The End of Insurance as We Know It

by Rob Galbraith

  •sustainment of insurtech accelerators that serve as incubators

  •the potential for co-development alongside their business and IT experts

  •support for long-term viability through development of strategic partnerships

  However, there are significant disadvantages to pursuing a collaborative approach. Perhaps the largest is simply timeframe insurance as a whole is notoriously slow to respond to change and very wedded to traditional ways of thinking and doing business. This is not surprising when they’ve been successful for decades, insulated from external market forces.

  Some of the disadvantages of collaborating with traditional insurers are:

  •sacrificing visibility in an oversaturated marketplace

  •quickly making an impression and ensuring people understand your value proposition

  •navigating the corporate structure and politics to secure a contract

  •an asymmetric playing field where startups have an urgency to demonstrate viability quickly while traditional players view offerings merely as “nice to have”

  •vastly different perceptions of what “speed to market” is - months versus years

  •the loss of internal champions due to corporate restructuring or job moves

  •the chance of spending months demonstrating your product without getting a contract

  In addition to these significant downsides, the upside potential is also limited. Early-stage investments may dilute the equity of founders and other initial investors. Time spent securing partnerships may redirect time and resources that could be spent on product development and deploying new products and services to the market, potential directly to consumers. The relative success of products and services are judged may hinge on one or two large players rather than a larger and more diverse pool of individual actors. Startups who collaborate with traditional players can certainly grow into successful businesses, but few lead to multimillionaire paydays for founders and investors. I have a friend who was the founder of a successful startup in Austin that did business with many insurance carriers of all sizes tell me that his career arc, including pay and quality of life, was very similar to many of his high school and college friends that now worked for established organizations. His take is that his material wealth and general level of happiness was similar to theirs: he has just taken a different path.

  LOVE AND WAR

  Another option is coopetition which can take many forms. Arguably the most important is through building an API platform that enables others to leverage your technology through web services to provide new and enhanced products and services. By creating technology that others can leverage to compete more effectively in their domains, you are indiscriminate between assisting traditional players or startups looking to revolutionize how P&C insurance is done. Through an API, traditional players can white label their product and service offerings faster and cheaper than if they built the capabilities in house from scratch. APIs can also provide more seamless integration between two or more parties in the insurance ecosystem. If a startup has developed a robust enough platform to provide a full range of insurance products and related services, the value proposition becomes “if you have capital, we’ll do the rest to enable your insurance-related offering.”

  While building a full technology stack that supports all aspects of P&C insurance through an API is demanding, for hungry investors looking to quickly gain traction in the industry they offer an attractive solution. By stringing together multiple APIs with policy administration systems, digital marketing, agency management systems, billing systems, claims desktop management, rating and underwriting engines, offerings can be as broad or specialized as desired. APIs also offer the potential for a shortcut to partner with traditional players and avoid system integration nightmares. Many carriers and agencies are much more willing to go outside their firewall to call services and share data in a secure fashion than in the past. Data privacy and security is still of utmost importance, but reliable technologies such as Amazon Web Services (AWS) allow for quick deployment of cloud-based solutions that scale for lean startups while offering security protocols that are necessary to meet the rigorous standards of large corporations.

  APIs also unlock the possibility of disintermediation, which is mostly still a manual process in the insurance industry: shortening lengthy “supply chains” in insurance-related processes to reduce inefficiencies, improve speed to market and/or reduce expenses by eliminating operational redundancies. More broadly, modern technology solutions offer process efficiencies that can be gained through the elimination of intermediaries that perform a number of services that insurance carriers, agents and brokers have come to rely upon. Quite often, most of the organization may not be aware that some of this “back office” work is taking place. It is common to run across people at industry conferences that turn out to be a business partner to a large insurer that no one seems to know about. The reason? Another area in the organization is responsible for handling certain tasks, and they have decided that the best way to accomplish that task is by working with one or more third-party vendors. These contracts involve expenses to the firm outsourcing the work as well as a loss of expertise (or at least line of sight) as that work is no longer being done in house. Providing technology solutions that are cheaper and have the possibility of increasing transparency and simplicity are quite attractive in this realm.

  Another challenge for traditional players is reducing reliance on user-developed applications (UDAs). These often take the form of spreadsheets, macros, small databases, and other solutions built by power users that perform important functions for business users but are too varied to be effectively managed by IT resources. Most UDAs represent incremental improvements over highly manual processes but were not intended as a robust long-term solution. Business processes that rely heavily on UDAs often break down when software programs such as operating systems or the programs that UDAs are deployed in are upgraded. In addition, over time, the original UDA developers often move into new roles with little or no documentation left behind for the business area to maintain support for (or even line of sight to) these UDAs.

  What are the disadvantages of operating as a technology startup looking to partner with both traditional incumbents as well as insurtech startups looking to compete? For companies looking to serve both sets of customer bases, having a sound business strategy in place and effectively competing in both worlds is difficult. The corporate cultures and languages spoken between traditional players and startups is night and day different, as well as the expectations around speed to market and how quickly they move. Adjusting your pace and speed to match that of your consumers, especially when they are so radically different, is hard. Another challenge is honing an effective pitch strategy: startups may be reluctant to leverage your technology if they feel they can replicate your offering internally with their development team, while traditional players may be used to deploying solutions behind their firewall or building product and service offerings from scratch rather than partnering. Finally, when serving as a alternative to facilitate smoother processes among various parties and looking to disintermediate when inefficiencies exist, tech firms simultaneously have to ensure seamless integration across all of the remaining parties that need to be connected, while fighting against those that will be disintermediated who may be looking to retain their status and have the political savvy to do just that.

  WAR AND PEACE

  If cooperating with traditional incumbents is not appealing, and being client-agnostic feels too tedious, then perhaps you relish the idea of putting a stone in your slingshot and taking your best shot at being a direct competitor to established players. Founders and investors who choose this path know right at the outset the chances of success are slim. Firms who are ingrained in the existing insurance ecosystem are entrenched competitors who, while they may appear slow and inefficient, possess powerful competitive advantages. These firms are well-established, well-capitali
zed, sitting on mountains of data, and, if threatened by your presence, will rally to marshall resources to more effectively compete and regain the upper hand. As an insurtech startup looking to effectively compete against the big kids on the block, here is a list of some of the major homework assignments to begin working on:

  •Develop a solid problem statement

  ◦ What part(s) of the insurance ecosystem are you trying to disrupt?

  ◦ Who else is competing in this market space?

  ◦ Do you even know anything about insurance at all???

  •Determine how you are going to compete and execute on your strategy

  ◦ Are you building a better mousetrap using technology?

  ◦ Are you pursuing underserved markets that are being overlooked today?

  ◦ Are you pursuing “negative innovation” and providing similar products and services at lower cost due to lean operations?

  •Acquiring funding to begin your journey

  ◦ You can bootstrap, crowdsource or take venture capital money

  ◦ Funding is flowing freely in 2019 for insurtechs - will that continue?

  ◦ As interest rates rise, your hurdle rate to attract capital must rise as well

  •Technology stack

  ◦ You need to recruit developers and pay them

  ◦ Do you source developers from advanced countries such as the United States or Belgium or more affordable locations such as Russia or India?

  ◦ How are you planning to integrate or leverage other existing technologies?

  •Beta test your solution(s) and prove that they actually work

  ◦ Some view this as optional but vaporware doesn’t last long

  ◦ Find a market (or two or ten) to help deploy pilots to test and learn

  ◦ Be honest enough to admit when your mousetrap doesn’t work

  •Raise awareness that you exist and have a compelling value proposition

  ◦ Focus on first developing a MVP but don’t stop there

  ◦ Work on articulating the customer pain points exceptionally well

  ◦ Building a bright, shiny object in and of itself will not sustain your startup

  •Persuade customers to purchase your solution to solve one or more pain points

  ◦ Is your focus on end consumers or other businesses?

  ◦ Avoid free trials - require a small upfront investment to show commitment

  ◦ Proactively reach out and achieve “persistence without annoyance”

  •Be able to operate a business

  ◦ How do you handle billing, payments, accounts payable and receivables?

  ◦ How will you book revenues and how long is your path to profitability?

  ◦ What are your key performance indicators (KPIs) to gauge success?

  •If you actually earn revenue, you must grow your business by reinvesting

  ◦ How will you get more funding? Bootstrapping, crowdsource or VCs?

  ◦ How will you retain your developers and attract even more?

  ◦ How will you grow your sales organization and support functions?

  •Pray no one leapfrogs you along the way

  ◦ Remember: only the paranoid survive

  ◦ Do not fall in love with your technology - stay in love with your vision

  ◦ Know when to sell out and when to stay independent

  It is important to note that while competing against traditional players, you can still receive guidance and funding from legacy carriers. Many large reinsurance firms that partner with large primary carriers have been looking for ways to improve their returns outside of the traditional reinsurance marketplace, which has gotten squeezed in the past decade from a combination of historically low interest rates worldwide with a rise in the insurance-linked securities (ILS) marketplace. These reinsurers have been investing in some of the largest and most successful startups which directly compete against some of the primary insurers that they do business with.

  EVERLASTING LOVE

  Market conditions for insurtech startups have turned uniquely favorable this decade; as such, there has been a resulting explosion in new market entrants over the past five years. We are entering a new era in insurance, one that will profoundly be fundamentally changed by a combination of accelerating technological change and accompanying changes in society and consumer expectations. For traditional players seeking to effectively compete in this new insurance world, they will have to learn new tricks. How can they accomplish this? Chapter 12 will examine the landscape from the perspective of insurance incumbents who want to remain on top.

  1

  CHAPTER 12 - INSURANCE SERVED WITH A SIDE OF INNOVATION

  GOOD FOR YOU

  In the last chapter, I asked you to look at life from the perspective of a new entrant looking to find a home in the insurance ecosystem. This chapter will shift focus to the life of a traditional incumbent, focusing largely on the carrier’s perspective. Competitive pressures are forcing existing players to seek new ways of doing business.

  Incumbents have distinct advantages:

  •an established organization,

  •a base of customers,

  •brand recognition,

  •loads of data to analyze and leverage,

  •consistent cash flow, and

  •industry expertise.

  Traditional incumbents also have distinct disadvantages:

  •legacy IT systems that are expensive to maintain and difficult to modify

  •an rapidly aging workforce that is rapidly retiring, taking their experience with them

  •increasing consumer expectations

  •stagnating markets in some key areas such as auto insurance, the largest premium driver of personal lines and often serves as a springboard for cross-selling other products

  •increasing regulatory scrutiny and rising compliance costs

  •rising operational expenses

  •siloes of large inaccessible data

  GET YOUR PRIORITIES STRAIGHT

  Opportunities for improvement abound. Incumbents are often blessed with resources that startups can only dream of, but prioritizing where to deploy those resources is challenging. Where should incumbents focus their energies?

  Marketing and lead generation

  Insurance carriers spend billions annually in the United States on direct advertising. In the US there has been a shift towards more digital advertising which allows companies to be much more targeted in terms of audience selection than traditional media such as TV, radio, billboards and direct mail. Digital marketing makes it easier to calculate a ROI on your marketing spend since companies can track ad click through rates (CTR). In addition, a narrowed marketing focus avoids attracting business that is considered undesirable from the company’s perspective due to higher costs, low profitability, and lower retention. Increasingly, direct writers are able to design and deploy highly localized advertising that gives the prospect the impression that they know a lot about their community and helping to overcome the advantages that a local agent has.

  Agents

  Traditionally, insurance has been sold and serviced through agents as intermediaries because insurance is a complex product for consumers to understand, purchase and use. Agents can either be exclusive, meaning they only represent a single carrier, or independent, meaning they represent multiple carriers. Insurance industry press has written countless stories about the looming demise of the insurance agent[83] for the past several years, but the reality is that a good agent can add tremendous value for his or her clients.

  There are two major reasons that insurance agents have had longer staying power than travel agents. First, truly good agents add tremendous value for their clients. Knowledgeable insurance agents quickly assess client needs and find appropriate coverage solutions from a potentially overwhelming universe of options. Many insurance products, particularly in the small commercial space, require enough knowledge of the exposures involved and reputable carriers to be difficult
for businesses to confidently purchase these products on their own without risking a major gap in coverage. Second, all agents, good and bad, have a huge (some would say outsized) influence on the success (or lack thereof) of carriers. There is no quicker way to insurance purgatory than pissing off your agents. Lots of examples abound in the industry trade press[84] and from anecdotes online.[85] The lesson for carriers: disintermediate your agents at your own peril. This is why you rarely see an agent-based carrier make the switch to a direct writer even though it is a less expensive model.

  Agents are typically considered somewhere between the Stone Age and Y2K in their adoption of technology. Many agency management systems are based on older legacy technologies and are not easy to modify. For exclusive agents, they are at the mercy of the carrier for their tech. For independent agents, they have slightly more flexibility but have to ensure that whatever system(s) they choose are supported by the carriers they represent. In addition, similar to the insurance industry at large, agents are skewed to an older population[86] that may be reluctant to embrace new technologies, processes and ways of working. Selling agencies and finding new (younger) agents[87] to take over their books of business is a big challenge today.

  How can new technologies help agents move into the 21st century? By allowing them to better allocate their time towards activities that they are uniquely qualified to do and that are the keys to their ultimate success - generating leads, selling policies and assisting clients. Simplifying, automating and/or eliminating all other processes that do not involve directly working with clients are a gold mine for agents. Their compensation is commission-based. Agents who embrace technologies such as social media, online quoting, and texting their clients appear to be thriving. These investments appear to be paying off handsomely[88] for agents who fully embrace the use of social media platforms.