The End of Insurance as We Know It

by Rob Galbraith

  •Actions: What is the customer doing at each stage? What actions are they taking to move themselves on to the next stage?

  •Motivations: Why is the customer motivated to keep going to the next stage? What emotions are they feeling? Why do they care?

  •Questions: What are the uncertainties, jargon, or other issues preventing the customer from moving to the next stage?

  •Barriers: What structural, process, cost, implementation, or other barriers stand in the way of moving on to the next stage?

  Surveying the technology landscape

  The exponential growth in funding for insurtech has allowed for an exponential growth in the number of startups. These new companies are technologically savvy and seeking to position their technology as solutions for the pain points of incumbents. 183 companies were exhibitors at InsureTech Connect in 2018, the largest insurtech conference in the world with over 6,000 attendees in just its third year. The vast majority of those exhibitors are brand new to most incumbents as they are not traditional partners. How can incumbents find a partner (or many) to help them address their process and customer journey pain points?

  The key for incumbents is to ensure that they have a formal process for marrying their pain points with solution providers. These providers may be internal departments but increasingly incumbents should be looking externally for help. Why? Internal resources come with constraints: not just economic costs but opportunity costs. To engage an internal resource to solve a particular issue, that means that those resources cannot be engaged to work on other pain points simultaneously. In essence, a backlog of work piles up that must be prioritized according to some criteria. Those items that are not prioritized at the top must wait for those internal resources to free up to work them. By contrast, for external partners that issue will always be their #1 priority - or at least the incumbent should feel that way. No waiting to be prioritized is necessary: once a contract is negotiated and signed the work can commence right away, regardless of the partner’s other priorities.

  Regardless of whether internal resource, external resources or both are engaged on a particular improvement effort, there are decisions that must be made on scope, budget and timing. Too often, companies do not do an adequate job of finding opportunities to build in flexibility and scalability “when the hood is up”. These are necessary components of any system and process and will be even more prized in the future as businesses struggle to keep up with the accelerating pace of technological change and evolving customer expectations. Prizing flexibility, agility and scalability as characteristics that hold organizational value in their own right, not only when they are tied to a specific capability, is essential. Companies may not always have the luxury to know how these characteristics will benefit them down the line, so it takes a leap of faith to value them in their own right. More often than not, I believe this approach will be large dividends in our future world.

  Some broad key enabling technologies have already been discussed previously such as blockchain, AI, and APIs. Another technology that can play a big part in solving the back office challenges include Robotic Process Automation (RPA). According to CIO Magazine, RPA is “an application of technology, governed by business logic and structured inputs, aimed at automating business processes”.[201] RPAs can be thought of as macros on steroids: this software or “robot” can learn about various applications and manipulate data in order to streamline business process automation tasks. RPAs can often be deployed in scenarios where firms are using offshore resources today as a replacement for those repetitive and tedious manual tasks. The robots can be trained and potentially thousands of bots can be deployed to run a number of processes. Like AI, these bots do not get tired or need breaks and can process transactions mch faster than humans. Bots are typically low cost and can be relatively straightforward to implement if the right experts are supporting RPA. A new deployment strategy is Robots as a Service (RaaS) which operates in a similar fashion to Software as a Service (SaaS).[202] RaaS bot deployments require no upfront capital investments in software or hardware; instead, it operates using cloud computing and can quickly be scaled up to work on processes and terminated at any time. One benefit of RaaS is the extreme flexibility it provides: deploying the bots takes minimal startup time and little to no upfront investment and companies only pay for the service as long as they use it.

  Another area where technology is assisting traditional incumbents and building stronger linkages is the connection between agents and brokers to carriers and wholesalers. Startups like Ask Kodiak help agents and brokers find markets with carriers for their commercial clients. Bold Penguin is a commercial insurance exchange that removes friction in commercial insurance and quickly matches consumers, agents and carriers together to a quote in less time. Risk Genius applies AI to insurance policies and creates custom workflows to better understand policy language and streamline processes. There are many other firms seeking to build connections between parties looking to partner and reducing the friction involved to improve the overall efficiency of the insurance ecosystem for consumers.

  Managing efforts using agile methods

  Over the past 10-15 years, the way that IT projects are managed have changed from what was characterized as a “waterfall” approach to using an “agile methodology.” In the waterfall approach, requirements was gathered by IT from business users first. This process often took several weeks and even months for large-scale efforts, and it was important to avoid technology “solutions in search of a problem”. Once requirements were gathered and baselined, then IT would go off and program code to build systems and solutions that met those user requirements. One the system was built or modified to meet those requirements, system and user testing would take place to ensure that the new functionality worked as intended and could meet the needs of users.

  While the waterfall approach to software development was an upgrade over the disorganized processes used prior to adopting a standardized approach, the main drawback is speed to market. All requirements are attempted to be gathered and documented up front and then a period of time goes by before a complete solution is delivered. In today’s day and age of rapid changes, requirements can get stale quickly and priorities often shift on a dime. The agile methodology prioritizes work using short iterations or “sprints” and generates much more interaction between developers and business users. This approach allows for more “test and learn” scenarios and ultimately, when done well, enables speed to market and more functional solutions.

  According to Linchpin SEO, some of the core tenets of the agile method [203] include:

  •Satisfy the client and continually develop software

  •Changing requirements are embraced for the client’s competitive advantage

  •Concentrate on delivering working software frequently

  •Delivery preference will be placed on the shortest possible time span

  •Developers and business people must work together throughout the entire project

  •Working software is the primary measurement of progress

  •Agile processes will promote development that is sustainable

  •Constant attention to technical excellence and good design will enhance agility

  •Simplicity is considered to be the art of maximizing the work that is not done

  •At regular intervals, the team will reflect on how to become more effective, and they will tune and adjust their behavior accordingly

  LESS WEIGHTLIFTING, MORE YOGA

  A fundamental concept at this moment is that the pace of technological change is going faster than humans have ever experienced before. Hot fixes of outdated technology will not cut it much longer. The pace of technological change is rapidly bringing about changes in consumer expectations. Where systems are bending today, they will break tomorrow

  It’s not just investing in new technology, but investing in the right technology. This brings up a critical question. How can you know you are investing in
the right tech when new technology and capabilities are constantly emerging? The obsolescence cycle is faster than ever. To prove this point, think about the life cycle of mobile phones the past two decades. I have personally gone from a Nokia cell phone (complete with holster) to a Motorola flip phone to a Razr phone with keyboard to a Blackberry (also complete with holster) to 3 different versions of an iPhone. Are traditional insurance incumbents prepared to compete in a world where product life cycles are this short?

  The answer to knowing if you are pursuing the “right” technology is less about having a crystal ball and more about having the right mindset. Prioritize flexibility over strength, agility over brute force, maneuverability over pure speed to market. We all know weightlifting builds muscles that in turn builds strength, but so does yoga. Practicing yoga on a regular basis provides benefits that will last for a lifetime, which is exactly what companies competing in the insurance market should be striving for.

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  CHAPTER 21 - INNOVATION ENGINES: APIs, VCs, MGAs AND ACCELERATING CHANGE

  START ME UP

  Let’s go more behind the scenes to understand the pathways in which new, innovative insurance (and insurance-like) products are being created by different “engines of innovation.” Some of the approaches being taken are tried-and-true methods used over the course of decades within the P&C insurance space, such as Managing General Agents (MGAs) and Excess and Surplus Lines (E&S) carriers. Other approaches are newer with the rise of technology such as the use of application programming interfaces (APIs) that can be designed to offer new or enhanced insurance and insurance-like products and leveraged by both traditional players and startups alike. Fueling all of this recent innovation in the P&C insurance space is unprecedented amounts of money seeking a return on capital.

  As mentioned above, MGAs and E&S carriers have been a traditional source of innovation and providers of niche insurance products in the marketplace. Most traditional carriers are licensed by insurance regulators in the jurisdictions that they do business. This usual mix of personal and commercial lines carriers operating in a jurisdiction is commonly known as the admitted market. Carriers seek approval from regulators to operate in that jurisdiction and their agents are licensed to conduct business on their behalf. Carriers who are approved by insurance regulators are often referred to as full stack carriers and have to meet certain requirements which vary by jurisdiction but commonly include:

  •approval of rates (pricing)

  •approval of forms (contracts)

  •approval of rules manuals (that include underwriting guidelines)

  •meeting minimum solvency requirements

  In return for this level of oversight, jurisdictions provide coverage by their guaranty funds to protect consumers and make them whole in the rare event that an admitted carrier is unable to meet its financial obligations and pay all of the claims that they owe. This level of oversight by insurance regulators provides consumers in that jurisdiction with a certain level of faith and trust in the system - whether they are consciously aware of it or not.

  In Part 1, I explained the difference between direct writers (carriers that interface directly with consumers) and agency writers (those that are represented by either an exclusive or independent agent). Insurance agencies, like insurance carriers, must meet certain requirements by insurance regulators in order to operate within their jurisdiction. Typically, agents take a customer’s application for insurance but must receive approval from the carrier’s underwriting department prior to binding coverage - they have no inherent authority on their own. A managing general agent (sometimes referred to as a managing general underwriter or MGU, typically in association with life and health insurance) goes beyond a typical insurance agent in that they are vested with underwriting authority from an insurer. MGAs are typically involved with unusual or specialty lines of coverage in which specialized expertise is needed to write the policy. MGAs often perform functions that are usually performed by insurers such as binding coverage, pricing and underwriting coverage, appointing retail agents and settling claims. MGAs benefit insurance carriers because the expertise they possess may not be available in-house and may be prohibitively expensive to develop within the carrier.

  MGAs represent one or more carriers (usually more) and have been granted special authority by the carrier to administer insurance programs and negotiate contracts on its behalf. They can market through agents and/or brokers or may go direct to consumers. MGAs tend to be more nimble than the carriers that they represent and can also help agents find solutions - sometimes through packages leveraging multiple carriers - for hard-to-place business. MGAs are licensed to do business in the jurisdictions in which they operate, and there is some administrative burden associated with insurance regulation that must be met. However, the regulatory burden placed upon an MGA is not as high as what is expected of a full stack carrier, even when they are working with admitted products.

  The traditional flexibility of the MGA model to offer niche or specialty products in which they possess expertise in rating and underwriting the coverage, along with the lighter regulatory burden compared with a full stack carrier, has led MGAs to evolve into a second type of entity that looks more like a quasi-carrier.[204] This business model involves the use of an insurance carrier as a “fronting partner” that offers access to use its regulatory licenses and capital reserves to the MGA in exchange for a fee. The MGA pays the fee, typically a percent of premium, and they retain most if not all of the underwriting risk (meaning the carrier accepts little to no risk). This model allows startups to retain a large degree of control over their operations without the need to take the time and acquire the capital necessary to become a full stack admitted carrier.

  MGAs do take longer to establish than a standard agency or broker. They are regulated by state law and are generally required to be licensed producers. Startups are advised to seek legal counsel to determine if they truly need to operate as a MGA (as opposed to a pure technology company) and, if so, ensure that proper documentation and processes are followed. Startups looking to take advantage of the MGA setup also must prove that they have the ability to underwrite and price risks successfully, and balance their business model between the traditional commissions that are typically earned along with any profit (or loss) sharing with the capital that is backing them.

  One final consideration for a startup is whether it really needs to be licensed as a MGA or whether they can operate as a pure technology company that seeks to partner with others in the insurance space - either traditional players, insurtech startups or both. According to Chris Downer, Principal at XL Innovate, valuations by VCs depend in part on the structure of the startup and MGA valuations are significantly lower than pure technology plays. So startups should not automatically seek to become MGAs if they do not need to. However, when a startup wants to offer a new product to seize upon a market opportunity, it may need to operate similarly to an insurance carrier. In that case, going the MGA route can prove to be less burdensome out of the gate than becoming a full stack insurance carrier. It is also possible to convert from a MGA to a full stack if the market opportunity appears large enough to make the transition.[205] Having said that, some experts advise that making the decision to go the MGA vs. full stack route is best done up front: the costs to transition from a MGA to full stack can bring disadvantages such as incurring all the costs of partner integration and raising capital as well as diverting focus to raising capital precisely at the time that the business should be looking to scale up.[206]

  By contrast, E&S carriers are full stack but operate in the non-admitted market, meaning that they are not required to abide by the regulatory framework within a given jurisdiction. E&S carriers are, almost by definition, the antithesis of standard admitted carriers. Unlike admitted carriers that are very conservative in their approach to pricing, underwriting and managing risk, E&S carriers specialize in high risk markets that are impossible to place in the standard admitted
market.[207] Insureds generally seek coverage in the admitted market first because prices are much lower due to the standardization of the risk, increased competition and the effects of regulation. However, if consumers or businesses are unable to find coverage in the admitted market, securing insurance with a nonadmitted E&S carrier is better than the alternative: self-insuring. E&S carriers have maximum flexibility in adjusting rates and underwriting guidelines since they do not have to file with regulators. This increased flexibility and appetite for specialized risks can prove essential for the growth of new markets.

  One of the best examples where E&S coverage was essential in spurring the growth of a new market is ride sharing. Companies such as Uber initially had to rely on E&S carrier James River Insurance to provide commercial coverage for its drivers when they were carrying a rider. Standard commercial auto carriers did not want to insure this exposure because it did not resemble a typical commercial fleet where employees were driving on behalf of the company. Standard personal lines auto carriers did not want to insure this exposure because the driving activity involved carrying passengers for a fee, well beyond a carpool to work and back home. To provide protection for its contractors who served as drivers, Uber turned to James River for coverage.[208] Over time, as Uber grew so did its business with James River, resulting in a 60% growth in its E&S net written premiums in 2017 compared to the prior year.[209]

  VENTURING OUT

  Traditionally, venture capital (VC) funding has been concentrated in the technology sector and fueled the well-known rise of the dot-com era in the 1990s. VC funding has remained a critical source of funding in the subsequent two decades, fueling the rise of many top names in the technology space. More recently, VC money has found its way from a wide variety of sources into the insurance market sector to fund the rise of a wide variety of insurtech startups.[210] Sources of funding for innovation include traditional tech venture capitalists and other private investors who have a long track record of investing in tech startups, some of which have now come to be dominant players in today’s economy. Other sources include corporate venture capital (CVC)[211] from reinsurers, who are looking for returns on capital from nontraditional investments. Some primary insurers have even gotten into the mix as well with several standing up venture arms to provide funding for promising startups since 2012.