How insurtechs can inspire the insurance ecosystem

Insurtechs: the threat that inspires

A joke making the rounds among insurtechs is that the optimal insurance company has three employees: a computer, an actuary and a dog. The computer runs the insurance company, the actuary feeds the dog, and the dog bites the actuary if he (or she) tries to touch the computer.

We keep reading so much about disruption of insurance services. Insurtech funding reached a total of $2.3 billion in 2017, a 36% increase over 2016, according to a Willis Towers Watson report. Some 83% of insurtech ventures have an insurer or reinsurer as an investor. However with very few exceptions insurance has proved to be quite resilient to disruptors even with the best efforts of the Venture Capitalists, so far.

From the point of view of well established insurance companies, the grass does look awfully green when one looks at emerging insurtechs that boast of seamless operations, no expectation of delivering consistent quarterly profits, low head count, intermediary-less operations, totally scalable operations and never ending projected annual premium growth rates. How is one ever going to compete?

The good news for long standing insurers is that insurtechs usually attract new customers who have never purchased these services. To date no traditional insurer has seen a stampede of their clientele into the arms of an insurtech and most importantly financial analysts have not downgraded the stocks of the quoted traditional insurers in the face of the risk of disruption.

There exists a huge opportunity for existing insurers to learn from the successes and errors (oh yeah, there will be a lot of these) from the entrepreneurs who have embraced this brave new world. The intention of this article is to highlight some high tech, low tech and no tech ideas. It`s not supposed to be an all-inclusive list, and I`m not going to deal with every type of insurance company. But certain innovations have certainly caught my attention both because of their simplicity and the fact that their ideas seem to have lots of upside and limited downside. The insurance value chain is literally made up of hundreds of dynamic moving parts, this article looks some successful case studies for those macro-aspects of the value chain that relate to:

· Marketing, Leads Generations and Sales

· Underwriting & Risk

· Customer Service

· Claims Management

· Customer Retention

1. Marketing, Leads Generations and Sales

First the bad news regarding marketing. Insurers have been too lethargic in their comfort zone feeling protected by the unassailable moat that is their century old brand. Counting on customer loyalty to name brands is no longer realistic in a world where some of the most valuable tech-driven companies have come on the scene and dominated their respective industries virtually overnight. Traditional companies can be blind-sided by an upstart in the blink of an eye. Marketing needs to pay more attention to the competition and client complaints (which you must treat as free consultancy).

Let`s look at how we traditionally gain new business for Individual Life Sales. Insurance companies who have career force agents usually expect agents to both find their clients and pitch/close a sale. Hunting and gathering are two very different skill sets that very few agents can master simultaneously. Most career forces have a distribution of agents that usually include only a small percentage (less than 10%) of the elite salespersons; the million dollar round table (MDRT) qualifiers`. Being a member of the MDRT is considered to be a `badge of prestige`. Come how no one seem to rail again the fact that 10% is a really low number. This must mean that there is a chronic and persistent unhealthy imbalance between the have and have-nots which results in a largely unhappy and unproductive sales force.

Companies like Contactability seek to address this imbalance by specializing in hunting, leaving the sales pitch to agents. Contactability.com is a company that specializes in lead generation. The business proposition is simple. They aim to locate high intent insurance customers. The consumer information is then screened and verified. Pre-qualified prospects are delivered to the agency ready for a quote.

Contactability.com trawls the internet looking for clients with a high propensity to buy, but that does not mean that your lead generation strategy has to be limited to on-line customers. Even if your sales approach does not make use of `career force agents`, the principle of `divide and conquer` appears to be beneficial to all types of distribution channels.

2. Underwriting & Risk: No data no price..

Spotify, Uber and AirBnB own relatively low fixed assets, what they do have is great data. Data is the building block of Underwriting and Risk Selection. The truth of the matter is that Insurers no longer have a monopoly on data. Insurers are now in direct competition with newcomers in the race to develop advanced analytics and predictive models to make sense of all the new data, particularly for emerging risk exposures.

The future of Underwriting may include the risk selection criteria from diverse sources. There could be insurance products that are tailored to each of these segments and/or combinations of these risk classes; here are some possible future underwriting classifications

1) Business as usual. Traditional personal application questionnaires that may be complimented with medical evidence,

2) Financial Credit Scoring — early studies have shown that the difference in mortality between the highest and lowest financial credit scores can be much as 5 times. This can lead to guaranteed insurance offers to the highest credit scorers with simplified and/or full underwriting for lower credit scores.

3) The use of wearables. Your health-conscious author is continuously monitored by Garmin vivofit 2, Apple Watch version 2, Garmin forerunner 735XT watch and the iphone health app. The permission of users` data to an insurer may lead to life policy that offers varying life insurance rates. Kudos must be given to Discovery which already offers points and rewards to health insurance clients for exercise, health checks, eating healthy and good health indicators. Points may be gained via a wearable device that tracks average heart rate and duration of exercise activity.

4) Public information that can be obtained directly from social media sites like Facebook, Twitter, Instagram, LinkedIn, Spotify, Pinterest, Strava etc..

5) Genetic testing (e.g. leveraging services of budget DNA saliva tests offered by 23andme)

The main issue is actuarial pricing. There is a lot of truth in the joke that an insurance company is like driving a car. The CEO is behind the steering wheel, head of sales has his foot on the accelerator, the CFO has her foot on the brakes whilst the Actuary is looking through the rear windscreen shouting directions.

· Presently the Pricing Actuary is only really comfortable with Business as usual (1).. yes we are in our comfort zone when we are presented with a traditional health questionnaire with blood and urine analyses; since we have really great historical data. This traditional analysis will still lead to the best premium rates even for high sums insureds with some impairments.

· A recent and real innovation is the use of Financial Scoring (2). A major study backed up with a detailed cohort study of 18 million lives over a 12 year period that allows actuaries to price/accept the top 20% credit scorers without losing sleep at night.

· Wearables (3) and public information (4) require a leap of faith and that usually leads to a combination of lots of declines, limited benefits and high margins. Without a lot of historical data, actuaries tend to become staunch agnostics.

· Genetic tests (5) provide information regarding disease risk and susceptibility,drug senstitivity and ancestry and paternity; however they presently lack predictive power for insurers; with the exception of detection of monogenic diseases such as Huntington’s disease. The predictive powers of genetics are currently low especially regarding polygenic diseases which depend on the simultaneous presence of several genes. Examples of polygenic conditions include hypertension, coronary heart disease, and diabetes. Also multiple factors determine the manifestation of a gene (environment, lifestyle, family history. Here again actuaries are also `data-less` using this new field of study.

On a more low tech note, studies are being undertaken that analyze the correlation of health clients who incur high dental claims and their resulting mortality. It would appear that being fastidious about your dental hygiene is a crucial part of adopting an overall healthy lifestyle and hence you might be able to classify clients with high dental claims as preferred lives. In any event, it`s encouraging that insurers are looking at `other` underwriting methodologies to simplify/accelerate risk selection.

3 & 4 Customer Service & Claims Management

First some bad news (again). Policy complexity and inflexibility are curses, not blessings. Insurtechs sell directly to consumers, often via mobile apps policies so they must use contemporary language that everyone understands.

I have decided to combine the value chain topics of Customer Services & Claims Management since I`m going to refer to the golden boy of the Insurtechs — which is Lemonade — for both of these attributes. Yes I am a big fan of Lemonade, please refer to my article singing their praises. Lemonade`s four objectives regarding policy wording are that it must be: simple, approachable, relevant, and digital.

Lemonade does not use traditional brokers or intermediaries. They depend solely on snappy marketing (aimed at uninsured millennials) and word of mouth by happy customers for references. The vast majority of their clients have only ever interacted with Maya or Jim, these are AI avatars who are state of the art bots. Few Lemonade clients ever interact with a real person either during the sale or claims process. It turns out that left alone, people really don`t want to fill out a long and tedious application form on line, press search, compare the market and then buy the cheapest insurance. Clients prefer to interact with a cheerful person who will ask questions, help them fill out the questionnaire and recommend a policy. The thing is that the `upbeat person` is a computer algorithm, albeit one that is full of personality.

Making a claim via Lemonade could not be simpler. It only takes a minute to shoot a video of yourself explaining in your own words what happened. No paperwork, hassle free and Lemonade`s objective is to authorize your claim even before Usain Bolt breaks the 100m World Record. They have allegedly once paid a claim in a world breaking record 3 seconds. It has not been said publicly, but I am speculating that the videos are using facial micro-expressions to try to categorize honest versus dishonest claimants; the latter will require a more detailed analysis of the claim submitted. Processing new policies with AI bots and claims via video submission deliver scalability with the ability to service larger portfolios.

Lemonade prepares regular updates about their ups and downs and their own report was very self critical of their past claims process. Some of the revised steps they adopted to improve their customer experience were:

· Instead of focusing on damage containment as an objective of their claims department, they decided to shift focus to customer happiness.

· They measure their customer experience specialists (aka claims staff at other companies) by customer happiness

· Adopting the following mission statement: Provide a shockingly great claims experience through empathy, transparency, availability, and speed.

One does not have to be an insurtech or have a cutting edge bot to improve your claims service. Better claims service will result in a happy customer, positive referrals and higher persistency

In Asia, we are seeing an innovative and non-high tech sales model titled ` claims as a business` that cross sells life products and health reimbursements . It`s only actuaries that think about insurance 24/7, most normal people really don`t think about their insurance coverages or lack thereof. Might it not be the most opportune time to pitch for a sale of a new insurance policy when the client is filling out an insurance claim for reimbursement? When he/she is more sensitive to the benefit of insurance. This concept has the following paradigm changing benefits for the insurance industry:

· The head of Claims will now have a `new business premium` target.

· The claims managers will now be motivated to pay claims more efficiently since a happy client is likely to be more receptive to receiving an offer to buy more insurance.

Indeed the concept is truly making lemonade (new sales) from lemons (claims).

5. Customer Retention.. it`s as easy as 1,2,3

Salesmen are usually ABC driven. The phrase Always Be Closing was popularized in the 1992 film “Glengarry Glen Ross.” In this film agents were constantly motivated to sell more or be fired. Customer retention is usually an after-thought for alfa salesmen.

Managing the In-Force was initially developed by insurers to optimize capital usage, increase the embedded value and improve financial performance. The scope of Managing the In-Force project now encompasses the design of retention strategies to reduce lapse rates.

We are already impacted by some forms of Predictive Modeling. How do you think that some email ends up as `spam`? Ever wonder how you slowly became sleep-deprived as NetFlix`s recommendations get better and better? Predictive Modelling is behind these and many other practical applications. It involves a process by which current or historical facts are used to create predictions about future events or behaviors. Predictive Modelling has started to be used by Insurers, we see it mostly used as an Underwriting tool to filter new clients, but the utility of Predictive Modelling is quite diverse and can be used to predict claim frequency, identify fraudulent claims, handle low credibility data as well as predict lapses.

Marketing & Actuarial teams can then make use of the results of Predictive Modelling to develop targeted retention management. This is the process of measuring the value of customers, identifying policyholder behavioral characteristics that drive lapse and surrender rates, and subsequently implementing measures aimed at retaining positive or high-value customers. Over time, the quality of the portfolio should improve and, along with it, the financial performance and the value of the in-force book.

Conclusion: Come together… right now

Whilst it`s a great hedge to invest in these start-up fledgling insurtech ventures, one should not ignore the home-front. Insurance companies need to start considering revamping their existing value chain processes borrowing from `success stories` for their digital competitors.

When asked what should be the best place to start implementing an `in house` digital strategy, it`s best to identify existing in-house technological capabilities, pain points and company ambitions before considering solutions that can streamline your processes. It`s OK to adopt a piece-meal digital strategy, in fact success begets success.

Who knows, one day it might just be the InsurTech who`s looking over at the brick and mortar insurer as having the lusher, greener pasture. After all, in the end.. video did not kill the radio star.

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