THEM, JOIN THEM (AND HOPEFULLY GET RICH)
INSURTECH’S DILEMMA: COMPETE OR COOPERATE
Let’s say you’re a bold visionary founder with a boatload of funding at your disposal thanks to some angel investor, venture capital, or reinsurer. Your objective: cause a major wave in the insurance industry, possibly getting rich and famous in the process (or at least “insurance famous” - yes, that’s a term). You need to decide: compete or cooperate with traditional players?
You can cooperate by:
•enhancing their current offerings by leveraging your technology to provide process efficiencies, leading to expense reductions for their company
and/or
•extending their capabilities by enabling new products and services (possibly through building an application program interface or API)
Or you can compete by:
•identifying an unserved/underserved market need that traditional players today cannot compete for various reasons
and/or
•directly competing against the larger, established players by leveraging technology and a smaller workforce
Which choice should you pick? You can potentially have it both ways if you decide to be a pure technology play offering your products and/or services to both traditional players and startups. Another approach is to disintermediate a process to eliminate one or more third-parties in order to bring the carrier, agent or broker closer to their customer. Conversely, you could take on some task currently performed by an agent, broker, or carrier to free up time that allows increased focus on customers.
There are advantages and disadvantages to each approach and exploring the pros and cons of each will be the primary focus of this chapter. What should you choose: cooperation, coopetition (mix of both), or pure competition? Based on a survey from McKinsey & Company at the end of 2017, 61% of insurtech startups surveyed were focused on enabling the existing insurance value chain, 30% were focused on disintermediation in the value chain to improve efficiency and only 9% were looking to fundamentally disrupt the insurance value chain.[82]
Given all of the flaws in the current insurance ecosystem, regardless of which choice an startup founder makes, the opportunity to create a successful business venture is large.
PEACE AND LOVE
At first glance, cooperating with traditional players to enhance the existing insurance value chain has several attractive qualities. For starters, competing against entrenched parties that are well-known and have access to an enormous amount of resources (funding, data, industry expertise, etc.) can quickly appear to be a death march more than just an uphill battle. If startups can successfully partner with traditional players, they have the potential to quickly gain market share as word gets around the industry that their solution is solving a pain point. At a certain point, given the right amount of press releases, conference briefings and shifts in the market can give many parties a case of FOMO - fear of missing out.
In addition to potentially tapping into industry expertise and resources when partnering with traditional players, perhaps the most important advantage is gaining an intimate knowledge of the pain point(s) that the startup is looking to solve. Most traditional players are painfully aware of their pain points: they simply lack the ability to solve them for one reason or another. Most likely, the current solutions that are known are too expensive to implement relative to the size of the problem being solved. Other times, the issue is one of opportunity cost as other problems are more pressing to solve. The possibility of corporate politics is definitely a potential cause: less important problems are being solved because so-and-so executive is more effective at gathering a disproportionate share of resources. Additionally, the strategic objectives and operational goals of the organization may be aligned elsewhere. For instance, if all resources are being devoted to product acquisition and growth, implementing a new billing system may not be a top priority. Too often in my experience, startups approach traditional players with an arrogance because they think they fully understand the problems that they can “solve.” While the startup often has a general idea, the details are often crucial and peeling back the layers one at a time generally reveals a truer picture of the issues and obstacles to be faced.
Startups can overcome their lack of knowledge both by hiring staff with deep industry expertise. More importantly, startups need to be good at listening. Too often pitches fall flat because the startup is so focused on their own solution that they fail to engage with their potential clients. Some traditional players may be open about their pain points, causing a startup to feel overwhelmed by all the opportunities. Other traditional players are more guarded: they have heard thousands of pitches over the years and likely have signed a few contracts where the technology provider could not deliver as promised. Getting beyond the “wall of silence” to a true dialogue is critical and often takes several interactions to get the ball rolling. Be persistent but not annoying and keep pursuing until you get a hard no.
If your startup has a product or service that adds value for a traditional player, look to build internal champions within that organization to help build the business case for you. Internal resources are best positioned to help define a cost-benefit analysis (CBA) that estimates the expected return on investment (ROI) which is often needed to justify the expenditure outlay. Just as critical these internal champions can provide a compelling narrative in the terms and language that will resonate in their corporate culture. Small differences in word choices and phrasing can make all the difference. Each organization speaks its own language so the ability to be “multilingual” and speak their language is important.
Who are the right people to be internal champions? It is important to remember the people who benefit most from your product or solution may be at a lower level or across various departments. You need to find internal influencers: people who are important enough to have some clout internally and know how to navigate the waters and gain the necessary sign-offs, but not necessarily the person with the most important title. In fact, sometimes by going straight to the person with the most important title and lobbying them directly, you may alienate the people under them whose support and influence you need the most! There is no magic formula for identifying internal influencers, just keep an open mind and build lasting and meaningful relationships.
Having others jump
in the boat with you and begin rowing definitely makes it easier to fight the current and get where you want to go. Another key advantage is intimate knowledge of the company’s IT systems and how to integrate your solution into their existing architecture and business processes. Too often proposals gain support from the business only to crash on the shores of incompatible technology that does not seamlessly integrate with existing systems. Many traditional players have been around for decades and leveraged batch processing systems in the 1960s and 1970s, and there’s a good bet those systems are still being used. Since traditional players (both on the agent and carrier side) have been using the same technology for decades, their systems are often complex and stitched together in ways that are less than ideal. Integrating seamlessly in this environment should not be taken for granted, especially if your prior experience had been selling to more modern companies that are fully integrated into our digital economy.
Other advantages of collaborating with traditional players include:
•gaining valuable feedback from Proof of Concepts
•potential funding from revenue growth and early-stage investments
•access to a range of domain expertise including marketing, finance, HR, IT, etc.
•leveraging their brand name when marketing and raising venture capital
•assistance with legal and regulatory challenges
The End of Insurance as We Know It Page 12
