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InsurTech: Threat or Salvation for Insurers?

img_0567InsurTech – defined as the use of technology innovations designed to squeeze out savings and efficiency from the current insurance industry model – is threatening to cause significant disruption within the existing insurance community. How serious is this for established insurers and brokers? And what are the alternatives?

Interest in InsurTech has increased dramatically over the last 6 months

And for good reason.

Until recently, the vast majority of insurance technology investments have focused on internal improvements for insurance providers – streamlining processes, reducing distribution costs, preventing fraud, increasing underwriting accuracy.

I have argued that these initiatives also improve the product and service for the end consumer. Think of this as Insurance Trickle Down.

But I don’t have an elevator speech that can respond to a consumer who asks, “So why are my premiums going up when I haven’t had a claim?”

The InsurTech community can respond because the savings and efficiencies extend to the consumer.

Lemonade – an InsurTech driven insurer which started offering renters and home insurance in New York – describes its offering in two simple lines (conveniently posted on the first page of their mobile friendly website):

Forget everything you know about insurance

Instant everything. Killer prices. Big heart.

Lemonade’s secret? A Peer-to-Peer insurance model combined with streamlined data gathering tools and powerful analytics for underwriting, marketing, and claims.

As I noted after attending the InsureTechConnect conference earlier this month, there is a growing mass of insurance professionals and technology experts that are joining the InsurTech community in bringing new, customer-centric applications to the market.

So what does this mean for established insurers?

According to Michael Tempany, director at consultancy SMS Management & Technology Asia, established insurers cannot replicate the Lemonade offering for three reasons:

  • “First, traditional insurers are crippled by legacy systems …
  • “Second, traditional insurers have global workforces that are personally invested in the industry status quo …
  • And third, Lemonade’s product offering has no place for intermediaries who insurers depend on for the majority of their income. As we know, once an insurer goes direct, intermediaries will switch insurance companies, meaning bye-bye revenue.”

While there are elements of truth in each point, I don’t buy any of them completely. I will take on the last two today and reserve the legacy systems’ discussion for a later post.

Reality check

Tempany provides for an exception:

The only solution for traditional insurers wanting to compete with Lemonade is to start from scratch. In short, they need to create a company or subsidiary unencumbered by legacy systems, workforce constraints and intermediaries.

I still don’t don’t buy it.

Economical Insurance – which ranked #9 for 2015 DWP results – surprised many in the industry by announcing a new subsidiary – Sonnet Insurance – which would serve the automobile and home insurance market as an on-line only direct writer.

It’s description?

Fast. Fair. Clear.

Straightforward auto and home insurance done completely online.

Sonnet is a scratch project, but the workforce came primarily from Economical. The structure is direct, and there has been some reaction from Brokers, but the CEO from Economical was welcomed as usual to the Ontario broker association CEO Panel last week.

This part is about evolution, not devolution nor revolution.

Brokers are realistic and many have factored in new relationships with insurers. Economical has been, and continues to be, a good market.

And brokers are open to new relationships

Late last year, Gore Mutual – a mid sized insurer which distributes exclusively through brokers – introduced a new product – uBiz – for home-based businesses. It recruited 8 brokers to represent the product locally.

It built a front end interface which can be marketed by the broker (branded by the broker) or generally, in which case the data are passed to the broker on a geographic basis.

We talked to Sean Christie, CIO for the Gore, who told us that this was intended to test the use of internal people and resources in supporting a broker-enabled digital offering.

Two out of three ain’t bad …

So, the insurers are showing capabilities on the digital / InsurTech front with existing workforces and brokers. We’ll look at the legacy systems issue next.

Meantime, I’d appreciate your thoughts. Are you seeing real innovation happening with existing insurers and brokers, or do you believe that real innovation must be built on new earth, from the ground up?

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