At the end of the day, insurance is all about risk. Whatever keeps people safest leads to the lowest claims — and the happiest people. Insurance technology is getting very popular among founders and investors, yet, as a category, is little understood.
Insurance is one of the most difficult businesses to start, because, well, the regulators don’t actually want new players in the market. The reason for this is risk — insurance is all about having a strong system and balance sheet to manage risk. However, as a result of its difficulty, insurance is now behind the times in terms of technology. This leads to a perfect storm to disrupt the industry.
“We see this coming wave in the $1 billion-plus invested in the sector in the first half of 2016, and we see it in the buzz around industry conferences like InsureTech Connect, which is expecting 1,000 executives,” says Caribou Honig, partner at QED investors and co-founder of InsureTech Connect (disclosure: the other co-founder of InsureTech Connect previously invested in one of my portfolio companies).
Insurance is about risk, and the industry moves slowly to play it safe. Oftentimes product development cycles can be 3-5 years. That’s 3-5 years. In startup world, that’s an eternity and back. Meanwhile, there is $1.2 trillion in insurance premium written every year in the U.S. Premium is the industry term for revenue. That’s a lot of revenue. Typically, it takes more than a year to launch any kind of new technology, and takes 3-5 years of data to train underwriting models. Meanwhile, more data is available now than ever before — and it’s available in real time. This lag of product development represents the opportunity for startups!
Insurance is a game of odds, a bet based on statistical models.
The key to unlocking the insurance industry is understanding behavioral economics. Behavioral economics is the study of behavior and how it impacts purchasing. Insurance is a negative expense. If you get your money’s worth, that means shit happened, and if you don’t get your money’s worth, you feel cheated. Lose-lose, right? Not quite.
Given the size of the market you clearly can create a win-win situation. For example, in auto insurance, even out of those who shop for carriers, more than 71 percent of people stayed with their carrier in 2015.
“The best analogy to the insurance industry is Blockbuster versus Netflix,” says Jerry Gupta, co-founder and CEO of BumbleBee. “While the insurance industry is preoccupied with making the widget more efficient, startups are talking to customers and changing the basic structure of insurance. They are radically transforming product, distribution, and technology in a manner that we have not seen in the last 100 years.” Jerry was previously director of innovation at Liberty Mutual and launched BumbleBee to transform rideshare auto insurance (disclosure: BumbleBee is a portfolio company and I am chairman).
Meanwhile, there are a number of forces disrupting insurance, including the shared economy, on-demand services, big data, IoT and technology overall. So what will it take to make an insurance technology company successful? There are two schools of thought: build your own insurance company or be a service provider. We’ll explore building an insurance company in this article.
Insurance is a game of odds, a bet based on statistical models. So how can you use technology to increase your odds and make your bet pay off in the market?
Rounding the edges
The most successful players in insurance tech will win by rounding the edges on existing products. Don’t reinvent the wheel, take what works and make it work for today. That means making policies be more transparent, providing better user experiences and aligning incentives to adapt to the world in which we live.
Many of these policies were designed 100 years ago, before modern technologies and the complexities of a digitally connected, shared world. Design a policy in a way that simplifies the coverage, eliminates exclusions and makes it easy for people to articulate the benefits. Like rounding the edges on a sharp corner, it’s simple to do and makes it less likely for people to get hurt.
Design a policy in a way that simplifies the coverage, eliminates exclusions and makes it easy for people to articulate the benefits.
“Currently, the burden is on the insurance industry to adapt to consumers’ changing needs for increased transparency,” according to Farron Blanc, VP, Innovation Studio Lead at RGAx, one of the largest life insurance companies. “Insurance must similarly adapt; whether that is improved transparency in how an underwriter verifies applicant disclosures or the shape and timing of commission payments for advice. Insurance must adapt in order to advance its honorable purpose and change lives for the better.”
Transparent policies. Insurance is notoriously complicated and opaque. The policies tend to be written by lawyers and bought by regular consumers. That doesn’t seem fair, does it? Well, you can disrupt insurance by providing clear and transparent policies to customers.
Put in plain English what you are covering and what you aren’t covering. Eliminate exclusions and address the nuances that happen today. If you are a homeowner’s insurer, you should allow for limited use of Airbnb. If you are an auto insurer, you should be allowing for limited use of driving for Uber. If someone is going to make it a full-time job, then it veers into the commercial space — but give people room to dabble with their lives. Make sure your policies are easy to understand and actually cover the issues your customers face. This will lead to people spreading your policies by word of mouth.
User experience design. Design the user experience in such a way to be as easy as possible. Most insurance is still sold through brokers. However, a broker adds an expensive layer, and that money comes out of the customer’s pocket. Allow users to sign up directly with you. Have a mobile application to allow sign up and to process claims. If there is a claim, hop on a video chat with your customer and diagnose the situation. Allow customers to communicate via whichever channel they desire: mobile, SMS or chatbot. Then, once a claim is processed, notify them through the same channel where they contacted you. This will lead to very high customer satisfaction.
Meanwhile, incentivize users to collect as much data as possible. Mobile devices and IoT enable a host of ways to collect more data, learn about your customers and further align incentives based on actual real-time behavior. Start training your customers early and eventually it’ll pay off when you learn how to segment them based on their own behaviors.
Aligning incentives. Being able to use your coverage when you need it is the hallmark of insurance. However, insurance is not designed to cover every scratch on your car and every cough you get. Insurance originally was designed for catastrophes — big expenses. For example, Lloyd’s of London would cover you if your ship was stolen by pirates.
The small expenses cost the same to process as the big ones. Aligning incentives so the user is incentivized to handle small issues themselves, with zero handling cost, and using their insurance for the big expenses, saves insurance companies a lot of money. This can allow you, as the insurer, to pass on savings to your customers.
Insurance represents one of the largest opportunities for disruption. The key to being a successful entrepreneur in insurance is to provide clear policies to customers, make it easy to buy, make it easier to use and align incentives to save people money and cover their asses when they really need it.