If you swim in the waters of insurance and financial services, it’s a good time to paddle out and stand up. While the potential blockchain tsunami remains trapped behind legal and regulatory reefs, several good vibrations are creating strong waves to propel you forward. The question for insurers is, how can we get in the best position to ride these new industry dynamics?
The Waves to Ride
First, let’s look at the line-up of waves to help you launch your insurance growth venture. At PX Venture Studio, we see four exciting trends that are driving change in the insurance market.
Torrent of Data
Let’s face it, this is data’s world, and we’re just living in it. Cheap sensors, smartphones, and always-on digital communications are driving exponential growth of near-real-time data. Whether you are a health insurer or a property and casualty insurer, a dizzying array of data is available today, emanating from diverse sources, much of it IoT-related, including the following:
- Wearables and sensors
- Electronic logging devices & vehicle telematics
- Smart meters, smart homes, smart grids
- Video monitoring and surveillance
- Government records
- Commercial data sets from other businesses
- Drone data capture
- Social media
Wearables, for example, are “so commonplace that John Hancock has embedded the ability of a wearable to lower premiums into 100% of its life insurance policies,” notes Dave Peak, former VP of Digital Strategy at Humana. Drones can get into disaster zones within minutes and generate highly accurate data for property claims. Startup Geomni provides drone-captured data for inspections and claims. During the 2018 natural disasters in the Southeastern US, Geomni provided claims support to 4 of the top 10 property and casualty insurers.
An even more ubiquitous source of data is social media, with potentially unexpected consequences. A recent Wall Street Journal article advises, “Don’t post photos of yourself smoking on social-media sites. Do post photos of yourself running.” (Presumably, surfing photos might fit the bill, too.) Collectively, these sources represent a deeper and broader pool of data than we ever imagined possible. This has profound implications for insurers, as we’ll see.
Rise of Direct-to-Consumer Distribution and Claims
With all these new data sources, and with always-on connectivity, it is a no-brainer that insurance distribution is shifting heavily towards direct-to-consumer touch points. An omnichannel customer experience is a given. When human intermediaries exist, they are interacting with a customer that is highly-informed by technology and the internet. New entrants such as Bolt and Insureon are gaining traction with a digital-only channel strategy.
Oscar Health, a New York-based health insurer, uses a digital-first strategy to drive simplicity, transparency and personalization, creating a competitive advantage in customer satisfaction. While the rest of the industry is mired in low net promoter scores, Oscar’s state-of-the-art mobile app drives very personalized and responsive access to care. In an interview with CB Insights, CEO Mario Schlosser cites word-of-mouth referrals as their “number one channel for customer acquisition.”
As the Wall Street Journal article noted, word-of-mouth spreads fastest on social media, which is becoming a key distribution channel. Consumers on Facebook, Twitter, and LinkedIn get advice from friends, learn about insurance products, and click-thru to buy. Smartphones make it possible for consumers to dynamically adjust their coverages, such as with Sure, which enables travel insurance purchases as you are boarding a flight.
Claims has long been the un-sexy part of insurance, but now at least they can be processed more efficiently using digital tools. Smartphones are a key enabler, and apps such as Allstate’s QuickFoto Claim are making the process faster and more seamless than ever. Peer-to-peer insurer Lemonade says that over a quarter of its claims are paid in an astonishing 3 seconds!
In addition to enabling automation of work processes, data also fuels advanced analytics. This is taking hold in some obvious forms, such as online purchasing agents, chatbots, and the aforementioned smartphone claims apps. In the background, data from sensors and other sources fuels machine learning, and sophisticated algorithms provide automated risk analysis and fraud detection.
For example, all commercial trucks in the US are now required to be equipped with electronic logging devices, which synchronize with a vehicle engine to automatically record driving time. The days of keeping “a second set of books” for your truck (i.e., service fraud) are over. (Thus far, ELDs have only been shown to decrease hours of service violations, but not accidents.)
Another implication of analytics is personalization. Let’s say a customer insures a second home in a vacation haven such as Bend, Oregon. Analytics can see the Airbnb demand patterns in Bend and invite the owners to create an income stream from their investment. They might want an episodic insurance product, such as coverage from HomeAway during a short-term rental.
Of course, the crux of any successful insurance product is how to price risk accurately. Advanced analytics are being built into sophisticated rules engines that automate the core underwriting process. Tools like Carpe Data use names, emails, and birthdays to look for information on the internet that might show whether someone lied on their application about smoking or drug use. These advances compress the cycle time for a quote and dramatically improve predictive accuracy. The implication for insurers is this: be more accurate, or you will literally pay the price through higher claims costs.
New Demand Patterns and Risk Categories
New buying behaviors and risk categories are emerging, too. Many of the changes can be traced back to the habits of the millennial consumer. They are delaying asset ownership (car, home) in favor of the sharing economy. Equally important, this generation is very willing to try solutions (especially technology solutions) from startup brands.
Millennials are the driving force behind demand for services such as usage-based insurance, bundled products (e.g., home buying with home insurance), and episodic insurance. For example, risks such as short-term home rentals (HomeAway) and travel delays (Allianz) are gaining traction. Other small-ticket items, such as event cancellations (Markel) and goods in transit (Tokio Marine), are popping up.
Hybrid health-wealth offerings are on the horizon. Employer-sponsored health savings accounts (HSAs) and health reimbursement arrangements (HRAs) are becoming commonplace. A recent article in Strategy + Business noted, “We expect to see the emergence of a whole new class of innovative products and services that bring the sophistication of financial planning to health-care management, so that individuals will prepare for their future medical costs the way they now plan for their retirement expenses.”
New risk categories are emerging, too, such as cyber insurance, identity insurance, and coverage for the cannabis industry.
The Result? Fresh Competitive Energy
Turbulence always spawns adaptation, and the insurance market is no exception. Established competitors are exploring new directions (such as Zurich, Allstate, and Tokio, noted above). Upstarts are offering fresh contra-models for insurance (such as Bolt, Geomni, and HomeAway). The new entrants are enabled by affordable cloud infrastructure and the availability of risk capital. In addition to startups, non-traditional entrants include banks, consulting firms, law firms, and peer-to-peer groups. What happens when Amazon decides to enter this market?
Just as in nature, not all these new variants will stick. Natural selection will thin the herd, and only the most adaptive will survive.
Part 2: What to Do
So, what should a forward-thinking insurer do in the face of these changes? The four trends above reflect more than mere digital transformation. For insurers, data is enabling a fundamental shift in the underlying business model. Before the data deluge, insurers could prosper by using static, retrospective data to price risk, then pay for losses.
Post-deluge, it’s a more nuanced business. Rich, often real-time data from multiple sources makes it possible to anticipate risk and dynamically manage it. The emerging role of insurers is to assure operational continuity for their customers. If the pattern from other markets holds true, this new requirement will drive innovative offerings at every point on the price curve.
Certainly, Big Insurance has some built-in advantages when it comes to navigating this kind of sea change. They have confidence in data-driven business operations and deep expertise at underwriting and pooling. Large insurers are positioned to serve as person-to-person trusted advisors. And they have built big brands and the marketing infrastructure needed to scale new offerings.
But what about Insurtech Startups? We already noted that millennial customers don’t place the same value on brand names and traditional sales channels. On the operations side, startups may lack feet-on-the-street, but they can scale through technology. “One big advantage startups have is they can go to the cloud on day one,” notes Dave Peak, the ex-Humana digital strategy executive. “Devoted Health, for example, has raised over $300M and they are cloud-based.”
As the Devoted Health example illustrates, the presumed deep pockets advantage of Big Insurance is more than offset by the active private equity markets. InsurTech startups can get the funding they need; they raised just shy of $2.5 billion in 2018, more than double 2017 levels. Yet, with all the money going into insurance startups, there has been minimal M&A or IPO activity for US-based InsurTech startups.
Does that mean the small shall inherit the insurance market? Hardly. Available risk capital and open-minded customers help, but it’s still a 1-in-10 bet for an InsureTech startup to get to product-market fit.
Four Imperatives to Future Proof Your Insurance Venture
Yes, data is king. Without a doubt, the ability to collect, transmit, clean, store, protect, categorize, and analyze data is a must-have for any firm to succeed in the insurance market. However, the firms that thrive will need four agile capabilities not related to data.
Understanding Customers as People (Not Data)
Discovering unmet customer needs is still at the heart of any successful innovation. Data provides clues, but old-school customer empathy and insights cannot be outsourced to an algorithm. “It still pays to look deeply and to understand what drives human behavior,” says Nate Andorsky, CEO of Creative Science, a firm that builds digital experiences for InsurTech and other sectors based on behavioral economics.
“The peer-to-peer insurer Lemonade is a great example of behavioral science in action. They have taken a behavior-first approach to building their business from brand voice all the way down to reducing fraudulent claims,” he says. The Lemonade product is a beautiful blend of behavioral economics and AI. This fast-growing insurance app provides renters and home insurance powered by tech and driven by social good.
For starters, they speak the language of their millennial customers. “Peace of mind for the price of a latte,” says one online blurb. A recent Facebook ad reads, “Only 90 seconds to get insured.” That doesn’t sound like your grandfather’s insurance company. The GEICO promise of “15 minutes or less” sounds absolutely tortoise-like by comparison.
Their approach to the problem of fraudulent claims has a unique behavioral basis, too. As Andorsky notes, “They first asked themselves, how do you design a system of trust?” In a recent TED talk Dan Ariely, their chief behavioral officer, shared part of the answer:
“Let’s change the claims process from a two-player game to a three-player game. How does this help? When you join Lemonade you pick a charity you really love. Every month Lemonade takes a fix amount as profit, pays back claims and if there is money left over in the pool it goes to charity. Now it’s a game between you (the consumer) and charity. You cheat the system and you are no longer cheating Lemonade, you’re stealing from charity.”
Business Model Exploration
Once your firm has a unique insight and a solution hypothesis, you still need to connect it to a business model that scales. As the 4 trends above illustrate, the days of a single tried-and-true business model for insurance are over. Say hello to insurance as a multiple business model industry.
Allstate operates its traditional lines of business as well as the direct-to-consumer Esurance offering. MassMutual operates a wholly-owned InsurTech startup — Haven Life — within its walls. MassMutual is also an investor in PolicyGenius, a website that provides insurance quotes. The underlying business model for Lemonade is to pool the premiums and pay claims as a co-op, instead of the traditional adversarial model of consumer (David) vs. insurer (Goliath). Today, the ability to build supply chains, demand chains, revenue models and control points is becoming as important as underwriting.
MVP Design and Test
There is a difference between a business model on paper and product-market fit on a P&L. The way to bridge that gap is to test a minimum viable product (MVP) with target customers, and iterate until you get traction. The best insurance innovators know, you don’t run an in-market test to prove your business model hypothesis, but to improve it.
Each of the business model variants noted under Imperative #2 above required trial-and-error before getting traction. Consumers (and competitors) won’t wait around for 5 years of longitudinal data to satisfy the underwriters. The global law firm Baker McKenzie gets MVPs in front of clients within 45 days, first in the form of a “pitch deck,” then as a short-term Alpha test with a single account. “We are aggressive advocates for what our clients want to do,” says Jason Marty, global COO for Baker McKenzie. “Our most successful services come from listening to a client who is out on the leading edge and asking ourselves, ‘How can we make this work?’”
Big Insurance and InsurTech startups have different strengths, but both are hungry. As a result, we’re starting to see many Big-to-Small collaborations in niches of mutual interest. If you’re Big, the small partner has a risk tolerance and agility you might lack. If you’re Small, you might need customer access, a brand halo, and a way to scale. These collaborations are a form of agility that can generate benefits for both parties.
For example, Oscar Health has partnered with Cleveland Clinic to offer a co-branded health plan to enroll 11,000 members in NE Ohio. They have a similar partnership with Humana focused on small businesses in Nashville. Partnerships are popping up on the infrastructure side, too. Slice Labs provides a cloud services platform that enables large property and casualty insurers to quickly prototype and test on-demand insurance products. Their investors include Munich Re/HSB Ventures. On the health side, Zipari is offering a “consumer experience platform built specifically for health insurance,” per their website, with a wide range of partners and health plans as customers. Zurich is partnering with IoT startup Cocoon for home security insurance. If you’re small, like Slice Labs, Zipari, and Cocoon, it’s often easier to partner than pilfer.
In the face of all this emerging technology and data, the four imperatives above might sound a bit retro. Unfortunately, some traditional rules of innovation and entrepreneurship still apply.
- Great products are still essential … just create them with a deep understanding of who I am and what I care about.
- Underwriting is still crucial … you just have richer, more complex data to fuel it.
- Servicing claims still matters … but use real-time data and machine learning so I don’t have to wait or be interrupted.
Customer expectations for real-time communication, convenience, and transparency are drastically re-shaping the insurance market. Applying the four imperatives above with the emerging technological realities is still the best way to future-proof your insurance venture.
In summary, there are some very good waves for change-makers to ride in the insurance market. In fact, there is a sea change. Here’s how we might summarize it: In the old days, insurers paid for losses. That’s a zero-sum game for both sides. In the future, insurers will assure operational continuity; that’s partnership.
Wherever you choose to place your bets, just don’t expect a new status quo to emerge right away. This is a dynamic moment in insurance. Hey, is that the blockchain tsunami I see forming on the horizon? Surf’s up!