Industry Disruptors

The rise of disruptive technology in insurance BRAM J. SPECTOR

“May you live in interesting times.” Interesting times … We should all be so lucky, right? The real intent of the saying has a bit of ironic flair, as this expression is a play on the dichotomy of perceptions as to whether interesting times are exciting or disquieting. Ultimately, most common interpretations of this saying suggest that people prefer the predictability and order of uninteresting times.

Technology’s pervasive, fundamental impact on society is triggering interesting times—both exciting and disquieting. Consider Netflix, one of the most notable modern examples of disruptive technology: As an avid movie lover, the ability to have movies show up in my mailbox, or better yet, access movies and on-demand content using nothing more than my TV remote control, was liberating and delightful. Those who saw the changing tides in the movie rental business and invested in Netflix early were handsomely rewarded, and Netflix now enjoys a market capitalization of roughly $65 billion (as of July 10, 2017). On the other hand, at its peak in 2004, Blockbuster had approximately 60,000 employees, 9,000 stores worldwide and a market value of $5 billion.1 I can only imagine that those employees, franchise owners and stockholders found the rapid change and abrupt upending of Blockbuster’s business model to be far from delightful.

While Netflix has radically changed the retail movie rental and content streaming industry, some might argue that Amazon is an even better example of disruptive technology’s ability to reshape a landscape. Jeff Bezos’ choice of name (based on the Amazon River, the largest in the world) reflected his intention to make his foray into the e-commerce revolution the largest “store” in the world. Having strategically narrowed down potential products to market and sell online, Amazon began with a singular focus on selling books. It proceeded to reshape not only the retail bookstore landscape, leaving established global companies like Borders and countless independent bookstore operators in its wake, but it also went on to upend the book publishing industry through the introduction of the Kindle e-reader.

Amazon rapidly diversified its product lines and enjoyed explosive growth, as traditional brick-and-mortar retailers struggled to adapt. Retailer bankruptcies have mounted, and the impact has been so pervasive that some analysis suggests that as much as half of the retail space in the United States will go vacant within a decade.2 In the meantime, Amazon continues to diversify with adjacent innovations, such as its core e-commerce business spawning Amazon Web Services (a leading provider of on-demand cloud computing platforms); Amazon Music and Video, which eventually led to its development of original media content; and a significant foray into the connected home with its Amazon Echo line of smart speakers and voice-activated personal assistant service Alexa. It’s also transforming logistics as we know it, to keep pace with the exponential growth of the demand for distributing the goods it sells.3 And with the recent acquisition of Whole Foods, who knows what might be next.

Another powerful example of the potential for technology to fundamentally change a business model is the evolution of retail banking and payments. Many of us will recall the introduction of the automated teller machine (ATM); at the time, it was widely predicted that the ATM would bring the eventual demise of the bank teller. While bank tellers have survived, ATMs have augmented the teller’s role and provide a more efficient means to serve customers’ needs for routine tasks.

Fast-forward to today, and many of those same needs can be accomplished from the comfort of one’s couch using a smartphone and a well-designed banking app. Checks have given way to e-payments, and with the click of a few buttons, one can easily deposit funds, pay bills or transfer money. When it comes to paying in the checkout line, it is becoming increasingly unnecessary to even reach into one’s wallet to pull out a credit card, with the rise of mobile payment platforms like Android Pay, Apple Pay and Samsung Pay. The number of checks written in 2015 is less than half the number written 15 years prior,4 and cash has the potential to go the way of the check as credit card companies, such as Visa, have started pilot initiatives to incentivize and compensate merchants in a “journey to cashless” payments.5

What is InsurTech?

These advances in the financial services sector of retail banking and payments are some of the more visible examples of what can more broadly and somewhat ambiguously be categorized as FinTech, or Financial Technologies. For lack of a better definition, we can think of FinTech as: Technologies used and applied in the financial services sector, chiefly used by financial institutions themselves on the back end of their businesses. But more and more, FinTech is coming to represent technologies that are disrupting traditional financial services, including mobile payments, money transfers, loans, fundraising and asset management.6

FinTech includes both advances by traditional, established technology providers, as well as the emergence and entry of a wide array of startups that are looking to capitalize on this wave of change. FinTech is emerging and evolving not only as a response to concepts like crowdfunding (e.g., Kickstarter), mobile payments (e.g., Square), distributed ledgers (e.g., Blockchain) and the like, but also as a means to enable the increasingly high experience expectations that customers have in a world where companies like Amazon and Uber have set, and continue to raise, a high bar. Customers expect to buy products and services with a few clicks using an intuitive and simple user interface, and have instant gratification in executing the purchase. The impact of these types of customer expectations and the rapid evolution of technology are bound to permeate throughout all industries.

This brings us to the insurance industry. Many insurance companies, much like other established financial services institutions, have proud and successful legacies of serving policyholders and customers for a century or longer. Insurance companies, like virtually all companies, embraced the internet era and evolved and innovated to open new markets, channels and even new business models. We now stand at a pivotal juncture in time when some of the most significant advances in evolving the insurance business model are occurring. These advances fall into a broad category of new technologies referred to as InsurTech. InsurTech is poised to disrupt all forms of insurance, and it has the potential to impact most if not all aspects of the insurance business model.

To begin exploring InsurTech, let’s examine an example in three major categories of common insurance (in no particular order).

Health Insurance: Oscar

Upon visiting Oscar’s website, one is greeted by: Hi, we’re Oscar. Health insurance that’s easy. We created Oscar to give you: 1) Health plans that are easy to understand. 2) Reinvented customer service. 3) Health care that actually feels good to use.7

Imagine if technology veterans from Silicon Valley built a health plan from the ground up, unencumbered by decades of legacy technology. That is essentially what Oscar sought to do when it launched in 2014, funded by well-known venture capitalists and founded by executives from the likes of Microsoft and Google. It was built from the ground up, with the intent of creating simple health care plans that are easy to understand, bills that are easy to access and read, and a simple website and mobile app that make it easy to access information and services—thus greatly improving the experience of interacting with the health care system.

Behind the scenes, Oscar is working to unlock the power of the data it is quickly accumulating, and it is applying cutting-edge data science to “optimize” the provider network its customers access. The objective is not to offer a smaller network, but a smarter network.8 Oscar, like other health plans, seeks to pivot to an environment where data can inform health care consumers about which providers deliver high-quality medical care at the best value.

Life Insurance: PolicyGenius

With a flair for superlatives (as in its name), PolicyGenius’s website bills itself as: The easiest way to find affordable term life insurance online. Experts if you need them. Technology for everything else.9

The founders of PolicyGenius set out with the goal of bringing the insurance-buying process—from education to shopping to application—to the modern internet-savvy consumer. This ambition was based on the premise that the same simplicity that TurboTax software brought to personal taxes could be achieved in the complex process of picking and purchasing life insurance.10

While the age-old adage—that insurance is sold, not bought—still applies, PolicyGenius seeks to provide an alternative to the traditional face-to-face insurance agent sales process and deliver an intuitive and easy-to-understand online application process. It offers users not only education on insurance, but, when necessary, it provides decision support in the form of robo-advice on what insurance needs the specific user may have and how best to fulfill those needs, making the site much more than a price-comparison tool.

Some research shows that the average age of life insurance agents is 59 years old, suggesting a retirement cliff may be imminent. PolicyGenius is not only a response to the changing shopping and experience expectations of consumers, but it is also positioning itself to capture a growing share of insurance distribution as the supply of agents changes.

Property Insurance: Lemonade and Trov

Through 2016, the property and casualty (P&C) insurance sector has received the most attention from the InsurTech investment and startup space. With so many interesting examples of innovation, it was hard to pick just one to examine. So first up, Lemonade: Forget Everything You Know About Insurance. Instant everything. Killer prices. Big heart.11

Lemonade provides renters and homeowners insurance for urban dwellers and uses its artificial intelligence bot to help guide users through the choices necessary to select the right insurance. Its website suggests that it takes as little as 90 seconds to get insured, and as little as three minutes to file and get a claim paid.

Lemonade is not only seeking to appeal to the growing insurance customer base of millennials through a simple user experience, it is also seeking to differentiate itself as being rooted in the principle of social impact. Lemonade aspires to change the insurance paradigm and remove what it believes is an inherent conflict of interest between the insurance company and the policyholder: that every dollar paid out to a policyholder in claims is one less dollar of profit to the company. This conflict leads to mistrust and misalignment of incentives. To circumvent this conflict, Lemonade established itself as peer-to-peer insurance. It only keeps a fixed percentage of premiums to cover expenses and profit, and all remaining “unclaimed money” is given to a cause (e.g., nonprofit charity) of the policyholder’s choice. Based on its behavioral economics research, this results in a relationship founded on trust and eliminates claimant fraud, allowing the insurer to pay claims more quickly and minimize claims leakage. It also minimizes the time and effort necessary to review claims, which in turn drives down operational needs. Both of these factors help drive down costs and lower premiums, to the ultimate benefit of policyholders.

Trov, a company also focused on reimaging property insurance, is taking a different approach: On-Demand Insurance For The Things You Love: Protect just the things you want—exactly when you want—entirely from your phone.12

Trov is the insurance industry’s answer to the rapidly growing on-demand economy (e.g., Uber, Airbnb, Instacart). Trov’s mission is to simplify the insurance process and enable its customers to insure only the items they want and only at the times they want. This maximizes protection for when it is needed most, and it minimizes premiums by eliminating the need to pay for times when the property is not at risk.

Trov’s CEO sees his company unbundling coverage for single items as similar
to the way Apple unbundled music albums with iTunes.13 Trov enables its unique form of insurance using a mobile app, which allows the user to turn on or off protection from accidental damage, loss and theft simply by “swiping” left or right. The claims process is completed via text messaging, and it is designed to be entirely mobile.

What Does It All Mean?

These case studies represent just a small slice of the startups, disruptors and InsurTech firms looking to shake up the insurance industry. In fact, while these case studies generally represent some of the larger InsurTech firms—and three of the four cases are insurance companies—in most cases, InsurTech firms are more singularly focused on solving or improving one critical aspect of the insurance business model, like in the case of PolicyGenius. There are InsurTech startups, big and small, looking to solve fundamental problems or improve the experience in virtually all aspects of the insurance business model. While keeping count of the number of InsurTech firms is virtually impossible, by all accounts the number in the United States alone is in the hundreds. With total investments in InsurTech exceeding $2 billion in both 2015 and 2016, and with funding increasingly coming from the corporate venture capital arms of established insurance companies, it looks as if InsurTech is here to stay.14

While the pace of change has been, and certainly will continue to be, a topic of great debate, it is difficult to argue against the fact that change is in the air. There is no question that the Amazons and Netflixes of the world took years to establish dominance, but those who early on dismissed these examples of disruptive change certainly did so to their own detriment, if not demise. Which brings us to the last question …

What Should I Do?

Presuming that you, the reader, work in a traditional insurance setting, one option might be for you to pack up, move to Silicon Valley, buy a hoodie, take a crash course in coding and stake your claim by putting into action whatever brilliant ideas you may have on how to improve, disrupt or radically reshape the insurance business model. If that is your ambition, I’m impressed. But the remainder of this article won’t be of much help. Assuming what I just described is not your desire, but you are interested in exploring the world of InsurTech, then there are a few other steps you could consider.

  1. Start tracking the InsurTech space. I started casually monitoring news, investments and select firms in the InsurTech space in early 2015 when a client introduced me to this space. I was inspired quickly by the relentless focus on problem-solving, the commitment to improving and changing the way things are done, the risk taking juxtaposed with the recognition that failure is OK (as long as one fails small, fails early and learns from these failures), the nimble nature of startups (with timelines measured in days or weeks, not months or years) and more. I started viewing InsurTech firms as point solutions to critical problems in the insurance value chain, and my colleagues and I started compiling the various use cases that InsurTech firms were working to solve. As you track the space, you will undoubtedly be inspired in unique ways, and you might take what you learn and find ways to put that into action in your day job.
  2. Consider how the principles that InsurTech startups are using to differentiate themselves might be applied to your company and your slice of the insurance world. Customer experience is critical, and it’s easy to point to this as the first place to focus. However, focusing on this alone would be missing the bigger picture of InsurTech, which often involves bringing together numerous principles. Maybe how telematics is changing auto insurance is of interest to you, and you want to brainstorm ways the Internet of Things and sensors can be applied to other forms of insurance. Perhaps you have creative ideas on how robo-advice can be used to simplify the benefits enrollment process. Or maybe you’ve solved all the underwriting and claims problems that exist in your company, and you want to think about some of the other business problems that analytics-focused InsurTech firms are working on. The possibilities are endless.
  3. Get excited, take a risk and plot an experiment. InsurTech firms frequently talk about “pilots” and “proofs of concept.” Unlike traditional “projects,” the idea is to start small, prove an idea works, demonstrate value quickly and build momentum. The cost and timeline is small; if the idea doesn’t pan out, it’s no big loss. If the idea proves worthwhile, it can be subsequently tested on a larger scale, or implemented in a small-scale live rollout to continue the testing and refine the concept. This approach isn’t meant to circumvent the traditional and rigorous project governance or software development lifecycle that may exist and apply within an organization, but it is simply meant to be a way to incubate ideas quickly and efficiently before rolling them out through formal processes.

But most important, be open to change! Netflix and Amazon both have continued to change as technology in the world around us continues to evolve.

These are my impressions, observations and recommendations. If you agree, disagree or want to discuss, please drop me a line or find me on social media.

Bram J. Spector, FSA, MAAA, is a managing director in Deloitte Consulting LLP’s Actuarial, Rewards & Analytics practice.