The End of Insurance as We Know It

by Rob Galbraith

  THE OBSTACLE IS THE WAY

  Blinding flash of the obvious: there are obstacles in your organization that inhibit innovation. Taking the time to identify those obstacles, understand them and determine whether they provide valuable checks and balance or create bottlenecks to success is key. Some of the more common organizational barriers to innovation that adds business value include:

  •a limited mindset best summarized as “that’s the way we’ve always done it”

  •conversely, falling in love with bright, shiny objects

  •a top-down mentality where all ideas must receive prior approval from senior executives

  •worse yet, only pursuing innovative ideas that come from the top of the organization

  •having good ideas bubble up from the front lines only to have supervisors quash them

  •being too quick to fold new innovations into existing framework of products and services

  •valuing the “sizzle” more than the “steak”

  •over-promising and under-delivering

  •betting too much on a single innovation rather than managing a portfolio of projects

  •falling in love with a technology rather than the capabilities it can support

  •admitting failure too soon without sufficient iterations of test-and-learn

  •never admitting failure and moving on to other ideas which hold more promise

  •prioritizing short-term results over long-term viability of your organization

  •failure to engender a sense of urgency to match our accelerating pace of change

  •rushing ideas to implementation without performing a thorough vetting about compatibility with other technologies, products and services along with receptivity of the market to your new invention

  It is fairly evident from the list of obstacles above that many of these are contradictory, or at least appear to be. Don’t give up on an idea too soon but don’t wait to admit failure and move on. Push for faster speed-to-market but don’t roll out something that’s half-baked. Don’t reject ideas that flies in the face of your firm’s conventional wisdom but also don’t innovative just to be innovative. There’s an element of wisdom in seeking to overcome each of these obstacles and the key to achieving success is striking the right balance. Olympic champion figure skaters cannot remain safely on their skates; they must push themselves to go right to the edge on their routines to where they either brilliantly pull off an amazing element or fall on their behinds. Those that play it safe can compete in the Games but will not earn a medal. Your organization needs to identify obstacles and use them as your guide for where to go to become truly innovative.[96]

  REMAIN SEATED WITH YOUR SEATBELTS ON

  When the pace of change is linear, it’s easier for industry leaders to anticipate where trends are heading and innovative to meet the future needs. Perhaps the best description is the famous quote by hockey great Wayne Gretzky: “I skate to where the puck is going to be not where it has been”. Senior executives at insurance carriers, agency owners and other top leaders who have decades of hard-earned industry experience are well positioned in this environment to guide their organizations through the transition needed. However, the pace of change is indisputably accelerating in our current world - from technological change following Moore’s Law to demographic changes with the retirement of the Baby Boomer generation, the rise of millennials in the workforce and the coming wave of Gen Z following close behind. We see it everywhere in our lives, and it is hard to fathom that these disruptive changes will not be felt in the insurance industry.

  When the pace of change is exponential instead of linear, it is much harder to anticipate where the puck will be. A long work history in the insurance industry may become, counterintuitively, a disadvantage because it is much harder to unlearn and relearn something new than to learn it in the first place. As we age, we gain knowledge - but how much is still relevant? Most schools today no longer teach cursive writing, and math teachers who in the past said to students that they needed to memorize multiplication facts because “we won’t always carry a calculator in our pocket” have been proven wrong in the world we live in today.

  If only those dang disruptive technologies would stop coming, we could more effectively integrate them into our status quo insurance world! That isn’t how life works, to the misfortune of existing players in the insurance ecosystem. Disruption should be a foregone conclusion: the question remains how the details will be filled in. Part 3 will explore some emerging technologies that are generating a lot of buzz in the industry today, all under the generic heading of “insurtech.” These new technologies could prove key enablers towards accelerating change in the insurance industry to light speed.

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  PART 3 - SHAKEN, NOT STIRRED: HOW INSURTECH CAN RE-MIX INSURANCE AS A FULLY DIGITAL RISK TRANSFER PRODUCT

  CHAPTER 14 - THE MARAUDER'S TECHNOLOGY MAP FOR INSURANCE

  I SOLEMNLY SWEAR THAT I AM UP TO NO GOOD

  There are several new technologies that have emerged in recent years that are getting a lot of hype for their potential to disrupt the insurance industry. We’ve seen this before: technologies such as telematics have been seen as revolutionary 15 years ago, and while it remains a big potential disruptor, we’ve yet to see it fully disrupt the auto insurance sector the way many of us imagined it would in the early 2000s. Will this time be any different? Or is all the hype about insurtech the insurance industry equivalent of the 1990s dot-com boom and bust?

  Part 3 is dedicated to highlighting the technologies that appear to have the most potential to disrupt the P&C insurance industry. A combination of some or all of these new technologies, mixed just right, hold the promise of accelerating the pace of change in the industry, perhaps to the point of fundamental disruption and an entirely new paradigm. Taken even further, these technologies hold the potential of fully disrupting insurance by reinventing the foundational process of risk transfer.

  My foundational assertion is that insurance is an ideal digital product and I am not alone in this view.[97] Why is this so?

  •Insurance requires practically no physical capital like manufacturing plants.

  •Insurance does not require complicated global supply chains to move physical products.

  •Insurance does not even require a person to sell it!

  •All you need is a few million dollars to start an insurance company.

  •The market size is so large, even modest success can lead to a sustainable business.

  The success of direct writers in the United States and a highly competitive and innovative sector in the United Kingdom and Australia point to what is possible. Perhaps more so, innovative microinsurance that are bought and serviced over smart phones in India and elsewhere really showcase that selling and servicing insurance does not always require an in-person meeting. Industry trade publications such as Digital Insurance, Coverager and others point to numerous successes that both traditional players and startups are having leveraging insurtech to streamline processes, remove customer pain points, sell more policies and develop new products and services. Bottom line: much, much more can be done in the digital realm for insurance than is done today.

  BARRIERS TO ENTRY

  If much, much more can be done in the digital realm, why hasn’t it happened yet? Entrepreneurs and visionaries can articulate a variety of different future risk transfer paradigms including decentralized peer-to-peer (P2P) insurance based on the blockchain with no insurance carrier needed as the intermediary. This mechanism could all be facilitated by an API platform that can access whichever modules are needed including claims servicing when needed and a loss prevention service that advises clients on tips to reduce loss. Another concept is that auto manufacturers (OEMs) and possibly even structural engineers and building contractors have so much knowledge about their systems and products that they are willing to take on the insurance risk on more of a product liability basis than traditional property and casualty insurance. Per
haps P&C insurance could work similar to whole life insurance as a store of value where you pay in a certain amount each month but some portion that is not used for claims accrues to you and your deductible goes up, building a nest egg over time that can help you absorb the financial consequences of loss without leaving years and years of premiums “unused”.

  The reason these schemes and many more do not exist today - or, if they do exist, have not achieved widespread adoption and dethroned the current status quo - are due to barriers that need to be overcome. Broadly speaking, there are three barriers that any new risk transfer paradigm will need to overcome:

  1.The need for trust in the risk transfer (insurance) ecosystem

  2.Reliance on historical data and retrospective analysis to set premiums, hold loss reserves and set capital thresholds

  3.The lack of consumer engagement

  Need for trust in the system

  This barrier is the most obvious: the primary reason we have arrived at the current paradigm is 300 years of building trust in the insurance product, which due to its nature of collecting premiums up front to pay contingent losses in the future based solely on a promise creates all sorts of perverse incentives. Indeed, there are many stories in the early days of insurance of swindlers, thieves and crooks running what essentially were Ponzi schemes at best to defraud people out of their money without being there to support them financially in their time of need. Even well-intentioned insurance companies easily come up short if they did not properly charge actuarially sound premiums and hold enough capital in reserve to cover all losses that could occur, as mentioned in Part 1 about insurers that failed after Hurricane Andrew.

  To build trust in the system, many institutions, rules and practices had to be adopted: developing actuarial science to know how much to charge and hold in reserves, setting up guaranty funds backstopped by government institutions when an insurer goes belly up, creating regulatory authorities to oversee carriers and ensure agents are trained and licensed to do business, enforcing contracts as legally binding documents through the court system, and developing the principle of indemnification. The current system evolved over time to where claims are adjusted (by trained and licensed personnel) who investigate claims to ensure that claimants are paid what they are owed - no more and no less - to put them back to their pre-loss state (less any deductibles that may apply and subject to policy limits and exclusions).

  All of these edifices have been developed over the course of time for one main purpose: to build trust between two parties. Trust between that do not know each other and are engaged in a large financial transaction on both ends is facilitated by the regular payment of premium by the insured and the payment of larger claim amounts for those who do suffer a covered loss by the insurer. In general, these constructs have served their purpose over time and led to the current state of affairs in the P&C insurance market.

  Any new paradigm of risk transfer that seeks to replace the existing order found today in the P&C insurance industry must build a similar level of trust. Without it, any new system has no hope of disrupting the industry in any meaningful way. For companies like Uber and Amazon that have found ways to disrupt traditional industries such as taxis and retail stores, they have used conventions such as user reviews - ratings and comments - along with reliability in terms of tracking their rides or packages and direct communication with customers through apps, texts, e-mail and phone to build up enough trust where people are willing to substitute these (relatively) new startups and gain the advantages they offer over existing players. Anecdotally, millennials are more trusting of newer companies than old, stodgy one (as several friends have attested to). Any startups looking to do the same in the insurance space must build the highest degree of trust with their customers.

  Reliance on historical data

  A second barrier is a heavy reliance on historical data to sell profitable insurance products. Existing players have a tremendous advantage over startups because they are sitting on vast troves of data. In a world of Big Data, predictive analytics, artificial intelligence (AI), machine learning (ML) - a world run by algorithms - data are a foundational commodity needed as input to train models that can be deployed to run your business. Regulators generally require historical data to justify rate changes and possibly underwriting guidelines, and rating agencies and reinsurers also want to see historical data in order to provide their rating or reinsurance cover.

  For startups, simply acquiring data is a huge hurdle to overcome. Even companies that are making sensors such as telematics devices and smart home IoT sensors that stream a continuous feed of data that can directly observe behaviors need claims and loss cost information to develop their value propositions. Offering new products and services in the insurance space is challenging for firms that do not have data, and even though it is possible to launch when you have capital backing you, the initial loss experience is generally worse than companies assume which does not make their investors very pleased. Figuring out how to pool risks into the right segmentation scheme is a major challenge not to be underestimated.

  However, having all of this historical data is not always the advantage that it seems for existing firms in the insurance ecosystem. Simply storing the data and wrangling it into a format that can be useful for analysis is a massive undertaking. Many legacy transactional systems are particularly hard to leverage and a decade or more has been spent on efforts to build large data marts and data warehouses to efficiently store and access data to feed dashboards and reports - when data lakes are the new preferred method to feed AI quickly. All those old flat files that companies spent millions replacing into complex data structures are essentially back in vogue. Existing players often do not properly capture data that can be easily access and utilized, particularly any unstructured data from phone calls, images and text descriptions.

  Consumer engagement

  The final hurdle that needs to be overcome is the level of customer engagement. For P&C insurance today, the consumer mindset is generally “set it and forget it”. Insurance is something that is a necessary product to acquire in order to achieve some larger goal, like drive a car, rent a space or buy a house. There is little day-to-day interaction between insureds and insurers and virtually all interaction comes when there is a claim to report, there is a change in exposure (e.g., a new car or driver, moving to a new home, etc.), or rates go up enough where the consumer decides to shop around in order to save money. On the commercial side, small business insurance is a bit more involved and certainly requires an agent to assist but it can be similar to personal lines once set. For larger accounts, insurance is part of a risk management program and the risk management function at the corporation seeking coverage works with a broker on an entire plan that includes not just insurance coverage but an assessment of exposures and loss mitigation strategies (which may include items such as telematics in fleet vehicles and sensors in commercial structures to detect water leaks, fire starts, etc.)

  Is this the level of engagement with their insurance company that insureds want? For good or bad, this model of limited interaction is the norm that both consumers and insurers have come to expect. For carriers and startups looking to offer high-touch services such as apps that provide scoring of driving trips to the supermarket or reports, water flow rates in the house and a ton more data to help people manage their day-to-day lives, the question is: how will consumers respond? Will they appreciate the higher level of engagement? Or have firms in the insurance space not earned the same level of daily intimacy that products from Apple, Google and Amazon have? And do consumers value this information past its initial novelty?

  Certainly a parent of a teen driver may value feedback on how well or poorly their trip to the movie theater went - but what about their own commute to work that morning? Will they take the “feedback” and change their driving behaviors or simply continue to drive the same way, given that the vast majority of the time they make it to work safely without getting int
o an accident? In my twenty years of industry experience, I’ve seen time and again the devastating things that can happen to cause losses - the injuries caused, the lives changed forever. Yet, even if those impacted were to provide testimonials about their harrowing experiences, most people have a cognitive disconnect. Those not directly affected by tragedy feel sympathy for the person who suffered a major loss, while remaining resolute that “it won’t happen to me”.

  When human psychology is tuned to be unrealistically optimistic about the probability of a loss occurring and people are bad at judging the impact that low frequency but high severity events can have on them, how do you pitch your value proposition? Can surveys and interviews be a reliable source for what consumers really want? What problems are they really trying to solve? What are their true pain points? This exercise cannot be about finding use cases that justify your technology solution. Companies need to identify real problems faced daily by real people living real lives who may come to adopt and value your product or service. Most importantly, people need to perceive these as real problems as much as, in fact, there are actually real problems.