If you work in the insurance and financial services, it’s a good time to explore your reach in the industry. In 2020, the question for insurers is: How can we get in the best position to ride the successes of the new industry dynamics?
PART 1: THE Industry as a Whole
The new reality is that this is now 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 and life insurer or a property and casualty insurer, an overwhelming amount of data is available today, emanating from diverse sources including:
- Wearables & sensors
- Smart meters, smart homes, smart grids
- Video monitoring & 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. During the 2018 natural disasters in the Southeastern US, startup Geomni provided claims support to 4 of the top 10 property and casualty insurers.
An even more omnipresent source of data is social media, with potentially unexpected consequences. 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.
Trend 2: The Rise of Direct-to-Consumer Distribution & Claims
With all these new data sources, and with always-on connectivity, it is obvious that insurance distribution is shifting heavily towards direct-to-consumer touch points. An omnichannel customer experience is a given. When human intermediaries, such as producers and service experts exist, they are interacting with a customer that is highly-informed by technology and the Internet.
Some health insurers use 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,
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 to buy. Smartphones make it possible for consumers to dynamically adjust their coverage.
Claims have 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 are making the process faster and more seamless than ever.
trend 3: Advanced Analytics in the Modern Age
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, 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 Port Townsend, Washington. Analytics can see the Airbnb demand patterns in Port Townsend and invite the owners to create an income stream from their investment in the gorgeous summers. 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. These advances compress the cycle time for a quote and dramatically improve predictive accuracy. The implication for insurers is: be more accurate, or you will literally pay the price through higher claims costs.
trend 4: New Demand Patterns and Risk Categories
New buying behaviors and risk categories are emerging, too. A recent Netflix documentary titled 'The Great Hack' shows how data is collected in the US and many of the changes can be traced back to the habits of the millennial consumer. They are delaying asset ownership, like homes for example, 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.
New risk categories are emerging, too, such as cyber insurance, identity insurance, and coverage for the cannabis industry.
Fresh competitive energy Is the Result
Turbulence always spawns adaptation, and the insurance market is no exception. Established competitors are exploring new directions. 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 of these new variants will stick. Natural selection will thin the herd, and only the most adaptive will survive.
PART 2: How to Adapt
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. Detailed and 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, established carriers 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.
The presumed deep pockets advantage of established carriers 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 U.S. 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 insurtech startup to get to product-market fit.
The 4 Initiatives to Future Proof Your Insurance Agency
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.
For starters, speak the language of your 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.
2. Business model exploration
Once your agency 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.
Today, the ability to build supply chains, demand chains, revenue models and control points is becoming as important as underwriting.
3. MVP design and test
There is a difference between a business model on paper and it's resulting product. 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 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.
4. Big-to-Small Collaboration
Established carriers 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.
In the face of all this emerging technology and data, the four trends above might sound a bit retro. Unfortunately, some traditional rules of innovation and entrepreneurship still apply.
Here’s what I mean:
- 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: Use real-time data and machine learning so I don’t have to wait or be interrupted, OK?
Customer expectations for real-time communication, convenience, and transparency are drastically re-shaping the insurance market. Applying the four trends above with the emerging technological realities is still the best way to future-proof your insurance venture. 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 so we're excited to see what 2020 brings!