The insurance industry has been ripe for disruption for years and yet a quick walk around Leadenhall market where brokers bustle about with paper files under their arms reveals nothing has changed in decades.
Why is this?
From one perspective it’s very simple to answer: every player in the insurance market has been enjoying 10-20% net margins for over a century, so why would they want that to change? Lloyds of London tried bringing into their organisation technology innovation with Kinnect in 2002 but after £70m investment and 5 years, it was shut down. Hence, until the rise of fintech, insurance companies felt very comfortable with business ‘as usual’, since the Kinnect episode had made it very clear that no one was prepared to change how things were done. However, things have begun to change. Over the past few years, the insurance sector has seen more innovative tech-led businesses. However, a great proportion of these are making the existing industry more efficient rather than disrupting the incumbents. Why is that? Are people happy with the status quo?
Why is disruption needed?
The most revealing survey was the Edelman global survey in 2013, which showed that 47% of adults trusted insurance versus 52% for banks, pretty shocking given that the banks are blamed for the financial crisis. This lack of trust is arguably driven from the general feeling that insurance is too expensive and when you claim, the insurers, through small print and painful claim processes, find ways to avoid paying out. Hence, until these two issues are addressed, entrepreneurs are only serving an industry which focuses on selling their (insurance) products rather than providing consumers with what they need. With insurance companies recently expressing their desire to change and embrace technology, one could wonder whether they have recognised this and are actually addressing the issue. However, the customer experience remains poor – the FCA report on mobile phone insurance in December 2015 revealed that a third of firms investigated paid out less than 60% of claims – and insurers are focusing on ‘big data’ analytics which arguably is not in the general public’s interest. Indeed “big data” is used to price individual risks at granular level. While this means that in the short term, it provides insurers a pricing advantage over their competitors, over time, if we take this to its natural conclusion, we will end up paying for our own exact risk. Notwithstanding, we would lose the bene t of pooling the risk – which is whole point of insurance – if insurance becomes payment for our exact risk, then it is a payment plan. Who would pay for a payment plan, where the majority of your money supports the industry rather than our risk? So, I would argue, serious disruption is required.
Why have there been few disruptors?
Because it’s hard! Insurance is an opaque, regulated market, where industry players only do business with people they know. Moreover, getting funding is not easy within the insurance space.
I spent over a decade investigating industries across sectors. When I started looking into the insurance sector, I found it one of the most convoluted and complex sectors to understand. There is little public data available and the industry has its own language, processes and accounting formats. It is as if everything was done to make it harder to understand what is going on for people on the outside. This therefore makes it extremely challenging for non-industry people to create disruption.
Insurance regulation is even tougher than banks. In the lending market, there was a regulatory loophole with simple loans (i.e. not asset-backed) which were not regulated as parent-child loans existed before the banks did. This loophole led to the emergence of peer-to-peer lending platforms, as an alternative to bank loans. In insurance, there was no such thing as ‘simple insurance’ before Edward Lloyds coffee shop in 1680s, so every insurance product sold in the UK is regulated. While it is required (as it protects the consumers), this regulation is such that if one tries to save money bypassing segments of the traditional value chain, the costs are such that they ‘kill’ the economics. So entrepreneurs have to work with the industry unless they recreate the whole value chain.
c) Connections and siloes
The insurance industry is like an old boys club. People do business with people they know and trust, so newcomers have great difficulty in engaging existing players to work with them. It is also an industry of silos where individuals find their specialism (underwriting, broking, claim handling, etc.) and tend to stay there for their entire careers. This lack of mobility makes it harder for people to understand the whole value chain and therefore figuring out how to disrupt the industry.
As a result of the above, it is really difficult for new entrants to create something entirely new, unless they have a LOT of capital behind them to build the whole value chain from scratch. However, and understandably, investors have become more attuned to Minimal Viable Product (MVP)-based lean startups. Sadly, in insurance, if a founder decided to launch an MVP without regulatory approvals, not only it is costly and time consuming – they risk jail. Moreover, the EIS/SEIS tax break rules in the UK are not applicable to balance sheet type businesses, thus further reducing the appetite for investors to back new insurance businesses.
Hence, most entrepreneurs in the insurance space have been focused on using technology to serve the incumbent players. This allows them to operate as non-regulated, B2B businesses serving a market that desperately needs innovation and doesn’t require them to take on the regulatory or capital burdens of insurance.
We often turn to America for technology-led innovation. American entrepreneurs have been lording the ‘disruption’ of insurance through their new comparison websites, such as Coverhound, which reduces the cost of insurance. The UK has had price comparison websites for nearly 20 years and we now know – as reported by the FCA in July 2014 report – that they do not address the consumers’ needs. Indeed, similar to Google rankings, insurers need to be in the top five. To do so, the insurers have to change (or rather ‘reduce’) their product quality to make their economics work – so customers buying the cheaper products may have a nasty surprise when they claim.
As with many industries, Internet of Things (IoT), Blockchain and Artificial Intelligence (AI) are powerful tools to improve the consumer experience. EverLedger.io appears to be leading the way for blockchain in diamond insurance which could really benefit the customer’s claim experience.
Meanwhile, so far, it appears that AI or IoT have mostly been applied to serve the insurers with some marginal benefits for consumers. AI is being used to help detect fraud and provide insurers with cheaper distribution model with robot-advisors. IoT has been applied to the service of the insurance companies’ “big data” drive: fit bits in health insurance (eg VitalityHealth) and telematics to car insurance (too many adopters in the UK to mention). These applications leave the “good risk” with slightly cheaper insurance and the “bad risk” with unaffordable insurance. I trust that entrepreneurs will soon develop applications of these great technological advances to serve the customer rather than the insurers. In my view, there have been two real innovations that address insurance from the consumer’s needs perspective, rather than the insurance company’s.
These innovations have been driven by the rethinking of the insurance product and rethinking of the insurance model:
1) Rethinking the insurance product
I believe people want the peace of mind that if something unforeseen happens to them, their possessions or their loved ones, they are covered. Who really wants an insurance product for every item they possess (household, car, bike, etc)? Few because it is too much work to identify and take out the appropriate policy for each item. While some are making forays in the one life, one policy concept, there has been interesting rethinking of the duration of the insurance cover, such as Cuvva’s pay as you go model.
2) Rethinking the insurance model
The real innovation in insurance has been in the peer-to-peer models. The theory behind these is that peer-to-peer reduces the moral hazard of insurance and therefore reduces the cost of insurance. As long as the savings are passed back to consumers, the consumer needs are finally addressed.
Friendsurance was the first peer-to-peer player with a model where the excess was mutualised. While the savings offered to their customers vary from 10-40% when nobody claims, they leave the customer’s claim experience to the traditional insurance companies. Guevara then came along with a more integrated online mutual model (mutual is how consumer insurance started in 17th century), which offers up to 50% savings when nobody claims.
In the coming weeks, we are launching so-sure, which takes peer-to-peer insurance to a new level, with our ‘Social Insurance’ model. Focused on addressing customers’ needs, Social Insurance ensures that customers have a great experience from purchase to claim. Moreover customers can get up to 80% money back, every year, if they and their friends don’t claim. Created to serve its customers rather than insurers, we are starting with mobile phones, as these are expensive devices, which we would struggle to live without.
In the UK, we are fortunate to have the most advanced insurance value chain and distribution channel system in the world. We also have some of the world’s best creative and technological talent. We are therefore in an ideal place to test truly disruptive models and these are desperately needed. While I remain confident that new insurance models will emerge using innovative technologies, I sincerely hope that the entrepreneurs will have the courage and persistence to focus on serving the consumers’ needs, rather than those of the insurers. It’s not easy, but nobody said it would be.