The digital revolution in insurance is about to begin its second act.
Having in its first phase used science and technology to inspire a rethinking of insurance that is making insurance easier and more efficient to buy and sell, and improving customer experiences especially around claims, InsurTech is poised for a dramatic sequel that will build on the first act theme that challenges present opportunities.
Products will have a starring role in the second act. Advanced technology and data will be used to design simpler products that better serve people’s real needs, according to experts at the third annual InsureTech Connect Conference in Las Vegas. The tools and data will also be used to more precisely assess and price risk.
The second installment will feature key roles for both incumbents and startups, along with cameo appearances by some new business models.
Seeing the Core
What has happened thus far in the first act is “just the tip of the iceberg,” according to Daniel Schreiber, founder and CEO of the pioneering InsurTech insurer Lemonade.
The second act, which Schreiber calls “Deep Seeing,” will revolutionize core insurance products and pricing. He said the second act will have a profound impact as it deploys artificial intelligence (AI) and machine learning along with predictive modeling and nontraditional data sets.
“The next insurance leaders will use bots, not brokers, and AI, not actuaries,” he proclaimed to the audience at the ITC.
According to Schreiber, the core product of insurance is essentially an algorithm and thus, unlike most consumer products, is susceptible to being reconfigured by new data practices. “Insurance is about using statistics to price risk, which is why data, properly collected and used, will transform the core of the product,” he said.
At the same time, “Insurance is about insuring people, not property,” he added. Advances in data science, access to hundreds of nontraditional data sources, and the application of AI and machine learning will make very precise underwriting possible—even down to the individual risk. Risks that are now seen as looking alike and part of a monolithic group will be assessed very differently.
“The breadcrumbs left behind by digital interactions are highly predictable,” he said.
Others at the InsureTech Connect Conference were in sync with the idea that a second wave of digital transformation is coming.
Caribou Honig, co-founder of the conference and of the venture capital firm QED Investors, sees different business models entering the fray, including ones that offer a product such as a will or, perhaps in the future, a genetic test, for free as a way of getting to the insurance sale. He also sees non-insurance firms entering.
“You should also keep an eye on the new companies coming to insurance. Not the InsurTechs, not the longstanding ones, but others who bring capabilities and are starting to eye the insurance vector,” Honig told attendees. “Now many of them, you want to be in your supply chain. They want to be helping you succeed, and indeed many of those will be content in simply being part of your supply chain. But some fraction of them will want you to be in their supply chain. Pay special attention to those because that’s where the action is really going to happen.”
Honig’s vision must have been influenced by Ken Lin, founder and CEO of the 80 million-member digital consumer service Credit Karma. For Lin, the first digital act in consumer finance has been great at collecting data but has essentially failed to help people solve their financial problems. Too many people are still living paycheck to paycheck, fail to save money, and are “depressed” and “ashamed” about their financial situations.
Credit Karma has just added auto insurance into its model. Its new service provides from 10 to 30 auto insurance quotes with little or no data entry. “It’s really simple,” he says. At this point, Credit Karma is not charging or getting paid for this service.
Lin plans to be a player in the digital revolution’s second act in financial services in part because he thinks that the first act has failed consumers. “We can do things faster, and we can pay with more payment methods, we can take applications online,” said Lin. “We’ve made streamlining and underwriting easier. We’ve done a lot of amazing things in capturing data.”
However, there is one big gap. “We’ve done a lot of amazing things in this space, but I would say that we actually haven’t done one thing, which is really solve the consumer problem,” he said. In his view, InsurTech must now be a consumer advocate.
Daniel Glaser, CEO of insurance broker and risk consulting giant Marsh McLennan, also has a view on the next phase of InsurTech. But his view includes brokers. He swatted down the Lemonade leader’s notion that bots will replace brokers. “That’s just nonsense,” he declared. “I’m on the other side of that bet.”
Glaser said the industry has been consolidating for a century but there are still plenty of intermediaries because the barriers to entry are low.
Glaser agreed that “digitization changes everything” and that the industry will have to embrace AI and machine learning. But he does not see these technologies becoming a differentiator in the long run. He predicts companies will at first go about creating proprietary AI and machine learning applications but that those will not be sustainable any more than proprietary customer relations management systems were.
“No one will have proprietary capability,” he predicted. “People will buy AI.”
Glaser said the industry will likely pivot from emphasizing product and protection to instead emphasizing a better client experience and how insurance enables people and businesses.
He said incumbents like MMC and others spend too much on running their operations and not enough on modernizing them. Yet they do have to find a way to do both. “We have to be able to deliver the future and the third quarter,” he quipped.
According to Glaser, who has been at each of the three InsureTech Connect meetings thus far, MMC has changed its view of technology. “Technology used to be viewed as a cost…” but “now it’s a strategy, a competitive advantage.”
Turned on Its Head
Lloyd’s CEO Inga Beale recently started buying landlord insurance on her smartphone while on her way to a manicure appointment and then resumed and finished the transaction after her appointment. She found the experience quick and enjoyable. That is, until the exclusions started to fill up her screen.
“We have created an ‘insurance monster,'” Beale said, referring to the multiple pages of policy endorsements and exclusions that accompany many policies.
She thinks the next phase of digital will have to focus on making products that are simpler and that make sense to today’s consumers. “We need to turn it on its head,” so that the industry is offering certainty, not uncertainty, she said.
Technology alone will not shape the next phase, according to Rick Chavez of Oliver Wyman. It will instead be shaped by a collision of mega-trends including the linking together of different technologies, changes in consumer behavior, regulatory policies and others.
Chavez said the first phase of digital disruption has seen a “shift of the balance of the power to people, the shift in power at the end of the command chain.”
This shift has presented a bit of a problem “because for many decades we’ve been taught the things about industries, things about our companies, and things about our products. We start with our products, not with the problems,” he said.
Now InsurTech has given people more of a voice. They vote with their wallets and with their attention. But attention is finite; it’s only 365 days a year, 24 hours a day. “The dominant forces that are grabbing that attention have the ability to lock themselves in to grab more,” he observed.
Chavez suggested there are lessons for insurance from other industries including retail where Amazon is now more valuable than Walmart; hospitality, where Airbnb is challenging Marriott; and banking, where PayPal has eaten into Bank of America. He also pointed to the energy industry where suppliers are using data to help customers manage their consumption.
Shareholder value vs. customer value is a metric to watch. According to the Oliver Wyman consultant, any CEO has to ask: “Where do I have great reliance in my shareholder obligation to products in business that are not generating value to the customer?” He stressed that this must be answered honestly and dispassionately from the view of the customer. It’s not what the company thinks they want, but what their genuine views are.
Chavez believes that while there is danger in disruption, there is also opportunity in terms of underserved markets, especially for insurers that establish trust. People are thinking about their “whole financial security in their workaday lives” and they are “having these conversations with their spouses and loved ones on weekends,” according to Chavez.
Important life events— saving for college, buying a new home, thinking about retirement —create moments of need that are highly underserved, and that are great opportunities to create disruptive offers, Chavez said.
“It’s not just InsurTech – it can be insurance companies just having the will to see it and to move in its direction,” he said.
Trust in Bots
Lemonade’s Schreiber praised insurance as a unique and valuable “social good” but criticized the current structure for having various conflicts of interest and bad incentives—for one, carriers are rewarded if they keep claims payments low— that undermine consumer trust in insurance.
He said Lemonade is trying to address the trust gap by incorporating a third party — charities — into the equation. Customers know that any amount of the premium they pay that the insurer does not need for operations or claims goes to their favorite charity.
Schreiber said technology is being used to both “collapse costs” and “delight consumers.” As an example, he pointed to his firm Lemonade’s use of bots to sell coverage and manage claims, resulting in the company having about 2,500 customers per human versus much lower numbers for traditional carriers: State Farm (500), Geico (400), Allstate (246) and Farmers (143).
Challenging calls that humans are needed for the best customer service, he claimed that bots actually improve customer satisfaction and shared a comment by one customer who told a reviewer that Lemonade’s chat bot had more personality than her traditional carrier’s customer service human.
According to the outspoken InsurTech CEO, insurance is not like other products in this digital age. Spotify has revolutionized how consumers buy music but the songs being sold are themselves the same as the artists originally performed them. Amazon has revolutionized retail sales but the toaster it sells is the same one that Macy’s sells.
Technology and data, however, will change the insurance product because at its core, insurance is data.
A digital insurance business is profoundly different from incumbent carriers, according to Schreiber. As a result, legacy insurers will have trouble in the digital age. Traditional and digital players “will not converge, they will diverge,” he predicted.
He dismissed those who criticize or question the sustainability of Lemonade’s own operation because of its initial high loss ratios. He said the critics are missing the point.
“The changes coming are bigger than one company,” he said.
*This story ran previously in our sister publication Insurance Journal.